The report forecasts growth of 10.8% for 2008, also an upward revision from the 9.8% projection in March when ADB launched the flagship annual forecasting publication ADO 2007.
“Further steps to cool the rapid investment expansion are likely and the Government will put more emphasis on improving energy efficiency and on cutting pollution. But top priorities remain the creation of jobs for nearly 8 million rural surplus workers migrating to cities each year and on lifting income growth in lagging regions and areas,” says the report.
The 11.5% Gross Domestic Product (GDP) growth in the first half, its fastest rate since 1994, was led by industry, especially in such sectors as steel, electricity, chemicals, and oil processing. Strong profitability, buoyant sales and still-low lending rates drove investment during the period.
Investment administered by local governments grew by 28.1% in the first six months, nearly double the equivalent central government rate, suggesting that efforts by the center to tighten local investment have not had lasting effects.
Supported by policies to boost the rural economy, investment in agriculture surged by 37.5% in the first half, faster than that in industry (29.0%) and services (24.6%). The report says domestic agriculture should be boosted by policies to lift rural incomes and improve rural infrastructure. Growth in the services sector will be supported by the summer Olympics next year.
Rising incomes bolstered by enterprise profits, salary increases for civil servants and higher minimum wages for some employees and policies to spur the rural economy will drive consumption. Higher incomes and improvements in the social security system will continue to underpin consumption growth.
PRC’s inflation is estimated to be 4.2% this year and 3.8% in 2008 against the previous forecasts of 1.8% and 2.2%, respectively. Rising global grain prices and a pig disease outbreak led to sharply higher food prices, but this is expected to ease next year, paving the way for the implementation of planned reforms in the pricing of state-controlled sectors such as water, power and natural gas.
Exports rose by 27.6% in the first half, exceeding import growth of 18.2%. Exports are forecast to grow by 20% and imports by 16% in the second half, resulting in a record full-year trade surplus of around $300 billion, up more than 60% from 2006.
The current account surplus is now expected to swell to 10.9% and 10.5% of GDP in 2007 and 2008, respectively, revised up from the 8.8% and 8.9% projected earlier this year. The gap between export and import growth will probably narrow slightly as the changes to export tariffs and export tax rebates take effect.
Significantly higher than expected inflation, however, poses a risk to the outlook. Adverse weather would lower domestic grain production at a time when imported grain prices are high.
Excessive liquidity in the financial system and relatively unattractive bank deposit rates helped boost stock and property prices. But a major adjustment in stock prices could hurt bank balance sheets. Faced with rising nonperforming loan ratios, banks would likely curtail lending with knock-on effects on the broader economy.
ADO Update adds that PRC faces the key challenge of reducing the country’s reliance on exports and investment for growth in favor of private consumption. “Such a switch could lessen vulnerability to external shocks and ease environmental strains caused by the emphasis on export- and investment-led heavy industry.”
