PRC Growth to Remain Robust as Economy Diversifies - ADB Report

HONG KONG, CHINA – Growth in the People’s Republic of China (PRC) is set to moderate slightly over the next two years but will still exceed 8% annually on the back of strong investment, rising private consumption and a more stable global economy, says a new Asian Development Bank (ADB) report.

ADB’s flagship annual economic publication, Asian Development Outlook 2012 (ADO 2012), released today, says the PRC ― the world’s second largest economy ― is set to post gross domestic product growth of 8.5% in 2012, and 8.7% in 2013 after expanding to 9.2% in 2011. The report assumes that the US economy will continue its slow recovery, the eurozone debt crisis will not worsen, and the government of the PRC will continue to pursue policies that support growth.

“The global environment remains very uncertain but the People’s Republic of China is showing healthy signs of economic diversification with domestic consumption up and the trade surplus down,” said ADB Chief Economist Changyong Rhee. “At the same time, rising income inequality and strains on the environment highlight the need to continue the push for a more balanced, eco-friendly growth model.”

A fall in net exports last year was largely offset by high levels of foreign and domestic investment, robust government spending, and private consumption. That pattern is likely to continue over the next two years with the government set to boost social service spending and to carry out further fiscal and financial reforms to aid domestic demand and small business development.

Fixed asset investment is likely to remain the main engine of growth, expanding more than 20% annually in 2012 and 2013, with public infrastructure and housing partially offsetting a slowdown in private sector real estate construction. Private consumption is forecast to grow about 12% annually over the next two years, supported by employment and wage growth, and government spending.

Consumer price inflation is set to decline to about 4% in 2012 after peaking at a three-year high of 6.5% in July last year, amidst restrained global demand for commodities and continued measures to keep domestic property prices in check. The pace of appreciation of the yuan is likely to ease given rising costs affecting the PRC’s export competitiveness.

The report highlights some of the challenges for policymakers, including tackling income inequality and reducing pressure on natural resources, both of which threaten the sustainability of future growth and poverty reduction. This will require stepped up investment in rural areas and more comprehensive social security safety nets, as well stronger management of water and other natural resources, and improving energy efficiency.

With a strong fiscal position and declining inflation, the government is now well placed to push ahead with planned measures to reduce regional and rural-urban income gaps and to cut industrial water consumption and energy use, which will help accelerate the country’s economic transformation.

The key downside risks to the latest forecasts include a further deterioration in global economic conditions, as well as a potential spike in non-performing loans of domestic local governments.