PRC Growth Forecast Raised, Downside Risks Remain
9/8/2005BEIJING, PEOPLE'S REPUBLIC OF CHINA (8 September 2005) - Surging net exports, strong investment, and accelerating consumption are expected to propel economic growth in the People's Republic of China (PRC) to 9.2% this year, outpacing an earlier forecast of 8.5%.
According to ADB's Asian Development Outlook 2005 Update (Update) released today, the PRC's economy showed little sign of the anticipated growth slowdown in the first half of 2005. The Update is a supplemental issue of the Asian Development Outlook 2005 (ADO 2005), ADB's flagship publication forecasting economic trends in the Asia and Pacific region, released in April.
The Update forecasts GDP growth of just below 9% for 2006, largely in line with the ADO 2005 growth projections.
"It is expected that high economic growth will be supported by rising incomes and consumption, though the deceleration of investment and net exports expected from the second half of 2005 is likely to bring GDP growth down a little from the peak levels of recent years," the Update says.
Consumer price inflation, which hit an eight-year high of 5.3% in July and August 2004, slowed to 2.3% in the first half of 2005, resulting in a reduction in the full-year inflation forecast to below 3% from 3.6%. Inflation is likely to stay below 3% in 2006, as excess capacity in manufacturing and an expected increase in grain production will likely diminish upward pressure from higher production costs, including rises in wages, benefits and international oil prices.
Downside risks to the growth outlook are energy concerns, weaknesses in the banking system, over-capacity in some industries, and the possibility that rural incomes will come under pressure.
The PRC is now the second-biggest oil consumer and one of the largest oil importers in the world. The PRC's demand for oil is driven partly by the rising number of private vehicles, inefficient use of oil, and price controls in the domestic oil market.
"The PRC may face increasing energy bottlenecks in the future unless pricing becomes more responsive to market requirements, and energy conservation and efficiency are encouraged," the Update adds.
Discussing other potential risks to the outlook, the report says state-owned commercial banks need to improve services and strengthen capital structures and management to withstand foreign competition. It says overcapacity in some industries has resulted from heavy investment. If this is not reined in sufficiently, deflationary pressures could develop that seriously weaken producers' profitability and balance sheets, causing further problems for lenders and for growth in general. Additional government measures to assist rural communities cope with rising production costs are required to maintain growth in rural incomes.
The People's Bank of China on 21 July announced that it would no longer peg the yuan to the US dollar, but would instead manage the exchange rate based on market supply and demand and with reference to a basket of foreign currencies. The central bank also revalued the yuan by 2.1% against the dollar.
While it is too early to assess the full impact of the move toward greater exchange rate flexibility, it is likely to have several longer-term implications, the Update says. These include a moderating impact on exports and investments in export industries; an improvement in the PRC's terms of trade, providing some relief from rising global prices for oil and raw materials; a possible reduction in speculative capital inflows; and some weakening of inflationary pressures.
The report says a stronger banking system is needed to manage the risks of a more flexible exchange rate system.
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