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China economy expands 11.4%

But slower pace seen for 2008 on credit curbs, weaker global demand

(BEIJING) China grew 11.4 per cent in 2007, the fastest pace in 13 years, but is headed for a modest slowdown this year as global demand weakens and credit curbs to cap inflation ripple through the economy.

The softening was evident in figures issued yesterday, showing that annual gross domestic product (GDP) growth eased to 11.2 per cent in the fourth quarter from 11.5 per cent in the July-September period and 11.9 per cent in the second quarter.

‘If economic growth sees a mild slowdown, that would be within our expectations,’ Xie Fuzhan, head of the National Bureau of Statistics, told a news conference.

Still, 2007 marked the fifth consecutive year of double-digit growth for China, which is on course to overtake Germany as the world’s third-largest economy this year and is growing in importance as a locomotive for global growth.

‘Average growth over the last five years has been 10.6 per cent. That’s really extraordinary. The ups and downs each year have also been limited – that’s also extraordinary,’ Mr Xie said.

As global credit woes stemming from the US sub-prime mortgage crisis drag down demand for China’s exports, which contributed about a third of last year’s increase in GDP, economists expect China’s growth this year to dip to around 10 per cent.

If the economy slows more than expected, economists are in no doubt that Beijing will unwind some of the restrictive policies that it has rolled out over the past year.

And yet, China is also wary of inflation, which has touched off social unrest many times in the past. Although consumer price inflation slowed to 6.5 per cent in December from an 11-year high of 6.9 per cent in November, factory-gate inflation jumped to 5.4 per cent from 4.6 per cent.

To cap inflation and prevent overheating, Beijing raised interest rates six times last year and gave banks blunt orders to lend less. But continuing along this path could trigger a sudden slowdown as export demand weakens.

‘Tightening too much when the US is heading for a recession would be a double hit for the global economy,’ said Wang Qing, chief China economist at Morgan Stanley in Hong Kong. ‘Inflation is the key challenge.’

Currency gains, which push up export prices, may become a more important tool for cooling the economy this year. The US Federal Reserve’s unexpected cut in its benchmark interest rate to 3.5 per cent from 4.25 per cent this week makes China less likely to raise its one-year lending rate beyond a nine-year high of 7.47 per cent.

The Fed’s move increases the chances of ‘hot money’ flooding into China, Yu Yongding, director of the Institute of World Economics and Politics in Beijing, said earlier this week in Davos, Switzerland.

On Wednesday, Morgan Stanley cut its forecast for rate increases in China this year from two to none.

The yuan’s gains versus the US dollar accelerated to almost 3 per cent in the fourth quarter.

Weaker US demand and cuts to export incentives have already slowed growth in overseas shipments from China.

Exports rose at the slowest pace since 2002 in the fourth quarter.

‘The yuan should be allowed to appreciate faster to deal with excess liquidity and inflation,’ said Frank Gong, chief China economist at JPMorgan. ‘The pressure is building and the argument is gaining momentum within the Chinese government.’

 

Source: Reuters, Bloomberg (Business Times 25 Jan 08)

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