Economic growth remains rapid and the trade surplus continues to
widen, while the pattern of growth remains unchanged, notes the
World Bank's China Quarterly Update released today.
The rising trade surplus, which so far seems little affected by
measures to contain export growth, constitutes the bulk of the
rising balance of payment surplus. This surplus, together with
financial sector developments, is adding to domestic liquidity and
contributing to asset price rises, share prices in particular.
Although consumer price inflation has risen to a decade high, this
has largely been because of higher food prices.
The Quarterly Update finds that the recent
international financial market turmoil may affect China's economy,
but that China is well-placed to absorb the impact. Although the
direct financial impact seems to be limited, China would be
affected by an economic slowdown in key markets, because of the
large weight of exports in China's economy.
But China is in a strong position. "China is well-placed to deal
with the possible impact of slower global growth," says Louis
Kuijs, senior economist for China and the main author of the
report. "A moderate global slowdown would actually mitigate
concerns of policymakers on overall growth, inflation, and the
trade surplus, while China's strong macroeconomic position provides
room to adjust the domestic policy stance if necessary."
China's macroeconomic prospects remain good, concludes the
Quarterly Update. Internationally, there
are no indications that cost pressures are reducing the
competitiveness of China's exports. Domestically, prospects remain
buoyant. Profit and credit growth are high, so investment is likely
to continue to expand strongly. Consumption is expected to remain
solid, although higher inflation is constraining real consumption
growth.
The World Bank now projects GDP growth of 11.3 percent in 2007
and below 11 percent in 2008. International food prices are
expected to increase further, but industrial commodity and producer
price rises may continue to moderate. The World Bank expects CPI
inflation to gradually ease from later in 2007 onwards, but thinks
there are upward risks. The Bank now projects a current account
surplus of around 12 percent of GDP in 2007.
The external imbalance remains the main macroeconomic policy
issue. While there are no serious demand and price pressures yet,
the very strong growth risks eventually outpacing supply. Thus, the
authorities are rightly aiming at avoiding excess demand and the
spillover of high food prices into generalized inflation, and
mopping up liquidity and raising interest rates will continue to be
needed.
"However, the main macroeconomic task remains to contain the
trade surplus, and a stronger real exchange rate is the most
obvious tool," says Bert Hofman, lead economist for China.
"Reducing the external imbalance may become an important
contribution from China to world growth, if a sharper than expected
US slowdown were to affect this adversely." The government has
taken some tax-based measures to contain the surplus. However, more
policy action is likely to be needed.
A key challenge remains to rebalance the economy. This calls for
further fiscal and structural policy measures, which are discussed
in the Quarterly Update.
In a special section, the Quarterly Update addresses the issue of
whether China is running the risk of labor shortage. The section
concludes that, while continued rapid growth would eventually
exhaust China's surplus labor, this is unlikely to happen soon.
Next to demographics, policies also affect labor supply. The
section discusses the impact of policies, in particular those on
education, pensions, land reform, and migration.
(China.org.cn September 12, 2007)
