The contribution of consumption to gross domestic product (GDP) is expected to rise in 2008 and investment will continue to be a driver of growth.
ADO warns that rising food prices will stoke inflationary pressures in the economy. Consumer price inflation is expected to average 5.5% in 2008 and remain around 5% in 2009, up from 4.8% in 2007.
“Aggressive monetary tightening measures, weak global economic prospects, and tighter lending policies will bring growth down to its potential level,” says Ifzal Ali, Chief Economist of the Manila-based regional development bank.
As the trade surplus and surging capital inflows contribute to excess liquidity, the authorities are expected to permit faster appreciation of the yuan against the US dollar.
Export growth is expected to slow to 19% in 2008 and further to 18% in 2009, from 26% in 2007, hit by weaker global demand and cuts in export rebates. Imports, on the other hand, are expected to grow at 20% in 2008 and 2009 as the currency appreciates, import tariffs are brought down, and other pro-import policies are implemented.
While growth in trade surplus is expected to decelerate in 2008-2009, revenues from the Olympic Games will reduce the deficit on the services account in 2008. Income from the country’s rising foreign exchange reserves and growing overseas investment will boost the income account. The current account surplus is forecast to decline as a share of GDP to 9.9% in 2008 and 8.6% in 2009, from about 11% in 2007.
Looking forward, the report says to keep the economy on a high growth path and move away from over-reliance on investment and exports, the government needs to address three major imbalances in the economy.
“The PRC needs to boost domestic consumption, address the energy and environmental concerns and bridge rising income inequality between rural and urban areas,” says Mr. Ali.
The report says that the government has already launched a raft of new measures to promote a “harmonious society.” However, rebalancing faces some constraints. These are high savings rates, particularly by enterprises; an emphasis on economic growth by officials in local governments; low energy prices and weak environmental pollution abatement policies; and regulations such as the household registration system.
