World Bank's China Quarterly Update, November 2010

Quartely Update

OVERVIEW

China’s growth has moderated somewhat, with a shifting composition.

The global outlook is broadly favorable, but risks remain.

China’s own economic prospects remain sound, with risks both ways.

Further normalization of the macroeconomic stance is needed to guard against macro risks.

The preparations for the 12th 5YP (2011-2015) call for focus on structural issues and reforms.

RECENT ECONOMIC DEVELOPMENTS

China's continued rapid growth during the global crisis reflected large scale stimulus and strong underlying growth drivers.

Growth moderated to a still rapid pace of 9.6 % (yoy) in the third quarter of 2010, with a shifting composition (Figure 1/Figure 2).

So far, the growth moderation has been largely domestically-led.

Investment continued to slow gradually through the third quarter (Figure 3).

Consumption growth has also softened, especially in urban areas (Figure 4).

With exports strong, domestic demand and imports easing, and a broadly unchanged growth pattern so far, the external surplus is increasing again.

China’s highly competitive exports have continued to outpace global imports (Figure 5).

The expansion of import volumes has slowed alongside investment (Figure 6).

China’s terms of trade (TOT) were unfavorable in the first half, but are turning around (Figure 7).

The trade surplus is rising again (Figure 8).

Consumer price inflation has risen on higher food prices (Figure 9/Figure 10).

Property prices have hardly budged since April.

Despite some exchange rate appreciation against the US dollar, foreign exchange accumulation is accelerating again (Figure 11).

ECONOMIC PROSPECTS

The global economy is starting to slow again, particularly in high income countries (HICs).

However, overall global growth prospects are supported by emerging market strength.

Nonetheless, the global growth outlook remains subject to large risks, both ways.

The global imbalances and the tensions they create cast a shadow over the global outlook.

Internationally, underlying price pressures seem to remain moderate, but there are risks.

In China, growth may ease in the short term, notwithstanding the surprisingly robust third quarter.

Growth is likely to moderate somewhat more in 2011 and the medium term to a still robust pace.

Inflation is unlikely to escalate but it will be difficult to contain housing prices for long.

The external surplus is on course to rise again (Figure 12).

There are of course risks to this outlook.

ECONOMIC POLICIES

China’s favorable growth outlook warrants further normalization of the macroeconomic stance.

Two way risks to growth make it important to be able to respond flexibly to changes in circumstances.

The preparations for the 12th 5YP (2011-2015) call for focus on structural issues and reforms.

Key among the objectives is changing the growth pattern (Figure 13/Figure 14)..

China’s favorable growth outlook warrants further normalization of the macroeconomic stance.

The need to transform the economic growth pattern may be stronger now than 5 years ago.

Fiscal and monetary policy

China’s headline fiscal position remains sound, which helps to provide policy space.

Quasi fiscal spending is being contained, after the surge that has reduced the overall macro policy space (Figure 15).

The overall monetary stance needs to be normalized to contain the associated risks.

The authorities are broadly on track to meet the 2010 monetary targets and have started to normalize interest rates (Figure 16/Figure 17).

Pressure from international capital flows may challenge the conduct of monetary policy, but these challenges should be more manageable in China than in some other countries.

Measures can be taken to further shore up protection against unwanted capital flows.

Private Sector Development

The private sector will remain critical for achieving China’s development objectives over the 12th 5YP period and beyond.

First, opening up to private enterprises sectors so far dominated by state-owned firms.

In this connection, the government could usefully clarify the role it envisages SOEs to play in China‘s economy.

Second, continuing to address investment climate constraints.

- Making access to finance more equal and developing capital markets.
- Adjusting the role of the government and reducing "red tape."
- Reducing further regulatory barriers to entry.

Third, supporting the research and development (R&D) and innovation capacity of the private sector.

Reducing energy intensity—challenges and policies

China will get close to meeting the energy intensity (EI) target of the 11th 5YP(Figure 18).

More generally, China has made impressive achievements in energy conservation and renewable energy during the 11th 5YP period.

Looking forward, China will continue to face (local and global) environmental sustainability challenges to meet the energy needs arising from rapid economic development (Figure 19).

Specifically, China‘s energy needs will be shaped by its response to three overarching challenges.

First, continuing energy pricing reforms.

Second, complementing administrative measures with market-based mechanisms to further reduce energy intensity.

Third, reducing cost and improving performance of renewable energy.

Fourth, accelerating development and diffusion of new energy technologies.