High growth and low inflation in 2012 are expected to continue in 2013. Growth slowed but continued to shine among large economies. Consumption outpaced investment to contribute the most to expansion. In line with the emphasis on domestic demand, the current account surplus continued to decline relative to the gross domestic product (GDP) in a trend expected to continue in 2013 and 2014. The challenge for the People’s Republic of China (PRC) is to implement ambitious reforms to restructure the economy toward domestic demand and inclusive growth.

Economic performance

Beset by a deteriorated external environment and a cooled real estate sector, economic growth in the PRC slowed from 9.3% in 2011 to 7.8% in 2012, the lowest rate in the past 13 years but still higher than the government’s target of 7.5%. Growth picked up late in 2012, boosted by stimulus measures adopted earlier in the year that included higher public spending, especially on infrastructure, and fiscal incentives. Economic activity - particularly manufacturing and other industry - started to rebound in September in a trend that has continued uninterrupted. Higher growth at 7.9% in the fourth quarter of 2012 ended deceleration that had persisted for seven consecutive quarters. Higher salary and pension increases fueled real income growth - up by 9.5% in urban areas and by 10.7% in rural areas - lifting per capita income in the PRC to $6,080 at the market exchange rate prevailing at the end of December.

Source: ADB estimates.

Economic prospects

The baseline outlook assumes that the economy of the United States will continue its slow recovery, the euro area will avoid a worsening of the current crisis, and increased public spending in the PRC will improve living standards and boost consumption. Against this backdrop, and following the rebound in economic activity since September 2012, growth is expected to continue picking up in the first half of 2013 and stabilize for the remainder of the year, as the impact of stimulus implemented in mid-2012 fades.

Looking ahead, fixed asset investment will continue to drive growth, boosted by efforts to accelerate large infrastructure projects earmarked in the Twelfth Five-Year Plan, 2011-2015. Rising wages and pensions will support private consumption growth. The expected slow recovery of external demand suggests the contribution of net exports to growth will remain marginally negative in 2013 but turn modestly positive in 2014 as global trade picks up.

Export growth is projected at 10% in 2013, and import growth will reach 9% as domestic demand strengthens, commodity prices rebound, and the national currency continues to appreciate. The trade surplus will nevertheless be slimmer, narrowing the current account surplus to 2.5% of GDP in 2013 and 2.1% in 2014.

The accompanying policy stance will likely be supportive. Fiscal policy is expected to be more expansionary, with the overall fiscal deficit projected to widen to 2.2% of GDP in 2013 from 1.6% in 2012. The bias toward social expenditure will continue in accordance with government intentions to reduce the income gap and improve living standards through tax reform. Monetary policy will remain accommodative with broad money supply set to grow by 13% in 2013.

Under these assumptions, GDP growth in the PRC is forecast at 8.2% in 2013. Greater efforts to comply with more stringent environmental targets, coupled with reforms to make growth more inclusive, will push growth down slightly to 8% in 2014.

Source: ADB. 2013. Asian Development Outlook 2013. Manila.

READ MORE