The Chinese economy was witnessing growth even in the wake of a weakened world economic scenario, but it slowed down in the last quarter of 2012.The regions aggregate GDP declined to 5.8% in 2012 from 7.1% in 2011 as export growth minimized and investment spending in many economies slowed down. This was the steepest fall in more than a decade.
Activities of growth have regained momentum because of the implementation of new policies and rise in infrastructure expenditures. China has overtaken euro area and will in near future become the second largest economy in 2016. Living standards are expected to increase in China under the 12th five year plan (2011-2015). In the outlook for 2013, the consumption and investment demand in China will be supported by the laxity in monetary and fiscal policy with the growth for the entire year expected to reach upto 7.9%.
“Hot money inflows” to China
In recent years, China has been prone to these hot money inflows even in the wake of worldwide economic uncertainty, as a result of its relative economic stability supported by the optimistic long-term growth fundamentals and the prevailing view that RMB remains undervalued.These factors made China a sought after destination for investments yielding higher returns. Since 2007, the rate of interests of China and US are moving in opposite directions attracting investors to invest in China by shifting their investments from the U.S. Currency appreciation, inflationary pressures etc. are all symptoms of hot money flows that can destabilize the economy which is evident in China. Hot money flow has gained momentum in China from the start of 2013.
Key Development Highlights
• Mid-recovery of GDP growth 8-8.5%.
• Construction as well as consumption are seen to be main key drivers.
• Inflation is likely to increase to 3%.
• Wage levels most likely will rise.
• Slight recovery of weak exports demand.
• Moderate appreciation in RMB.
• International transactions will witness an increase in the use of RMB.
Inflationary pressures are expected to rise slightly with CPI increasing by around 3% in 2013. Factors that are compelling inflation are excessive liquidity, rising food prices as well as increasing real estate prices. Overall inflation is expected to remain stable which would allow monetary and fiscal policy to trigger the economy.
China’s foreign trade is expected to remain under pressure in the outlook for 2013. The growth target of 12% for the foreign trade remained unattained in the year 2012. Trade protectionism, falling exports, rising production costs, appreciation in RMB will continue to challenge China’s trade environment.
Labour Market Increasing wage levels is a major actionable area for the government as it is trying to narrow down the wide wealth gap and pushing up the consumption levels. As of January 2013, Bejing, Sharnix and Zehijiang have published new increased wage levels, between 11%-15%. Overall wages are expected to increase by 10%.
Selected Reform sectors (as per OECD data)
Financial Sector Reforms
RMB usage is witnessing an increase in International transactions. The regulations on inflow and outflow of capital to and from the country is purposed to be lifted.
Competition and Innovation
State ownership needs to be narrowed down in some sectors. The state should withdraw from non-core sectors.The intellectual property rights of innovators both in-house and outside should be more stringently protected.
More than 25% of the people live in the cities. Migration of people from villages and towns to cities, and from agriculture to production and service industry will bolster growth but at the same time bring forth a lot of challenges. Farmers need to be given the same property rights as urban dwellers.
A comprehensive policy mix is required to meet the environmental goals effectively by formulating a well designed market based approach and better implementation of existing regulations.
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Source: World Bank
|Last Updated on : 21th February 2015||Next Update : February 2016|