Although GDP growth again surprised on the upside, the pattern
of growth and the implications for policy have remained largely
unchanged, notes the World Bank's China Quarterly Update
released today. In the first quarter of 2007, growth continued to
be industry-led, powered by external trade and investment. With
export growth to the EU and the developing world surging, the trade
surplus continued to rise, and foreign reserves soared further.
Inflation picked up on the back of international food prices, while
China's stock markets are booming.
The Quarterly Update finds that prospects for growth
this year are good, both globally and in China. The international
environment remains largely favorable, although there is a risk of
a further rise in global food prices. With China's export prospects
improved, and a policy stance that is less tight than expected, the
World Bank revised its forecast for GDP growth in 2007 upwards to
10.4 percent and its projection for the current account surplus to
almost 11 percent of GDP.?
With no obvious need to tighten overall demand, policy would
best focus on liquidity and rebalancing the economy. From the
macroeconomic perspective, the real economy does not appear
overheated, as overall demand and supply are growing broadly in
line with each other, notes the World Bank's China Quarterly
Update. "The key macro issue in the real economy remains the
widening trade surplus," says Louis Kuijs, Senior Economist for
China and the main author of the report. "Macro policies to tighten
overall demand are therefore not obvious, although draining excess
liquidity from the banking system will remain necessary." The stock
market boom has drawn widespread attention. "Concerns about asset
market valuations strengthen the case for tighter monetary policy
and higher interest rates to tie up liquidity in bank deposits,"
says Bert Hofman, Lead Economist for China. "In turn, the need for
tighter monetary policy has strengthened the case for more rapid
RMB appreciation, although a lower trade surplus will have to come
largely from policies to rebalance the economy." The report points
out that there is a risk that food price increases spill over into
more general price increases.
The rapid rise in the stock market index has drawn the attention
of policymakers. While the report says that the authorities can be
agnostic about the stock market index level, a sharp negative
correction would have policy implications. The new-found confidence
in the Chinese capital market could be damaged, and although the
impact on the real economy and the banking sector is likely to be
modest, large losses of financial wealth for specific groups could
lead to pressure to bail them out. The authorities have already
taken several types of measures to stem price increases by
containing inflows into the stock market and stimulating outflows.
The Quarterly Update discusses possible additional
measures that could further moderate price rises, as well as other
measures and structural reforms that can mitigate volatility in
financial markets and make markets (and the economy) more robust to
shocks.
China's key economic challenge is to rebalance the economy. This
requires a shift in production from industry towards services, more
reliance on domestic demand, and more equally shared and
environmentally sustainable growth. The Quarterly Update
notes that the State Council's document on stimulating the service
sector sets the stage for future policy action in this area, while
many new policy initiatives could potentially support rebalancing,
including policies for more equitable growth, administrative
policies to reduce energy intensity, and price and tax mechanisms
to address environmental and energy issues. China could debate what
forms of taxes are best used to improve energy efficiency.
(China.org.cn May 30, 2007)