People’s Republic of China: Economy

As the economy in the People’s Republic of China has slowed more than expected in the first half of 2015, the growth forecast is revised down from Asian Development Outlook (ADO) 2015 for both 2015 and 2016. Export demand, tamped down by delayed recovery in the developed economies, should strengthen over the forecast period as global growth rises, and, together with robust consumption growth, cushion the impact of decelerating investment growth.

Selected economic indicators (%) 2015 2016
ADO 2015 Update ADO 2015 Update
GDP Growth 7.2 6.8 7.0 6.7
Inflation 1.8 1.5 2.3 2.2
Current Account Balance (share of GDP) 2.3 2.3 2.0 2.2

Source: Asian Development Outlook 2015; Asian Development Outlook 2015 Update

Economic performance

Economic growth in the People’s Republic of China moderated to 7.0% in the first half of 2015 as industrial and agricultural growth slowed. Services remained the driver of growth, as equity market firms benefited from a stock market boom and correction, and as real estate transactions were lifted by lower mortgage rates and more flexible purchase conditions.

On the demand side, the contributions of investment and net exports to GDP growth declined while that of consumption increased as wages rose. Inflation edged up in the first half of the year, but price pressures remained moderate as the impact of rising food prices was dampened by declines in other commodity prices and real renminbi appreciation.

In August, the central bank cut interest rates again in conjunction with other government policies that aimed to halt the fall in equity prices.

The renminbi weakened against the US dollar, reflecting market trends and the change in August to the procedure for fixing the exchange rate. Exports fell as recovery remained sluggish in major trade partners, and imports were lower owing mainly to falling commodity prices and growing import substitution. Trade and current account surpluses were up substantially over the same period in 2014. Net capital outflows pushed the overall balance of payments into a deficit, but gross international reserves remained sizeable.

Economic prospects

Consumer price inflation should remain low in 2015 as global prices for food and other commodities remain depressed, but likely rebound slightly in 2016 as those prices start to recover. Inflation forecasts are revised down for 2015 but less so for 2016. Foreign trade will benefit from global growth and trade, but current account surpluses will remain stable as global commodity prices recover.

Fiscal policy is expected to stay broadly unchanged, but lower revenues may push the deficit above the indicative target of 2.7% of GDP in 2015. Further widening of the budget deficit is expected in 2016 as more of local governments’ off-budget activities are brought on budget. Monetary policy has to take into account the risks associated with high credit growth, but further interest rate liberalization and lower reserve requirements cannot be ruled out.

The projections are subject to the external upside risk of commodity prices slipping further and the downside risk of economic activity suffering a further setback in the major industrial countries. The recent stock market correction is unlikely to adversely impact consumption, investment, or financial stability. Economic activity is unlikely to be sensitive to wealth effects, as equities comprise only a small part of household wealth, corporate finance, and financial institutions’ risk portfolios.

Excerpted from the Asian Development Outlook 2015 Update.