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Rebalancing economy needed: World Bank
April 12, 2010, Monday
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CHINA'S economy has held up well during the global recession.
Its GDP grew 8.7 percent in 2009, fueled by a massive investment-led stimulus that showed up partly as an increase in the official fiscal deficit from 0.4 percent of GDP in 2008 to 2.8 percent of GDP in 2009, but much more in a surge in bank lending by almost 30 percent of GDP.
Government-led investment was the key driver of growth for much of 2009, but real estate investment gained prominence more recently.
All in all, investment rose about 18 percent in real terms in 2009, the fastest growth since 1993.
Household consumption growth has remained solid throughout, largely because the labor market held up well. Overall employment and wage growth remained positive in the first half of 2009 and picked up again around midyear.
After a sharp fall early in 2009, exports recovered briskly and returned to the pre-crisis level by the end of 2009. Because of the steep initial fall, exports declined by around 10 percent in real terms in 2009 as a whole.
Imports held up much better than exports, especially the non-processing imports used in the domestic economy. Because of the larger increase in imports, net external trade was a major drag on growth in 2009, subtracting 3.9 percentage points from GDP growth.
The current account surplus declined from 9.4 percent of GDP in 2008 to 5.8 percent in 2009.
Real GDP growth is likely to remain strong this year, with the composition of growth set to shift markedly.
The strong growth momentum carried into the first months of 2010.
The World Bank projects real GDP growth of 9.5 percent for the year as a whole. Exports are on course to grow robustly as global demand recovers.
Although imports should outpace exports somewhat, net external trade should add modestly to real GDP growth. Real investment growth, however, may be around half of the rate last year.
In a heated housing market, real estate investment should grow strongly. But government-led investment, the key driver of growth in 2009, is bound to decelerate heavily.
In this scenario, the trade surplus may edge down in 2010 in US dollar terms because of a projected decline in the terms of trade.
The current account surplus may increase somewhat, again in US dollar terms, mainly due to higher income on China's foreign exchange reserves.
Inflation has turned positive, but is likely to remain modest in 2010.
Consumer prices picked up in the second half of 2009, predominantly because of higher food prices.
Nonetheless, inflation will likely remain modest, reaching 3.5-4 percent on average in 2010, as global price pressures remain subdued, China-specific factors behind food price increases abate, and the authorities respond decisively to help curb core inflation pressures.
In the heated real estate market, however, property prices are rising rapidly. Prices in the large cities were on average more than 30 percent higher than a year ago in February, and further increases are in sight.
This has triggered policy measures to expand supply and curb speculation, although the government is cautious in its policy response and does not want to reduce real estate activity.
China needs a less accommodative macroeconomic policy stance than in 2009 to contain the emerging risks.
The world economy is still subdued, with output below potential in many parts. However, China's growth has been strong and, unlike most other countries, China's overall output is close to potential.
Property bubble
Thus, China needs a different macro stance than most other economies. Even though inflation risks remain modest because of the global context, the macro stance needs to be noticeably tighter than in 2009 to manage inflation expectations and contain the risks of a property bubble and strained local government finances.
Monetary policy should be tighter than last year and the case for exchange rate flexibility and more monetary independence from the US is getting stronger. The case for a larger role for interest rates in monetary policy is strong. If policy makers remain concerned about interest rate sensitive capital flows, more exchange rate flexibility would help.
Ensuring financial stability includes mitigating the risk of a property price bubble and ensuring the sustainability of local government finances.
With regard to the property market, stability calls for an appropriate macro stance and improving the functioning of markets.
Concerns about the affordability of housing for lower income people would be best addressed by a long-term government support framework.
The central authorities have rightly increased vigilance over lending by local government investment platforms.
Given China's solid macroeconomic position, the local finance problems are unlikely to cause systemic stress. But the flow of new lending to the platforms needs to be contained and local government revenues need to become less dependent on land transaction revenues.
As China is preparing for the 12th five-year plan (2011-2015), the key overall objectives are making further progress in "rebalancing" the economy, enhancing efficiency gains, moving to a more sustainable spatial transformation of economic activity and employment, further changing the role of the state in the economy, and taking account of China's interaction with the rest of the world.
(The article is adapted from the World Bank's report titled "Emerging stronger from the crisis." )
Its GDP grew 8.7 percent in 2009, fueled by a massive investment-led stimulus that showed up partly as an increase in the official fiscal deficit from 0.4 percent of GDP in 2008 to 2.8 percent of GDP in 2009, but much more in a surge in bank lending by almost 30 percent of GDP.
Government-led investment was the key driver of growth for much of 2009, but real estate investment gained prominence more recently.
All in all, investment rose about 18 percent in real terms in 2009, the fastest growth since 1993.
Household consumption growth has remained solid throughout, largely because the labor market held up well. Overall employment and wage growth remained positive in the first half of 2009 and picked up again around midyear.
After a sharp fall early in 2009, exports recovered briskly and returned to the pre-crisis level by the end of 2009. Because of the steep initial fall, exports declined by around 10 percent in real terms in 2009 as a whole.
Imports held up much better than exports, especially the non-processing imports used in the domestic economy. Because of the larger increase in imports, net external trade was a major drag on growth in 2009, subtracting 3.9 percentage points from GDP growth.
The current account surplus declined from 9.4 percent of GDP in 2008 to 5.8 percent in 2009.
Real GDP growth is likely to remain strong this year, with the composition of growth set to shift markedly.
The strong growth momentum carried into the first months of 2010.
The World Bank projects real GDP growth of 9.5 percent for the year as a whole. Exports are on course to grow robustly as global demand recovers.
Although imports should outpace exports somewhat, net external trade should add modestly to real GDP growth. Real investment growth, however, may be around half of the rate last year.
In a heated housing market, real estate investment should grow strongly. But government-led investment, the key driver of growth in 2009, is bound to decelerate heavily.
In this scenario, the trade surplus may edge down in 2010 in US dollar terms because of a projected decline in the terms of trade.
The current account surplus may increase somewhat, again in US dollar terms, mainly due to higher income on China's foreign exchange reserves.
Inflation has turned positive, but is likely to remain modest in 2010.
Consumer prices picked up in the second half of 2009, predominantly because of higher food prices.
Nonetheless, inflation will likely remain modest, reaching 3.5-4 percent on average in 2010, as global price pressures remain subdued, China-specific factors behind food price increases abate, and the authorities respond decisively to help curb core inflation pressures.
In the heated real estate market, however, property prices are rising rapidly. Prices in the large cities were on average more than 30 percent higher than a year ago in February, and further increases are in sight.
This has triggered policy measures to expand supply and curb speculation, although the government is cautious in its policy response and does not want to reduce real estate activity.
China needs a less accommodative macroeconomic policy stance than in 2009 to contain the emerging risks.
The world economy is still subdued, with output below potential in many parts. However, China's growth has been strong and, unlike most other countries, China's overall output is close to potential.
Property bubble
Thus, China needs a different macro stance than most other economies. Even though inflation risks remain modest because of the global context, the macro stance needs to be noticeably tighter than in 2009 to manage inflation expectations and contain the risks of a property bubble and strained local government finances.
Monetary policy should be tighter than last year and the case for exchange rate flexibility and more monetary independence from the US is getting stronger. The case for a larger role for interest rates in monetary policy is strong. If policy makers remain concerned about interest rate sensitive capital flows, more exchange rate flexibility would help.
Ensuring financial stability includes mitigating the risk of a property price bubble and ensuring the sustainability of local government finances.
With regard to the property market, stability calls for an appropriate macro stance and improving the functioning of markets.
Concerns about the affordability of housing for lower income people would be best addressed by a long-term government support framework.
The central authorities have rightly increased vigilance over lending by local government investment platforms.
Given China's solid macroeconomic position, the local finance problems are unlikely to cause systemic stress. But the flow of new lending to the platforms needs to be contained and local government revenues need to become less dependent on land transaction revenues.
As China is preparing for the 12th five-year plan (2011-2015), the key overall objectives are making further progress in "rebalancing" the economy, enhancing efficiency gains, moving to a more sustainable spatial transformation of economic activity and employment, further changing the role of the state in the economy, and taking account of China's interaction with the rest of the world.
(The article is adapted from the World Bank's report titled "Emerging stronger from the crisis." )
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