China's Economic Prospects: Outlook And Policy Challenges

China's Economic Prospects: Outlook And Policy Challenges

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China's Economic Prospects: Outlook and Policy Challenges
According to the World Bank, global economic growth is likely to contract by two percent this year. With export markets shrinking, many have questioned whether Chinas domestic economy can supplement lost export revenue to maintain the countrys historically high growth rate.
Carnegie invited Louis Kujis, senior economist at the World Banks China office, to discuss this issue. Kujis was joined by Carnegies Albert Keidel and Uri Dadush.
Two Different Pictures
In the short-term, China is faced with a contracting international economy, but a relatively strong domestic one. Kujis warned that the global economy is going to remain gloomy for the remainder of 2009; the United States, Chinas largest export market, has experienced a 6.1 percent drop in GDP in the first quarter of 2009, which is about 1.5 percent worse than many expected.
On the domestic side, the governments fiscal and monetary expansions have kept the economy growing at a relatively high rate of 6 percent year-on-year in the first quarter of 2009. China has a strong macroeconomic situation high foreign reserves and little debt which has given the government space to act in a crisis. Even now, after its 4 trillion yuan ($586 billion) stimulus, China has room to increase spending further if necessary.
These two very different pictures have implications for Chinese economic policy. The Chinese Communist Partys (CCP) current 5-year plan is focused on rebalancing the economy away from what it considers an overdependence on exports. To achieve this rebalancing, China needs to strengthen its service sector, generate greater domestic consumption, and engage in fiscal reform. The current global crisis increases the urgency of these priorities.
Outlook in 2012
Although some analysts are already signaling the bottom of Chinas slump at home, Kujis explained that there is reason to be skeptical of CCP projections for eight percent growth in 2009. Most of Chinas six percent GDP growth can be attributed to the expansion in government investment. However, growth in consumption during the first quarter was relatively low. This means that as net trade continues to worsen as is likely to happen domestic demand may be too weak to make up for the significant drop in trade. Keidel provided a scenario: if Chinas trade surplus drops by another third, domestic demand would have to grow by 11 percent in order to achieve 7.6 percent GDP growth for the year. This kind of growth would be difficult to achieve: the World Bank predicts 6.5 percent growth in 2009, and two-thirds of that will come from government investment.
Medium-term Forecasting
When considering Chinas prospects in the coming decade, Kujis argued that no one should expect the 19 percent average annual export growth experienced in the previous decade to continue. The hyper-liquidity of export markets in the pre-crisis heyday is over; global demand is expected to grow at a lower rate. There is still room for China to expand its exports, but at a rate closer to nine percent annually. Assuming no other economic changes, this drop in exports would slice about two percent from Chinas annual GDP growth.
Along with much of the rest of the world, China will be entering a period of spare capacity in the coming years. The results will be weaker employment growth, less migration, downward pressure on profits and prices, incentives to redirect sales to the domestic market, and a greater proportion of sourcing from domestic companies for inputs import substitution.
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Questions & Answers
Kujis said that he expected Chinas manufacturing sector, despite less global demand, to remain very competitive and continue to gain global market share without major government support.
Keidel expressed concern about the U.S.-China trade relationship; although there may not be a major shift, there is potential particularly during a recession for a protectionist reaction to Chinas trade surplus. On the other hand, Chinas trade surplus is likely to diminish or even reverse during 2009, which would quell protectionist sentiments in the United States.
Both Kujis and Keidel agreed that it is not in Chinas best interest to devalue its currency, which should continue to appreciate in the long-term.

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