Soft Landing Expected for People's Republic of China Economy

BEIJING, PEOPLE'S REPUBLIC OF CHINA (6 April 2005) - The economy of the People's Republic of China (PRC) will continue to expand rapidly in 2005 to 2007, with growth rates expected at 8.5%, 8.7%, and 8.9%, respectively, according to a major ADB report released today.

Despite a series of macroeconomic control measures taken in 2004 to damp sectors considered to be overheated, economic growth last year accelerated to 9.5%, the highest level since 1997.

The fast growing economy is being reined in for a soft landing under the Government's balanced development strategy and continued macroeconomic control policies, says the Asian Development Outlook 2005 (ADO), the annual ADB publication that forecasts economic trends in the region.

The growth rate of exports will slow because of easing demand in industrial nations and higher costs for PRC exporters. Manufacturing and construction, hampered by bottlenecks in energy and transportation, land constraints, and reduced levels of investment, also will slow.

The industry sector is forecast to expand by 9.3-10.2% over the next three years. Agriculture will grow by 3.0-4.6% a year in this period, reflecting government's efforts to support rural production and farmers' incomes. As more domestic service industries open to the outside world, an average 8% growth in the services sector is expected for 2005-2007.

In addition to guiding its economy to a more sustainable growth path, the PRC also is working to fulfill commitments it made when joining the World Trade Organization in 2001.

In this regard, the PRC has reached its goal of cutting trade tariffs, with the general tariff level lowered from 15.6% in 2001 to 10.1% in early 2005, according to ADO.

In services such as banking, insurance and securities, the PRC has met its WTO commitments on time. "Over the past three years, the country has revised more than 2,300 national laws and regulations that ran counter to WTO rules," the report says.

Among them are laws related to intellectual property rights protection, including trademarks, patents, copyright and protection of computer software. However, enforcement of these laws remains difficult, the report says.

The PRC continued to be a favored destination for foreign investment, which rose by 13.3% to $60.6 billion in 2004.

"Investors come partly for unskilled labor, which is about 4% of the cost in the US and one third of the cost in, for example, Malaysia," the report says. "Moreover, the country's infrastructure continues to strengthen, and its business environment has improved significantly since it joined WTO," ADO says.

Despite the forecast of a soft landing for the economy, significant challenges remain. Risks to the outlook include a possible return to extraordinarily high growth rates of investment, which could spark further overheating. Conversely, the soft-landing scenario could be disrupted by potential problems that cause growth to slow more sharply than planned. The country must maintain rural income growth, stimulate development of small and medium-sized enterprises and speed up banking reforms, the report says.