PRC's Recovery Quickens as Investments, Lending Surge, Says ADB

HONG KONG, CHINA – After falling to its lowest rate in 20 years in the first quarter of this year as a result of the global downturn, economic growth in the People's Republic of China (PRC) rebounded in the second quarter and is expected to record more than 8% in 2009 and 2010, according to a major new report from the Asian Development Bank (ADB).

The Asian Development Outlook 2009 Update (ADO Update), released today, projects economic growth of 8.2% this year, with a surge in bank lending and fixed asset investments pushing growth 1.2 percentage points higher than ADB's forecast in March.

The expected maintenance of the Government's fiscal stimulus and a moderate recovery in the international economy in 2010 will lift the PRC's growth rate next year to 8.9%, the report adds.

"The massive fiscal stimulus announced last year and the aggressive monetary easing in 2009 has softened the blow of the global slump on the economy," said Jong-Wha Lee, ADB's Chief Economist. "The 8% growth target for 2009 set by the Government at the start of the year now looks within reach for developing Asia's largest economy and, in 2010, it will be in sight of the country's long-run sustainable growth range of about 9%."

The report says that growth accelerated to 7.9% in the second quarter of 2009 from a low 6.1% in the first quarter, bringing first half growth to 7.1%. The expansion in the first 6 months was driven by investment, which contributed 6.2 percentage points of the total. Consumption contributed 3.8 percentage points, but was offset by a 2.9 percentage point decline in net exports.

Fixed asset investment in real terms soared by 41.2% in the second quarter, 27 percentage points above a year earlier, reflecting the impact of the large fiscal stimulus and rapid credit expansion. Investments in agriculture, infrastructure, and public funding for projects related to health and social security all rose sharply.

A flood of new bank lending, fuelled by the Government's expansionary monetary stance, was equivalent to around 50% of GDP for the first half of the year, double the average level of the previous two years. State-owned enterprises and large private businesses were the major borrowers.

Industrial production regained momentum in the second quarter as firms began to rebuild inventories after a significant destocking during the worst of the crisis, in late 2008 and early 2009. However, weak external demand and overcapacity in industries, such as steel, cement, and machinery, saw total profits of enterprises fall by 22.9% in the first five months of 2009.

The report says that in the second quarter of 2009, the PRC posted its smallest trade surplus ($34.9 billion) in three years, the result of a dramatic slump in exports and a slowdown in imports. A vigorous increase in consumption was bolstered by strong growth in real incomes in both urban and rural areas.

The ADO Update expects mild deflation to continue through most of 2009, but higher economic growth in 2010 will contribute to inflation rising to a forecast 3%.

The major drivers of growth in 2010 will be infrastructure investment, construction, and an expansion of consumption. With only a moderate recovery forecast for the international economy, net exports are expected to make only a minor contribution to growth.

The main risks to the outlook, the report notes, is a significantly weaker recovery in the international economy than currently foreseen, and, on the domestic front, an earlier than expected exit from the Government's fiscal stimulus package, and concerns that the flood of bank lending, if maintained for too long, could trigger another round of severe monetary policy tightening that would pull growth down again.

Asian Development Outlook, and Asian Development Outlook Update, are ADB’s flagship economic reports analyzing the economic conditions and prospects in Asia and the Pacific, and are issued in March and September, respectively.

About ADB