China Growth to Rebound in 2013, But Level Off in 2014, Says ADB

Strong consumption and fiscal spending in the People’s Republic of China (PRC) will fuel a rebound in growth in 2013, but government steps to cool pressures on the environment and to narrow income gaps will limit the upside in 2014, says a new Asian Development Bank (ADB) report.

 

“The country’s new leaders are focused on delivering sustainable, quality growth, which is a welcome change from the growth-at-all-costs approach of the past,” said ADB Chief Economist Changyong Rhee. “They will face a difficult task in managing risks and keeping the economy on an even keel, while shepherding through the complex reforms needed to deliver more inclusive growth.”

 

ADB’s flagship annual economic publication, Asian Development Outlook 2013 (ADO 2013), says PRC―the world’s second largest economy―is set to post gross domestic product (GDP) growth of 8.2% in 2013, and 8.0% in 2014 after expanding 7.8% in 2012―the lowest rate in 13 years. The outlook assumes that the US economy will continue its slow recovery, conditions in the eurozone will not worsen, and the government will continue to boost public spending.

 

The tough external environment continued to weigh on exports and a slowdown in the real estate sector pressured the economy in 2012. At the same time, consumption, government spending, and fiscal incentives supported overall activity. The industrial sector―the largest component of GDP―saw a revival in the last three months of 2012, while consumer price inflation slowed measurably over the year to average 2.6% against 5.4% in 2011, aided by improved food supplies and better weather. Inflation is expected to remain muted in 2013.

 

Monetary policy in 2012 remained accommodative, with cuts in benchmark interest rates and banks’ reserve requirement ratio. The renminbi appreciated by more than 2% against the US dollar and more than 10% against the euro, supported by a doubling of the currency trading band and central bank steps to liberalize exchange and interest rates.

 

Robust fixed asset investment and private consumption, supported by large-scale public projects, and rising wages and pensions, will underpin the growth resurgence in 2013, AD0 2013 says. However, planned fiscal and financial reforms and more stringent environmental targets for business will see growth level off next year.

 

Ongoing sluggishness in the global economy will remain a drag on exports, while further headwinds from Europe―the PRC’s largest trading partner―and the possibility of renewed inflationary pressures pose downside risks to the overall outlook.

 

ADO 2013 also highlights the PRC’s declining labor competitiveness, with surging wages and other costs outstripping labor productivity. This trend, exacerbated by the strong exchange rate, has already seen many low-cost and labor-intensive manufacturing jobs shift to cheaper locales, such as Southeast Asia. To arrest the slide in competitiveness, policymakers need to ensure minimum wages do not outpace productivity growth and firms are given incentives to provide on-the-job training and invest in new technologies. Measures are also needed to reform the hukou residential registration system to reduce migration costs and improve labor market flexibility.
 

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