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Economic growth in the People’s Republic of China (PRC) slowed in the first half of 2013 to 7.6% year on year. Services expanded briskly, but the industrial rebound of late 2012 could not be sustained and agricultural growth declined. On the demand side, investment surpassed consumption as a domestic contributor to growth, but both grew more slowly than a year earlier.
|Selected Economic Indicators (%) - People's Republic of China||2013||2014|
|ADO 2013||Update||ADO 2013||Update|
|Current Account Balance (share of GDP)||2.5||2.2||2.1||2.1|
Source: Asian Development Outlook (ADO) 2013 Update; ADB estimates.
Weakening global demand, friction with trade partners, and rising export prices sharply slowed growth in exports and imports in the first half of 2013. However, with exports growing during this period by 10.3% year on year against growth at 6.7% for imports, the trade surplus widened, driving up the current account surplus by 23.9% to $95.8 billion (or 2.4% of 2012 GDP), despite a widening deficit in the services and income accounts. Foreign direct investment rose by 4.9% in the first half of 2013, reversing a 3.0% drop a year earlier.
Strong demand for food pushed up the consumer price index by 2.6% year on year in August 2013, but core inflation (excluding food and energy) eased to 1.5% as domestic demand weakened and commodity prices fell. The renminbi had appreciated by 1.9% in nominal terms against the US dollar in the first 8 months and by 6.8% in real effective terms as of July.
Money supply growth accelerated to 16.1% year on year by April 2013, exceeding the central bank’s 13.0% target, owing to the growth of less regulated financial transactions. Money supply growth eased to 14.7% by the end of August after financial sector regulation was tightened and liquidity injections into the interbank market curtailed. However, interbank rates rose sharply from mid-May to mid-June, prompting targeted liquidity injections to lower them, albeit not down to their levels before the turbulence.
The consolidated fiscal surplus remained substantial at 3.6% of gross domestic product (GDP) in the first half of 2013 but down from 4.3% a year earlier. As economic activity decelerated, central government revenue rose by only 1.5%, far less than the 8.1% rise in expenditure. In contrast, local governments saw revenues rise by 13.5% and outpace 11.3% expenditure growth. To improve fiscal revenue and ease local government finances, value-added taxes are replacing taxes on turnover, the property tax pilot will likely extend to other jurisdictions, and more local governments were authorized to issue bonds.
Moderating growth and lower current account surpluses are expected in 2013 and 2014. The growth forecast is revised down to 7.6% in 2013 and 7.4% in 2014 as structural reforms will take time to gain traction. Tighter regulation of local governments’ borrowing and some shadow banking activities will likely affect investment. Consumption is projected to continue growing at the current rate. External demand will remain weak as a stronger renminbi may discourage exports. Despite weaker domestic demand weighing on imports, the current account surplus is projected to narrow to 2.2% in 2013 and 2.1% in 2014.
The inflation forecast is revised down to 2.5% for 2013 and to 2.7% for 2014, in line with current trends and unexpectedly weak domestic demand. Renminbi appreciation will likely slow, with periods of depreciation, as the currency is believed to be near equilibrium and foreign trade and capital flows are both increasingly volatile.
Domestic risks to the projections stem mainly from monetary and financial developments, including rising local government debt. Warning signs would be continued strong growth in shadow banking, sharply falling property prices, or local governments further in arrears. External risks stem from the US Federal Reserve tapering quantitative easing, which could dry up capital inflows, heighten risk aversion, and undermine business confidence.
Source: ADB. 2013. Asian Development Outlook 2013 Update. Manila.