ADB Upgrades China Growth Forecasts, But Risks Remain

A stronger-than-expected first half performance and further stimulus measures will see China post slightly above previously forecast growth for 2016 and 2017, even as domestic and global pressures continue to drag on the economy, says a new Asian Development Bank (ADB) study.

In an update of its flagship annual economic publication, Asian Development Outlook 2016, ADB now forecasts 2016 growth of 6.6%, up slightly from its March projection of 6.5%, with 2017 growth now seen at 6.4% rather than 6.3% estimated previously.

“The economy remains on track to achieve the government’s annual average growth target of 6.5–7.0%,” says Juzhong Zhuang, Deputy Chief Economist. “A continued implementation of structural reforms should help China overcome risks from a number of quarters, including still weak export demand, falling manufacturing investment, and the risk of asset price bubbles.”

The first half performance for 2016 was supported by increased government infrastructure spending, strong retail spending, and an accommodative monetary policy, which helped to increase spending in infrastructure and real estate.

Services contributed 60% to GDP growth and expanded their share of GDP by 1.8 percentage points from a year earlier, an indication of China’s continued economic restructuring.

Growth under pressure

However, growth in other sectors of the economy, including industry and exports, remained under pressure, while expansion in real disposable income slowed.

Consumer price inflation moved up on higher food costs, while the renminbi came under pressure, partly reflecting the shift to a managed float, and partly from an overall investor move into the US currency, amid global uncertainty.

Moving forward, the Update says investment growth will weaken further, in the face of the ongoing rebalancing of the economy and soft global demand, with credit growth slowing and spending on manufacturing remaining subdued.

In response, the government is likely to take further stimulus measures to boost infrastructure. Consumer spending will continue driving GDP growth, but is dependent on a further decline in the household savings rate.

Inflation in 2016 is likely to move up to 2.0% from 1.7% projected earlier in March, amidst ongoing price deregulation and rising service costs. It may edge up further in 2017, although it will remain well within the government target ceiling of 3.0%, the report says.

Producer prices, which have been on a downward trend for about half a decade, are expected to turn upward by next year as commodity prices first stabilize and then increase.

The updated assessment says fiscal policy measures offer more scope for economic stimulus than monetary policy, given relatively low levels of central government debt and risks from easy credit. It notes that the authorities must tread carefully in stimulating the economy, to prevent too rapid credit expansions and real estate price bubbles, which could pose risks to the quality of bank assets.

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