Rapid China Growth to Moderate in the Coming Years, Says ADB

Slowing investment and exports will see growth in China moderate in 2011 and 2012, says the Asian Development Bank (ADB) in a major new report.


ADB's flagship annual economic publication, Asian Development Outlook 2011 (ADO 2011), released April 6, says the economy is likely to expand by 9.6% this year and 9.2% in 2012. It grew by 10.3% in 2010, on the back of a strong recovery in exports and a rebound in investment and consumption.


Looking forward, fixed asset investment will remain a key driver of growth over the next two years, the report says, although the rate of expansion is set to decelerate slightly from past levels due to the winding back of fiscal stimulus measures and tighter monetary policy. However, a moderation in export and industrial output growth will offset this somewhat as demand from major markets remains sluggish and as tax rebates on some export products expire. The inflation rate, which averaged 3.3% in 2010, will pick up to 4.6% in 2011, lifted by abundant liquidity and higher food and commodities prices, before easing back to 4.2% in 2012 as commodity prices level off.


With the slowdown in major industrial economies, China has been diversifying its export markets, as well as increasing direct overseas investments, which hit a record US$59 billion in 2010. The government, in its 12th Five-Year Plan for 2011 to 2015, has laid out measures to rebalance economic growth drivers by putting more emphasis on domestic consumption and services.


"The need to transform the pattern of economic growth is stronger now than when the 11th Five-Year Plan began. Global imbalances have become more pronounced, and the recent global recession highlighted the risk of heavy reliance on foreign demand for growth," says Changyong Rhee, ADB's Chief Economist.


The report notes that China's rapid shift from a low to middle income economy over the past three decades has been accompanied by widening income gaps, widespread environmental damage and underdeveloped services. To support inclusive and sustainable growth, the government will need to undertake broad policy adjustments such as increased public service spending, more financial sector liberalization, develop capital markets to help small enterprises and the self-employed access credit, and increase the role of the private sector.


These reforms are reflected to some degree in the new plan, so the key challenge lies in how to successfully carry them out.


The report says private consumption will expand by 12.6% in 2011 as a result of rising incomes and increased spending on education, health care and pensions. Merchandise export growth will ease to about 20% this year and 18% in 2012, well below the near 30% average seen in the five years before the global recession.


Downside risks to the economic outlook are further weakness in external demand, and fiscal and debt concerns in the European Union, China's largest trading partner.




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