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Growth in the gross domestic product (GDP) of the People’s Republic of China (PRC) moderated in the first quarter of 2014 as real estate investment declined, but monetary and fiscal measures revived growth in the second quarter to reach 7.4% in the first half. The contribution of investment and net exports declined while that of consumption increased as wages rose. On the supply side, services outpaced other sectors, driven by urbanization, tax reform, and business deregulation. Consumer price inflation eased from 2.5% year on year in December 2013 to 2.3% in July 2014, and producer price deflation moderated as global metal prices rose.
|Selected economic indicators (%) - People’s Republic of China||2014||2015|
|ADO 2014||Update||ADO 2014||Update|
|Current Account Balance (share of GDP)||2.0||2.2||1.9||2.1|
Source: ADB estimates.
Budgetary tightening at the beginning of 2014 was followed by accelerated government spending that, with a decline in revenue growth, trimmed the consolidated budget surplus of the central and local governments in the first half of the year to 2.0% of GDP. As off-budget expenses similarly seemed to decline in early 2014 and pick up again later, fiscal policy was contractionary in early 2014 but later became more accommodative. Monetary policy was accommodative in the first half, during which the broad money supply grew by 13.3%. However, credit growth outside the banking sector was on a declining trend.
Weakening external demand weighed on exports, but slack in construction slowed import growth such that the trade surplus widened in the first half. Both the current account surplus and the overall balance of payments declined, however, as the deficit on services and transfers widened. Central bank liquidity injections beginning in February 2014 interrupted the trend appreciation of the renminbi vis-à-vis the US dollar, but moderate appreciation resumed in May.
GDP growth projections for 2014 and 2015 are unchanged,supported by continued government stimulus and rising external demand. Consumption expenditure will remain robust, driven by more equitable income growth and higher social spending. The inflation forecast is revised down for 2014 but not for 2015. Improved terms of trade, stronger external demand, and a weaker renminbi should mean a slightly larger current account surplus as a percentage of GDP in 2014, not smaller as forecast in the Asian Development Outlook (ADO) 2014 in April. Likely renminbi appreciation could reverse this trend in 2015.
Regarding policy, the consolidated budget deficit for the whole of 2014 will likely exceed the indicative target of 2.1% of GDP and continue to grow in 2015 as more off-budget activities are brought on budget. Monetary policy will likely be tighter in 2015 to encourage financial deleveraging, and the renminbi-dollar exchange rate band will be widened to allow more effective response to capital flows.
The projections assume that the government can fine-tune measures to sustain growth without a buildup of fiscal and financial risks. They further assume that the United States Federal Reserve’s tapering of quantitative easing will not impede capital inflows and that the PRC will weather the effects of any slowdown in Europe.
Source: ADB. 2014. Asian Development Outlook 2014 Update. Manila.