Structural Reforms More Important Than Growth Targets in PRC, Says ADB

News Release | 25 September 2014

HONG KONG, CHINA – Steady consumption and rising external demand will support economic growth in the People’s Republic of China (PRC) this year, especially if the government continues an accommodative macroeconomic policy package,  the Asian Development Bank (ADB) said in a new report released today.

In an update of its flagship annual economic publication, Asian Development Outlook 2014, ADB kept its forecast for growth in the PRC’s gross domestic product (GDP) unchanged at 7.5% in 2014 and 7.4% in 2015, despite continuing pressure from a slowing property sector, tightening credit growth in the early part of this year, and a shrinking workforce.

“At this critical juncture in the PRC’s transition, carrying out the government’s announced structural reforms is more important than meeting the growth target,” said ADB Chief Economist Shang-Jin Wei in launching the report. “Even if the growth rate falls somewhat below the predicted rate, as long as the employment situation is healthy, there is no need for panic.”

GDP growth moderated from 7.7% year-on-year in the fourth quarter of 2013 to 7.4% in the first quarter of 2014, dragged down by fiscal tightening, weak export growth, and decelerating real estate investment. Growth picked up to 7.5% in the second quarter of 2014 as the government accelerated spending on infrastructure and social housing and introduced targeted monetary easing.

Exports expanded 4.9% year-on-year in the second quarter as external demand for PRC products improved, sending the trade surplus soaring to $85.9 billion, up from $16.6 billion in the first quarter. The combination of falling commodity prices, recovery in developed economies, and renminbi weakening earlier this year is likely to keep the trade surplus high for the rest of 2014.

As moderating economic activity restrains price pressures, consumer price inflation is forecast to remain subdued at 2.4% on average, well below the government ceiling of 3.5%.

In a positive sign for long-term sustainable growth, the government has made progress on its reform agenda. Milestones announced or implemented include development of the regulatory framework for the Shanghai free trade zone as a testing ground for service sector development and liberalizing the financial sector and capital account; doubling the daily trading band of the renminbi, which should allow better management of capital flows; and opening a new window for capital transfers by connecting the stock exchanges of Shanghai and Hong Kong, China.

The report notes that monetary policy should balance the need to ease financial risks, which stem from high credit growth in the past, with the need to support sustainable economic growth. As targeted monetary easing has accelerated credit growth since March 2014, monetary policy will likely tighten again in 2015 in line with the central bank’s view that the PRC needs financial deleveraging.

The principal domestic risks to the forecast stem from uncertainty over the government’s ability to control an ongoing correction in the real estate sector and avoid a rapid buildup of fiscal and financial strains.