China's GDP growth hardly slowed in
2005, with domestic demand firmly taking the lead over net trade in
the second half of the year, according to the World Bank (WB)'s
China Quarterly Update released today.
The report presents an overall benign outlook for China's economy
in 2006.
While China's 2005 trade surplus might have hogged the headlines,
the contribution of net trade to growth had already gone into the
negative by the end of the year, with solid consumption growth and
strong investment growth. Export growth, meanwhile,
decelerated.
Notwithstanding the large build-up of foreign reserves in 2005,
lower non-FDI (foreign direct investment) capital inflows in the
second half suggest that the new exchange rate regime should over
time add to domestic stability.
China will benefit from solid export demand, while profit and
credit developments suggest more robust investment in 2006.
Consumption might not accelerate much in 2006 because of subdued
rural income prospects.
Overall, GDP growth of 9.2 percent is projected for 2006, based on
the new GDP data, which is equivalent to an unchanged forecast of
about 8.7 percent based on the old data.
International risks include a disorderly adjustment in global
imbalances and trade tensions, even if China's trade surpluses are
likely to fall.
The main domestic risk is that ample liquidity will re-fuel credit
and investment.
For macroeconomic policies, this setting implies that the "prudent"
stance announced last year is appropriate for this year as
well.
"Monetary policy could in the short run focus on absorbing some of
the excess liquidity to reduce the risk of excessive credit
growth," according to Bert Hofman, WB lead economist for China.
"This task may be complicated somewhat by the rapid financial
innovation, whose impact should be closely watched. The overall
fiscal stance needs little change for now, but a shift toward
social spending is needed to redress China's macroeconomic and
structural imbalances."
Over time, with a rebalanced economy that relies more on services
and consumption, tax revenues might come under some pressure. That
would need to be countered by reform in tax structure and
administration and medium-term expenditure restraint.
The report, in a special focus section, notes that the GDP
revisions moderate, not substantially change, the perspective on
China's main structural challenges.
"China still shows a strong reliance on industry and investment and
a lower than normal share of services in GDP," according to Louis
Kuijs, WB senior economist on China, and main author of the report.
"Interestingly, two-thirds of the GDP revision came from higher
price increases, which, among other things, implies that China's
real exchange rate has appreciated 10 percent more than previously
thought."
The report also discusses the Communist Party of China (CPC)'s
Proposals for the 11th Five-Year Guideline for National Economy and
Social Development. The proposals signal a change to more balanced
growth, with more attention focused on the environment and income
distribution.
However, while local leaders' announcements fall in line with these
national goals, local growth targets remain high.
To achieve these high growth rates, local spending is likely to
continue to be directed at investment rather than at social
services.
The targeted reduction in energy intensity of the economy by 20
percent over the next five years is very ambitious, and the
announcement of an industrial rather than pricing policy to realize
this target raises some concerns.
(China.org.cn February 9, 2006)