UN Web Site   |   UN Website Locator Home     Site Map     Contact    
Home » Country Notes

China

Briefing Notes for the Launch in Beijing, March 2008

Growth performance and prospects

  • China’s economy continues to set records. Growth rate accelerated in 2007 to 11.4%, the fastest for China in 13 years, despite the slowdown in the country’s major export markets.
  • Investment continues to be the main driver of growth, remaining resilient despite government cooling measures supported by low real interest rates. Private consumption in China also performed strongly, with urban wage growth boosting consumer confidence. Retail sales towards the end of the year were the strongest in a decade.
  • China is forecast to have GDP growth moderate to 10.7% in 2008 from 11.4% in 2007. A slowdown in exports and the government’s measures to cool the economy are the main reasons for the moderation.
  • The external sector will likely weaken during the year ahead and as demand weakens, domestic costs rise, the export VAT rebate system will be revised and the currency continues to appreciate. But resilient domestic demand will mostly mitigate the effects of a lower contribution from net exports.
  • Domestic consumption is likely to remain strong in 2008, as the government’s “harmonious society” policy leads it to spend more on social welfare and as rural consumers increase their spending power. Investment will continue to be the main demand component of GDP, as policy measures to rein in spending in overheating sectors face obstacles from buoyant liquidity.
  • The destabilizing effect of growth on the environment is becoming more apparent. Air pollution, especially in large cities, is increasing the incidence of lung diseases. The country has lost 8 million hectares of its arable land – 6.6% – to manufacturing and construction in the past decade. The government has pledged to eliminate export tax rebates for 553 highly energy-consuming and resource-intensive products, such as cement, fertilizer and non-ferrous metals.
  • The subprime crisis is not expected to have a strong impact on growth in China. In a worst-case scenario – where the United States economy goes into a recession – the impact on China will not be as significant as other Asia-Pacific countries. Due to its blistering pace, China’s growth will remain resilient but will slow. Strong domestic demand should cushion a portion of an external shock. The government is also expected to use macroeconomic policy to mitigate any crisis. Some easing in exports will aid the Government’s efforts to cool the economy.

Inflation performance and prospects

  • Annual inflation in 2007 rose dramatically to 4.8% – the highest rate in 10 years and more than three times the 1.5% rate for 2006. The country suffered from the twin shocks of rising international oil and food prices. Rising food prices are a bigger inflationary concern than oil prices because food accounts for a far higher proportion of consumer spending. Food price inflation particularly hits low-income households.
  • Inflation was stoked by a continued injection of liquidity from the management of currency appreciation. The money supply continued to expand strongly fuelling asset price rises in the property and equity markets. As of end January 2008, China saw a rise (year-on-year) in the main equity market of 57%. Property prices have surged, with housing prices in 70 cities jumping by 10.5% in December 2007 compared with a year earlier.
  • Despite monetary policy tightening through interest rate increases, real interest rates on deposits remain negative. Interest rates were increased five times during the year, in September reaching a deposit rate of 3.87% and a lending rate of 7.29%.
  • The unattractiveness of bank deposits in China has drawn China’s public to invest in the asset markets. To control high levels of bank lending during a time of fairly low interest rates, the government has tried various non-interest rate mechanisms. But the host of cooling measures still has not affected bank lending sufficiently. The degree of overheating in China’s economy will depend on how effective these non-interest rate mechanisms prove in coming months.
  • China’s economy is resilient enough overall to withstand the spillover of a sharp fall in asset values. But such declines would be particularly difficult for the burgeoning middle-class investors that have cashed in on the boom. And declines in China and India, regarded by investors as markers for the region, would raise the spectre of contagion in other economies of the region.

Current and capital account performance and prospects

  • China experienced high export growth despite weakness in its main international markets. Growth in exports to the United States, China’s second largest export market, fell steadily during 2007. But exports to the European Union took up much of the slack.
  • Currency depreciation against the euro is contributing to trade tensions with the European Union. Despite such concerns, it remains unclear that China’s currency management has been the major cause of its soaring trade surplus. The country’s stellar productivity gains have done much to increase its competitiveness. The government has actively tried to limit export growth – for example, by removing or reducing export rebates for many products.
  • China is witnessing booming trade with Africa. China is the largest exporter to Africa amongst developing Asia-Pacific countries, accounting for more than a third of the group’s exports, or $26.4 billion in 2006. China is also the largest export market, receiving 45% of exports from Africa to developing Asia-Pacific countries. China becoming the centre of a rapidly growing global supply chain could also attract FDI to countries in Africa that export raw materials to China.
  • There is concern that cheap goods from Asia will displace domestic producers in African economies. However increased imports from China came at the expense of other exporters, with very little impact on domestic producers in Africa. There is also little similarity between most exports from China and those from sub-Saharan Africa. However for textiles, African exports to the American market have declined substantially while those of China have increased.
  • Chinese and other Asia-Pacific investors are playing a key role in supporting developed countries through the recent turmoil. Sovereign wealth funds and State investment institutions from the region have bolstered weakened banking sectors in the United States and Europe. Notable purchases include an equity stake for the China Investment Corporation in Morgan Stanley.
  • The shifting balance of financial power is also clear in the dramatic rise in the overseas investment of Chinese and other Asia-Pacific corporations. From 2005 to 2007, outward direct investments from China more than doubled. Prominent Chinese acquisitions in 2007 included the Industrial and Commercial Bank of China’s purchase of a 20% stake in South Africa’s Standard Bank.
  • China’s growth in service exports has been a notable development, averaging 16% over 1995-2006. China had the best performance in transport services exports of all Asia-Pacific countries, growing at 34% per year over 2000-2006. China is emerging as a major exporter of computer and information services. China had these exports increase at an annual rate of 40% after 2003, reaching $3 billion in 2006, when it became Japan’s largest outsourcing location for computer and information services.

Policy research piece: China’s “Go West” policy to reduce inequality among provinces – and its benefits for Asia-Pacific economies

  • China’s income inequality is among the highest in the world, higher than all other Asian countries except Nepal in 2004. A major part of China’s income inequality is inter-provincial inequality, mirrored by inequality in human development across economic and social indicators. Divisions are most pronounced between coastal and western provinces.
  • In response, China introduced its western development strategy, “Go West”, in 1999. Its priorities are infrastructure construction, environmental protection, industrial upgrading, human capital accumulation, science and technology research, and opening the provinces to foreign direct investment (FDI).
  • The preliminary evaluation of the policy is somewhat encouraging. In recent years, the gap in GDP per capita has shown some signs of closing. In 2005/2006, three-quarters of the western provinces experienced higher growth than the majority of coastal provinces. Rural income per capita, of the greatest concern given the rural-urban income divide, grew relatively fast in two western provinces. In 2006, government spending was higher in three-quarters of the western provinces than in the majority of coastal provinces.
  • Fixed-asset investment grew relatively rapidly in three-quarters of the western provinces. Final consumption increased more in a quarter of the western provinces than in the majority of coastal provinces. Foreign direct investment, a focus of the “Go West” policy, increased substantially in a quarter of the provinces. Another focus, research and development spending, increased substantially in a third of provinces.
  • Due to the country’s method of fiscal decentralization, funds for poorer regions, while growing rapidly, are lagging behind those for richer regions. This is due to a relatively high proportion of transfers going to provinces as tax-related revenue sharing and tax rebates, which are regressive because richer provinces are returned more money. Progressive transfers to the regions have come mainly from equalization transfers and ad-hoc transfers.
  • The development of China’s western provinces is directly benefiting neighbouring countries. A particularly encouraging trend for China’s neighbours is the relatively rapid export growth seen in many western provinces. The Government is encouraging this trend through extensive infrastructure projects to improve cross-border transportation.
  • Xinjiang is becoming China’s gateway to Central Asia. Tibet has also experienced rapid growth in trade with neighbouring countries. Guangxi is rapidly boosting its cross-border trade with Viet Nam. Yunnan has developed extensive trade links with its south-western neighbours. Mongolia and the Russian Federation have rapidly increased trade with neighbouring Inner Mongolia.
  • Development in China’s western provinces ties in closely to similar initiatives in neighbouring countries to encourage development in lagging border regions through cross-country trading ties. India is promoting trade for its north-eastern states, which are close to Yunnan. Viet Nam is also trying to reduce inter-provincial inequality, and increased ties with Guangxi are part of the country’s strategy to develop its mountainous northern provinces.