The impact of the international financial and economic turmoil on China’s economy has been manageable so far, but is expected to intensify. China’s financial system is relatively insulated from the direct impact of the international financial distress. In the real economy, overall export growth has until recently remained robust due to strong demand from emerging markets and gains in global market share reflecting strong competitiveness, although with pronounced differences in export performance between sectors. Looking forward, the impact of the crisis is spreading globally, with risk aversion and deleveraging leading to a funding squeeze that affects demand in many countries, including many emerging markets. Thus, as in earlier global downturns, China’s export growth is likely to be low in 2009, even with expected continued market share gains (we forecast 3.5 percent, based on current projections of global trends).
Domestic factors have already made China’s economy slow down in 2008, coming off its high pace in 2007. Due to an earlier tightening in macroeconomic policies, investment growth declined in 2008, led by real estate and construction, which then fed through to several “upstream” industries. Most other parts of the domestic economy, notably consumption, seem to have held up well so far. Looking ahead, private sector investment is likely to be weighed down by the unfavorable external prospects and continued weakness in real estate. Private consumption growth is likely to soften in 2009, but will receive some support from fiscal policy. In the mean time, inflation is coming down steadily. After absorbing higher food prices, headline inflation has receded and, with sharply lower commodity prices, inflation is not an issue of concern at this point.
Against this background, the authorities have adopted a more expansionary macro economic stance, and higher government-influenced spending is going to play a key role in 2009. Since the summer of 2008, the authorities have taken several steps to support growth, culminating in November with the outlining of a ten point plan to stimulate domestic demand. The emphasis will be on accelerating and increasing infrastructure and other investment, although of a different nature than in the wake of the Asian crisis, with many projects meant to focus on broad long term development and improving living standards. Most of the ten elements mean higher direct government-influenced spending—in the form of investment or consumption— and should thus have a measurable impact on output in the short term. Our forecast for 2009, which sees GDP growth of around 7.5 percent based on current projections of global economic trends, has more than one-half of that coming from government-influenced spending.
The stimulus policies provide China with a good opportunity to rebalance its economy in line with the objectives of the 11th five-year plan. The stimulus package contains many elements that support China’s overall long term development and improve people’s living standards. Moreover, some of the stimulus measures directly support the rebalancing of the pattern of growth from investment, exports, and industry to consumption and services. However, the government can use the opportunity of the fiscal stimulus package to take more rebalancing measures, including on energy and resource pricing; health, education, and social security; and financial reform.
The entire report is available at the World Bank website.