On the back of favorable global economic environment and improving domestic economic condition, China's real GDP growth is likely to reverse its downward trend since 1993 and pick up moderately in 2000 and 2001. Externally, overseas demand for Chinese goods has been surging since August 1999 due to stronger global economic growth. With faster recovery of other Asian economies and continued robust economic growth in the US and European Union (EU), China's exports are likely to rise strongly by 21.7% in 2000. The growth momentum of exports is, however, expected to slow in 2001 to 12.5%, as rising global interest rates would put a drag on the growth of US and European markets.

Domestically, private consumption is likely to improve moderately in 2000 and 2001. The doubling of government's social security payment to unemployed and retired state workers from RMB36 billion in 1999 to RMB70.7 billion in 2000 should cushion the impact of rising unemployment on consumption as the reform of state enterprises continues. Moreover, a plunge in the real return on bank deposits will help to discourage savings and lend support to the recovery of consumption. Thanks to a cut in interest rates in June 1999, the levy of a 20% tax on bank deposit interest income beginning November 1999 and the easing of deflation since mid-1999, the real return on one-year bank deposits tumbled from 6.1% in May 1999 to 1.1% in February 2000. If deflation continues to ease, the real return on bank deposit will become negative for the first time since 1995 later this year.

The growth of investment is also likely to pick up mildly in the coming two years, but the focus of the government's investment program will shift from infrastructure projects to technology upgrade. While the government has slashed its spending on infrastructure investment by 40% in the budget for 2000, it has sharply increased grants and interest subsidies to help state enterprises upgrade equipment and technology. China's possible accession to the World Trade Organization later this year will also boost investment. As China opens more of its market to foreign companies, the inflow of foreign direct investment (FDI) is expected to rebound. To prepare for increased foreign competition, Chinese companies will also step up investment to boost their competitiveness.

Despite the favorable external and domestic factors, China's real GDP growth is projected to pick up only moderately from 7.1% in 1999 to 7.5% and 7.8% in 2000 and 2001 respectively. Without resolving the structural problems in the banking and state enterprise sectors, China will be unable to fully unleash its growth potential. Constrained by the financial burden of massive non-performing loans, banks will be unable to sharply increase lending to finance investment. Rising unemployment due to the restructuring of state enterprises will also prevent a full recovery of consumer confidence.

China's balance of payments is, however, likely to remain favorable in 2000 and 2001, thanks to massive capital inflows and sizeable trade surplus. Apart from an increase in the inflows of FDI after China's entry to the WTO later this year, the inflow of portfolio investment will also increase as Chinese companies resume overseas listings. Meanwhile, although the trade surplus is expected to decline as stronger domestic demand and soaring world oil prices would increase China's imports, it would remain sizeable thanks to the sharp increase of exports. Given the favorable balance-of-payment position, China is under no pressure to either devalue its currency or allow a wider fluctuating band for its exchange rate.

Jason Kwok
North Asia Chief Economist

Joe Lo
Senior Economist

Ellen Cheuk
Economist

Alice Chan
Senior Information Officer

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