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Home » Opinion » Foreign Views
World Bank: China's growth still strong but problems remain
January 17, 2011, Monday
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Print Edition
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EDITOR'S note:
The article is adapted from the World Bank's latest report titled "Global Economic Prospects 2011."
The East Asia and Pacific region led the global recovery from the deepest recession since the 1930s over 2009 and 2010.
The recovery was led by robust 10 percent GDP gains in China, where fiscal and monetary support measures contributed almost a percentage point to growth.
For China, domestic demand contributed some 7.8 percentage points to overall growth of 10 percent in 2010, with net trade contributing the remainder.
With real imports expanding at a 35 percent pace, China's demand served as a powerful impetus for exports from the East Asia region and beyond.
However, China's growth moderated over the course of 2010 with domestic demand (particularly consumption and investment) cooling gradually as stimulus faded and the monetary stance tightened.
With domestic demand easing, import growth slowed, while stronger export performance helped to maintain growth at high levels and contributed to an increase in the trade surplus.
While growth prospects are bright, further normalization of the macro stance is likely required to guard against asset price increases, strained local government finances and a buildup of non-performing loans in the banking system.
Authorities have started to raise interest rates and are making administrative changes designed to tighten liquidity.
China experienced significant upward pressure on equity prices and the exchange rate in the fall months of 2010, the latter of which was mitigated through market intervention, leading to a further large build-up of reserves.
Mid-term outlook
Growth in China is likely to ease from the 10 percent pace of 2010 - due in part to the unwinding of fiscal stimulus, restrictions placed on over-heating sectors (eg housing) and a general tightening of monetary conditions in the face of rising inflation pressures.
Nevertheless, industry-led, capital intensive growth is likely to keep GDP gains near 8.5 percent over the period, with net exports contributing smaller shares of growth than in the pre-crisis years, closer to 0.5 to 1 points of growth.
China will remain the focal point of regional activity, with East Asian exports of materials and semi-finished manufactures to China for final processing and export to high-income destinations likely to intensify.
In 2012, growth for the overall region moves down moderately to 7.8 percent, a stability that masks further moderation of growth in China, and a firming elsewhere in the region.
At this juncture there are three primary risks to the baseline projections for China and the rest of the East Asia and Pacific region.
1. Continued reliance on export trade as a source of growth (though as noted, domestic demand is moving quickly to the fore) leaves China and other manufactures exporters at risk, as key export markets adjust to a environment of more moderate growth. High double-digit export volume performance is unlikely to characterize the coming two years.
Asset-price bubbles
2. A challenge for all policy makers is to achieve a balance in stance required to (i) begin the fundamental shift of easing stimulus efforts while planning for further medium term budgetary consolidation; at the same time (ii) financial markets (and in some cases earlier domestic overheating) are generating contingencies for potential short term asset-price bubbles, emerging inflation pressures, exchange rate appreciation - and in the medium term a loss of export competitiveness.
3. Food price increases underway have - as of December 2010 - not exceeded their real values during the food/fuel crisis of 2008.
Still, as international investors continue to explore new avenues for higher returns, commodities may become an attractive alternative to financial instruments and staple foods could be bid up further.
Terms of trade would be adversely affected for a number of countries in the region. The pickup of inflation in China is tied in large part to higher food prices; and for a number of countries import bills would escalate substantially.
The article is adapted from the World Bank's latest report titled "Global Economic Prospects 2011."
The East Asia and Pacific region led the global recovery from the deepest recession since the 1930s over 2009 and 2010.
The recovery was led by robust 10 percent GDP gains in China, where fiscal and monetary support measures contributed almost a percentage point to growth.
For China, domestic demand contributed some 7.8 percentage points to overall growth of 10 percent in 2010, with net trade contributing the remainder.
With real imports expanding at a 35 percent pace, China's demand served as a powerful impetus for exports from the East Asia region and beyond.
However, China's growth moderated over the course of 2010 with domestic demand (particularly consumption and investment) cooling gradually as stimulus faded and the monetary stance tightened.
With domestic demand easing, import growth slowed, while stronger export performance helped to maintain growth at high levels and contributed to an increase in the trade surplus.
While growth prospects are bright, further normalization of the macro stance is likely required to guard against asset price increases, strained local government finances and a buildup of non-performing loans in the banking system.
Authorities have started to raise interest rates and are making administrative changes designed to tighten liquidity.
China experienced significant upward pressure on equity prices and the exchange rate in the fall months of 2010, the latter of which was mitigated through market intervention, leading to a further large build-up of reserves.
Mid-term outlook
Growth in China is likely to ease from the 10 percent pace of 2010 - due in part to the unwinding of fiscal stimulus, restrictions placed on over-heating sectors (eg housing) and a general tightening of monetary conditions in the face of rising inflation pressures.
Nevertheless, industry-led, capital intensive growth is likely to keep GDP gains near 8.5 percent over the period, with net exports contributing smaller shares of growth than in the pre-crisis years, closer to 0.5 to 1 points of growth.
China will remain the focal point of regional activity, with East Asian exports of materials and semi-finished manufactures to China for final processing and export to high-income destinations likely to intensify.
In 2012, growth for the overall region moves down moderately to 7.8 percent, a stability that masks further moderation of growth in China, and a firming elsewhere in the region.
At this juncture there are three primary risks to the baseline projections for China and the rest of the East Asia and Pacific region.
1. Continued reliance on export trade as a source of growth (though as noted, domestic demand is moving quickly to the fore) leaves China and other manufactures exporters at risk, as key export markets adjust to a environment of more moderate growth. High double-digit export volume performance is unlikely to characterize the coming two years.
Asset-price bubbles
2. A challenge for all policy makers is to achieve a balance in stance required to (i) begin the fundamental shift of easing stimulus efforts while planning for further medium term budgetary consolidation; at the same time (ii) financial markets (and in some cases earlier domestic overheating) are generating contingencies for potential short term asset-price bubbles, emerging inflation pressures, exchange rate appreciation - and in the medium term a loss of export competitiveness.
3. Food price increases underway have - as of December 2010 - not exceeded their real values during the food/fuel crisis of 2008.
Still, as international investors continue to explore new avenues for higher returns, commodities may become an attractive alternative to financial instruments and staple foods could be bid up further.
Terms of trade would be adversely affected for a number of countries in the region. The pickup of inflation in China is tied in large part to higher food prices; and for a number of countries import bills would escalate substantially.
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