China’s Growth Slows As Restructuring Goes Slowly

The World Bank is holding steady its forecast for China’s economic growth. In its newly published Global Economic Forecast, 2011, the Bank expects GDP growth to slow to 8.7% this year and 8.4% next as monetary policy is tightened to fight inflation and 2008’s stimulus is unwound. Those are the same numbers as in the Bank’s China Quarterly Update published in November.

The Bank says it estimates China’s growth to have been 10% last year, up from 9.1% in 2009 and with domestic demand accounting for 7.8 percentage points of overall growth. Domestic demand’s share gradually diminished across the year as the stimulus was wound down and monetary policy tightened, increasing exports share and underlining the policy conundrum facing Beijing as it tries to restructure the economy from export to domestic driven demand that we discussed in November. In the near-term the Bank sees China’s growth being driven by industry-led capital intensive activity as China remains “the focal point of regional activity, with East Asian exports of materials and semi-finished manufactures to China for final processing and export to high-income destinations likely to intensify.”

The Bank’s chief economist, Justin Yifu Lin, emphasized a need to Beijing to pursue its switch of expansionary monetary policy to a more neutral stance to reduce inflationary pressures. He also said that inflation has been the main reason behind the real appreciation of the yuan against the dollar over the past year of “a bit more than 10%”. That rate of appreciation, welcome as it will be to the U.S., will crimp exports, cost domestic jobs and slow growth at home, until, if Lin is right, inflation moderates. Thus the conundrum continues.




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