(MENAFN - Arab Times) A report issued by KFH-Research showed growth expectations regarding the Chinese economy in 2013, where momentum of growth will increase slightly due to slowdown in global demand.
In addition, the Chinese economy will depend on local consumption for growth, although the report expects the Chinese economy to grow annually by 8.1% in 2013. The report added that policy makers in China are considering taking more encouraging procedures to avoid sharp economy drops. China plans a new national program from 2012-2015 to achieve comprehensive development and redistribute wealths, in addition to developing western areas.
China's growth rate has been decelerating in the past quarters underpinned by strong external headwinds and only limited policy easing and stimulus action by the Chinese government. One must remember that back in late 2010 and in 2011, China's economic policies were aimed at slowing down the economy, as economic overheating was perceived as the main threat at the time.
Monetary policies were tightened throughout 2011 as a result, including five 25bps benchmark interest rate hikes, and no less than nine 50bps increases of the reserve requirement ratio. Inflation also peaked at 6.5% mid-2011, well above the central bank's 4.0%, and remained stubbornly high in the months thereafter. Monetary policies were, therefore, still tight in the first half of 2012, aimed at slowing inflation.
2013 Outlook
Forecasting China's economic performance in 2013 is somewhat more of a challenge, as it will depend on factors that are difficult to predict. We believe that risks to China are likely to intensify in the short term, given the bleak global demand, especially from the E.U., and the uncertain outlook for its largest trading partners. China must brace itself for a prolonged period of moderate expansion after years of rapid growth, as although global growth will recover somewhat in 2013, it is expected to remain relatively subdued. Still, even in a worst case scenario, China would be able to avoid a hard economic landing, given that policymakers in Beijing have considerable scope for further stimulus measures. The government's budget deficit is relatively small at around 2.5% of GDP while the government's debt stock is low at around 17.0% of GDP.
Taking the factors into account, we believe that China will grow 8.1% y-o-y in 2013 (2012E: 7.7%), depending on the strength of global demand, the effect of the policy easing and stimulus measures already taken and the extent to which the new government will implement stimulus measures or policy easing. Assuming no major developments (e.g. no major breakthrough nor a major break down) in the E.U, we do not expect that export growth will be a major growth-driving factor in 2013. With import growth likely to increase on the back of a stronger domestic economy, China's trade and current account surpluses will expectedly narrow.
The trade surplus is estimated to narrow from around 3.0% of GDP in 2012 to an estimated 2.5% of GDP in 2013, reducing the current account surplus to roughly 1.6% of GDP in 2013, down from 2.1% in 2012.
We reiterate again that China must transition toward a consumption-led growth model, especially as its working-age population shrinks and demand for its exports falters. As is, there is a widespread agreement both inside and outside China that if the country is going to reach the ranks of wealthy nations, it must look less to exports reliant on cheap labour and focus more on innovative economic activity involving branded goods and advanced services aimed at domestic consumers. For now, the global economic recovery is at stake as the world is looking to China to drive global demand and prop up growth. A sharp decline in Chinese growth and demand will have a bad aftermath-it could, first and foremost, send shock waves through the economies of its trading partners. Asian countries and commodities suppliers would be hit first, but if that cut into their demand for machinery and other goods, the impact could spread to the US and EU.
Bearing that in mind, the longer-term outlook will depend on how China manages key structural challenges. As China matures from rapid, investment-intensive 'catch-up' growth to a more balanced model where the share of consumption and services to overall GDP will rise, the structural speed limits of its economy is likely to decline. The country's challenge is to continue steering its economy towards a more sustainable path. Given the anticipated structural slowdown, this would involve re-invigorating the underlying drivers of growth to achieve health per capita income growth. In view of the economic, social, environmental and external imbalances that have accompanied rapid growth and structural change, this would also involve sustaining the on-going shift in focus from the rate of growth towards the quality of development.
China's 12th Five-Year Plan (2011-2015)
On March 14, 2011, China's National People's Congress approved a new national development program stretching from 2011-2015. The plan aims to transform the world's second-largest economy from an investment-driven dynamo into a global powerhouse with a steadier and more stable trajectory, with industry-specific and provincial targets over the course of the period. According to President Hu Jintao, important features of the plan include the concept of "inclusive growth", as China attempts to solve the issue of increasing wealth disparity, as well as "higher quality growth", as China grapples with challenges of sustainability issues such as pollution, intensive energy use and resource depletion. Overall, the government has set the new annual GDP target at 7.0% over the next five years, however we believe annual growth will exceed 8.0%. By comparison, the 11th Five-Year Plan called for annual growth of 7.5% (Actual: around 11.0%).
Key takeaways:
* Develop China's western regions
* Protect the environment and improve energy efficiency
* Continue transitioning to an economy driven by domestic consumption instead of exports
* Improve the lives of Chinese citizens
* Develop seven priority industries, with the aim of increasing their GDP contributions from 2.0% of GDP to 8.0% of GDP
* Three sectors are aligned with the theme of sustainable growth, namely energy savings and environmental protection, new energy and clean energy vehicles
* The other areas are consistent with China's ambition to move-up the value chain, including biotechnology, new materials, IT, and high-end manufacturing.
Moving forward, effective implementation of the plan objectives remains difficult. Local government officials have been known to either slavishly follow plan targets or not follow them at all. For example, during the 11th Five-Year Plan period (2006-2010) the country's target annual GDP growth rate was routinely exceeded, while energy intensity targets led to forced electricity brown-outs in several cities in late 2010 to meet those targets.
The 11th Five-Year plan was also slow in applying fundamental structural changes to China's economy that top leaders say are needed - for example, reducing fixed asset investment as a share of GDP and increasing domestic consumption. Increasing consumption has always been a difficult task for China. The country has enjoyed spectacular growth from its old growth model; a model that promoted investments and exports at the expense of increased wage growth and household savings.
Structural change in any economy does not happen overnight and China is no exception. Therefore we foresee bumps in the road. Whether they are manifested in the form of domestic issues, external demand shocks, global rebalancing concerns, or some other unexpected development, these are all problems that China can address and overcome. But it can only do so provided it is committed to implementation and stays on the course of reform.
