Briefing Notes for the Launch in Beijing, March 2009
Growth performance and prospects
- Growth in China slowed in 2008 to 9.0%, its lowest level since 2002, due primarily to a
slowing of net exports and export-related investment as well as a decline in real estate
- Economic growth in China in 2009 will be dragged down by the impact on the export
sector of weaker external demand. Domestic demand, supported by a loosened
monetary stance and increased public spending on infrastructure projects, is expected
to provide a partial cushion. As a result, the economy of China is forecast to attain
7.5% growth in 2009.
- The slowdown was started by the effect of the decelerating real estate sector on
domestic investment. The decrease in consumer confidence from the global financial
crisis in late 2008 contributed to further contraction.
- By the end of 2008 the main impact on China’s growth had come from a rapid
slowdown in net exports and export-related investment due to less consumption in
developed countries. This impact on investment has contributed to the overall
decrease in investment growth.
- Consumption in China will be affected by the growth slowdown and by the loss of
wealth from declining market assets. The growth slowdown will affect jobs and wages,
particularly in enterprises connected to export and real estate.
Inflation performance and prospects
- China saw a rapid slowdown in inflation in the latter part of 2008, but overall inflation
for the year was 5.9%, still greater than 2007. While the global slowdown in fuel and
food prices contributed to the lessening of inflation, food prices also stabilized due to
the fading effects of shocks from pig disease in 2007 and snowstorms in February
- Consumer price growth slowed as the general domestic growth also slowed, while
producer prices dropped due to greater competition in the face of curtailed demand
and high supply.
- Inflation in China was affected less in 2008 than in previous years by excess demand
from the injection of money into the economy to manage currency appreciation.
- China reversed its monetary policy over the course of the year as inflation pressures
subsided. Since 2007 interest rates had been raised six times, the reserve requirement
ratio 15 times.
- In response to the slowing of the real estate sector, general consumption and
investment, these measures were reversed in the latter half of 2008. The People’s
Bank of China relaxed credit quotas and cut both interest rates and bank reserve ratios
in late 2008. Interest rates were reduced four times, starting in September 2008; the
cut of 108 basis points in late November 2008 was the largest reduction since the 1997
Current and capital account performance and prospects
- Pressure for appreciation of the China renminbi diminished somewhat over the course
of 2008, in line with the regional slowdown in exports and capital inflows. Relatively
fast appreciation of the renminbi until mid-2008 was followed by less upward
movement in the latter part of the year as the effects of the global financial crisis were
felt. Reduced pressure for currency appreciation emanated from slowing exports and
lower interest rates. Less need for government intervention in managing currency
values contributed to a slower build up of reserves.
- China’s export performance held up reasonably well in the initial months of the export
slowdown. Still, export growth was on a downward trend, while import growth
decreased faster, leading to a falling contribution of net exports. By November 2008,
there was a contraction in exports of 2.2% year-on-year, the first monthly fall in almost
seven years. But the export contraction was accompanied by an even faster import
contraction of 17.9%, leading to a larger trade surplus for the month. December 2008
and January 2009, saw a continuation of the trend with a contraction in exports of
2.8% and 17.5% year-on-year, respectively. More worrisome was an accelerating
decrease in imports of 21.3% and 43.1% for the same period, most likely reflecting
further downturns in future export performance.
- The government has attempted to support exports by various policy measures. Three
rounds of export tax rebates were announced, with the latest round in December 2008
affecting 3,770 items accounting for 28% of total exports. Export duties have also been
removed on a range of products.
- Portfolio capital inflows to China moderated during the course of the year because of
declining asset values and reduced expectations for currency appreciation. Equity
market values fell throughout the year in response to the slowing domestic economy
and reduced appetite for global risk. China continued to see FDI growth during the
year, though the pace had slowed sharply by the end of the year. The late slowdown in
FDI was likely due to the lag in FDI data, reflecting decisions taken months earlier and
revealing more circumspect investment because of slowing global and domestic
- The Government of China has made efforts to counteract the growth slowdown
through a fiscal policy package of 4 trillion yuan ($584 billion), announced in November
2008, followed by further plans announced in early 2009 dedicated to science and
technology and the health care system. Though some of the amount in the late 2008
fiscal package includes previously announced spending plans, the size of the package
is unprecedented in China.
- The package is heavily directed toward infrastructure investment—railways, airports,
environmental infrastructure, low-cost housing and the reconstruction of areas affected
by the Sichuan earthquake of May 2008. Real estate investment will be boosted by the
support for low-cost housing. The government’s “harmonious society” initiative to
reduce the socio-economic gap between regions and sections of the population will be
supported by the share of spending to be directed to rural livelihoods.
- While such supportive policies by Governments across the region could help stabilize
and ride out the prevailing economic downturn, Governments will face increased
dilemmas in terms of keeping a prudent budget policy in a sustainable manner. Failure
to keep government budgets in check will lead to concerns about public-sector debt.
Overexpansion of the public sector will also crowd out private-sector investment