China

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 investment.
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 2008.
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.

Monetary policy

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 Asian crisis.

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 economic conditions.

Policy responses

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 incentives.