China’s Fourth-Quarter Economic Outlook

The sluggish economies of the U.S. and Europe will likely pull growth in China down to 9% in the fourth quarter, and even possibly below, with domestic demand and investment not fully able to take up the slack or, in the later case, with property, not being wanted to. We expect GDP growth for the full year, however, to be closer to 10% than 9% and to moderate only barely in 2012.

Inflation will remain policymakers top priority in the fourth quarter. Consumer price inflation may have peaked at 6.5% in the third-quarter but will ease only slowly. A further round of interest rates rises before year end remains likely, along with more effective tightening of banks’ capital reserve requirements.

The yuan will continue to rise, unless demand in the developed economies falls markedly putting exporters under sudden stress. A stronger yuan should narrow the trade deficit, easing, if only slightly the task of neutralizing capital inflows from both commerce and speculation.

The largest risk to the economy, we believe, remains from a policy misstep in response to global economic uncertainties or foreign policy issues with economic ramifications as China heads into the sharp end of its leadership transition that starts next year.

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