China Quarterly Update, January 2008

(worldbank.org)
Updated: 2008-02-18 11:00

(Summary)

OVERVIEW

China’s economic growth has begun to inch down from its record rates earlier in 2007, while food prices are lifting inflation.

The global outlook has weakened and is uncertain, but China is likely to grow robustly and is well-positioned to stimulate demand if needed.

Macroeconomic policy needs to address the challenges of inflation and persistent external surpluses.

The government recently introduced further administrative measures to contain inflation.

The recent revision of purchasing power parity (PPP) estimates does not change the conclusions about China’s growth and poverty reduction.

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RECENT ECONOMIC DEVELOPMENTS

Economic growth remained strong in 2007, but the economy appears to have slowed down somewhat in the second half.

The slowdown in demand was due to a declining contribution of external trade to GDP growth, partly offset by a rising contribution of domestic demand.

It is too early to tell whether more general rebalancing of the pattern of growth is taking place.

More detailed trade data reveals a strengthening of demand for imports in China’s domestic economy throughout 2007.

Inflation rose considerably, due to higher food prices.

Some wage cost pressure seems to have emerged, but there is no significant spill over into general inflation yet.

There are so far few signs of overall excess demand pressure, but there are risks.

These price and cost developments take place against a backdrop of large balance of payment surpluses that continues to boost liquidity.

So far, balance of payment surpluses (and the policy response to them) have mainly contributed to high asset prices—shares in particular—as opposed to goods inflation.

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ECONOMIC PROSPECTS AND POLICIES

Economic Prospects

Global growth prospects for 2008 have deteriorated considerably amidst financial market turmoil and increased uncertainty.

The expected weakening of global growth is bound to affect China’s economy.

China’s domestic economy should maintain robust momentum.

Consumption should grow robustly.

In light of these considerations, we now project GDP growth of 9.6 percent for 2008.

The trade and current account surpluses are likely to remain broadly at the high levels of 2007.

Price pressures should ease in 2008, but inflation is not likely to decline to low levels.

Risks on price pressures may be on the upside.


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