Soft Landing Predicted for People's Republic of China Despite Growth Cut

News Release | 3 October 2012

HONG KONG, CHINA - The Asian Development Bank (ADB) has cut its 2012 gross domestic product (GDP) growth estimate for the People's Republic of China (PRC) by nearly 1 percentage point, warning that downside risks to the economy are likely to intensify in the short run given bleak global demand and the uncertain outlook for the country's largest trading partners.

"The global slump in demand, especially from Europe, will remain a serious drag on growth in the near term," said ADB's Chief Economist Changyong Rhee. "The government has the means to cushion the economy from global turmoil, however. Its strong fiscal position, receding inflation and expansionary policy measures should ensure a soft economic landing, but it needs to expedite its effort to diversify the source of growth and strengthen structural reforms for inclusive growth."

An update of ADB's Asian Development Outlook 2012 lowers PRC's 2012 forecast to 7.7% from the 8.5% projected in April. Its 2013 forecast is also ratcheted down to 8.1% from 8.7%.

Inflation is expected to remain subdued for the rest of 2012, providing scope for a further easing of monetary policy. ADB now projects inflation of 3.2% for 2012, with the rate ticking up to 3.5% in 2013.

Subdued exports, weaker investment, softer consumption and a slump in industrial output dragged heavily on the economy in the first half of 2012, with GDP growth easing to 7.8% from 9.6% over the same period a year earlier.

The government has responded with a series of measures to stimulate economic activity, including additional state spending, tax cuts and incentives, and advancing infrastructure projects. Softer inflation has allowed People's Bank of China to cut the 1-year benchmark interest rate and banks' reserve requirement ratio twice each in the year to date.

With global demand likely to remain lackluster, however, policymakers must continue to boost domestic sources of growth, including scaling up the country's service sector, which lags well behind its international peers but offers substantial employment opportunities.

Fixed asset investment is likely to remain the major driver of the economy, with growth of about 20% over the forecast period, despite measures taken to cool the real estate sector. Rising wages, pensions, and subsidies will support growth in private consumption. Export and import growth is expected to remain subdued, however, with external trade expanding 8% in 2012 and 10% in 2013.

Domestically, the quality of some bank assets appears to be deteriorating, a situation which could worsen with pressure on local governments to borrow for large infrastructure projects to arrest the current economic slowdown.