The country’s GDP is forecast to grow by 8.8% in 2H2011, as slower growth will be inevitable for China but supported by resilient domestic demand.
Growth prospects for developed economies have weakened sharply in recent months but China’s economic growth remains strong –Sharply weakened growth of the world’s developed economies will trigger declines in the value of China’s exports, but the country’s resilient domestic demand and growing intra-regional trade will help sustain its economic growth, at a rate of about 9% during the 4th quarter of 2011 and the year 2012, forecasts Dr. Liao Qun, Senior Vice President, Chief Economist / Strategist, China Banking Group of CITIC Bank International Limited.
Under a slow-growth baseline scenario for developed economies, the economic growth of emerging markets will relax but remain strong at 6.4% and 6.2% in 2011 and 2012 respectively. Particularly, Emerging Asian economies are expected to expand more strongly by 7.7% in 2011 and 7.5% in 2012. Under this scenario, sand growing intra-regional trade, the country’s GDP is forecast to grow by 8.8% in 2H2011, 9.2% in 2011, and 8.9% in 2012, writes Dr. Liao in his latest report China’s Prospects for Economic Growth amid Weaker External Outlook.
Measured by value, Emerging Asia absorbed 31.2% of China’s total exports in 2010, followed by Europe (22.5%), the US (18.0%) and Japan (7.7%). “This suggests that intra-regional trade between China and other Emerging Asian economies will offset the negative impact of the weaker outlook for developed economies on China’s exports, which will maintain a respectable growth under the baseline scenario for developed countries in spite of the inevitable slowdown,” Dr. Liao notes.
Meanwhile, the impact of export slowdown on China’s economic growth should not be overestimated, points out Dr. Liao. “People have been using the ratio of total-export-value-to-GDP to measure China’s reliance on exports but this is not a fair indicator since total export value and GDP are two different and incomparable concepts.
Dr. Liao anticipates that in response to changes in the external environment under the baseline scenario, China’s fiscal policy will remain largely unchanged, while the cycle of monetary policy tightening is likely to end. Increases in interest rates will come to an early end, with the odds of a further rate hike before the end of this year diminishing.
Increases in the reserve requirement ratio may still be possible, but that will be primarily for sterilising continuous hikes in the country’s foreign exchange reserves. “If the rate of growth in the foreign exchange reserves stabilises, there will be no need to raise the reserve requirement ratio any further, while other monetary tightening moves including open operations and ‘Window Guidance’ will also come to an end,” Dr. Liao adds.
However, under a pessimistic scenario of a double-dip recession, China’s exports and domestic demand will be hit more severely and therefore policy interventions will be much stronger. “Monetary policy will then turn quickly to a looser stance, with cuts likely in interest rates and the reserve requirement ratio. Fiscal policy will become more proactive while various measures will be implemented to raise government expenditure and curb tax rates.”
But even if the pessimistic scenario becomes a reality, there will be no need for another large-scale investment scheme like the RMB4 trillion stimulation programme in 2009, argues Dr. Liao.
“Firstly, the degree of decline in the developed economies would not be as severe as that during the recession in 2009. Secondly, given that the objective set by the Central Government for its RMB4 trillion investment programme was to ‘defend 8%’ but the outcome was a 9.2% GDP growth in 2009, the programme is deemed excessive.
Thirdly, the country’s reliance on exports has decreased from 9.0% in 2009 to 6.7% in the middle of 2011, demonstrating China’s strengthened capability in withstanding external weaknesses. Last but not least, the Central Government has reduced its growth target for the 12th Five-year Plan period from previously 8% to 7%. A different degree of policy support will be required for ‘defending 8%’ and ‘defending 7%’.
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