PRC Growth Moderation Highlights Need to Quicken Structural Reforms

News Release | 2 October 2013

HONG KONG, CHINA – Growth rates in the People’s Republic of China (PRC) in 2013 and 2014 will fall below earlier projections, highlighting the need to quicken structural economic reforms, says the Asian Development Bank (ADB). In an update of its flagship annual economic publication, Asian Development Outlook 2013 released today, ADB revised down its 2013 gross domestic product (GDP) growth forecast for the PRC to 7.6% from 8.2% seen in April. For 2014, growth will slow further to 7.4% from the previous estimate of 8.0%.

“Moderating growth in the PRC is the price of structural reform as authorities engineer a medium-term transition to a more sustainable growth path than one led by exports and investment,” said ADB Chief Economist Changyong Rhee. “However, this growth deceleration could impact the rest of Asia, especially East and Southeast Asia, since the PRC’s economic influence has grown in the past decade.”

The first-half growth in 2013 of 7.6% was below projections, with weaker domestic demand, a softening of the 2012 industrial rebound, and a sharp deceleration in foreign trade. Export growth slipped from 18.3% in the first quarter to just 3.7% in the second, on the back of still anemic global demand. Services remained the main driver of growth. In the third quarter, some signs of a rebound in domestic demand, industrial production, and trade are emerging.

Authorities must continue with structural measures to help lift the economy, putting greater emphasis on domestic consumption and less on investment. The central government will have to carry out a delicate balancing act of encouraging sustained robust growth through reforms and stimulus, while continuing to mitigate risks in the financial sector through careful monetary policy management. A sudden pullback in credit could slow investment growth and put a strain on the balance sheets of financial institutions that had earlier expanded too rapidly.

Promoting greater domestic consumption requires more public spending on health, education, and social safety nets. However, with moderating growth prospects, fiscal reform is necessary to secure sufficient resources to meet the rising demand for social services.

The more subdued economic environment has helped calm consumer price pressures, with the inflation forecast for 2013 revised down to 2.5% from 3.2%, and to 2.7% from 3.5% in 2014. For the rest of 2013, export and import growth rates are expected to remain in the single digit range, while the renminbi will continue to appreciate, but at a more moderate pace than earlier in the year.