Despite an expected weakening of export growth, continued strong domestic demand will shield China from the impact of a global economic slowdown.  Apart from sustained government's infrastructure development against a low interest rate environment, the growth of investment will further be boosted by the massive inflow of foreign capital.  Attracted by the opening of China's domestic economy after accession to the World Trade Organization, foreign investors have expressed strong interest in investing in the country.  To prepare for fierce foreign competition, Chinese companies would also step up investment to boost their competitiveness.  Meanwhile, falling real interest rates and strengthened consumer confidence will continue to boost private consumption.  Real GDP growth is, therefore, projected to pick up from 8.2% this year to 8.3% in 2001.  Continued economic growth will help to absorb surplus production capacity, and lift consumer price inflation from an average of 0.2% this year to 1% in 2001.

Despite a slowdown of export growth from 38% in the first half of the year to 25% in the third quarter, China's real GDP growth remained strong at 8.2% year-on-year during July-September thanks to a continued recovery of domestic spending.  Looking ahead, strong domestic demand, particularly investment spending, will shield China from the impact of a global economic slowdown.

Externally, the demand for China's exports is set to further weaken, as monetary tightening in major industrial economies, along with higher oil prices and plunge of stock prices are likely to slow world economic growth from a decade-high of 4.5% this year to 3.9% in 2001.  In the US, economic growth is already losing momentum following the 175 basis point interest rate hike between June 1999 and May 2000.  US consumption could weaken further, as the plunge of US stock prices in recent months has shaken consumer confidence while soaring oil prices this year could prompt households to cut spending on other consumer goods.  Given that the US market accounted for 41% of China's exports, a slowdown of US economic growth would inevitably hit the external demand for Chinese goods.  Meanwhile, the Euro Area, which absorbs another 24% of China's exports, is also likely to grow less rapidly, as the European Central Bank will further raise interest rates to offset the impact of weakening Euro and higher oil prices on inflation.  The slowdown of US and European economies would more than offset the stronger demand for Chinese goods from Japan, and bring the growth of exports down to only 13.5% in 2001, from an estimated 29.8% this year.

Domestic demand is, however, expected to pick up more rapidly as consumer confidence has strengthened thanks to higher asset prices and the doubling of government's social welfare spending this year.  Consumption will further be boosted by falling real interest rates which tend to encourage consumers to save less and spend more.  As a result of the reemergence of inflation and the levy of interest tax on bank deposits beginning November 1999, the real return on bank deposits had fallen from 2.8% at end-1999 to 1.3% in July 2000.

More importantly, the rebound of investment is likely to gain further momentum in the coming year.  Apart from sustained government's infrastructure development against a low interest rate environment, the growth of investment will further be boosted by the massive inflow of foreign direct investment (FDI).  Attracted by the opening of China's domestic economy after the country's imminent accession to the World Trade Organization (WTO), foreign investors have expressed strong interest in investing in the country.  In the first nine months of this year, the value of investment contracts signed by foreign investors rose 28%, the highest since 1993.  To prepare for stronger foreign competition, Chinese companies would also step up investment to boost their competitiveness.

As robust domestic demand is expected to more than offset the weakening exports, real GDP growth is projected to pick up from 8.2% this year to 8.3% in 2001.  Continued recovery of economic growth will help to absorb surplus production capacity, and ease the pressure on producers to cut prices.  Consumer price inflation is, therefore, likely to rise from an average of 0.2% this year to 1% in 2001.

As a result of strengthening domestic demand and a lowering of Chinese trade barriers after the country's entry to the WTO, imports will continue to increase more rapidly than exports.  The decline in trade surplus will, however, be more than offset by the massive inflows of FDI and further overseas listings of Chinese firms.  With the balance-of-payments position remaining favorable, China's under no pressure to devalue its currency.  The Renminbi may, in fact, strengthen should the central bank allow a wider fluctuating band for its exchange rate as speculated.

Jason Kwok
North Asia Chief Economist

Joe Lo
Senior Economist

Ellen Cheuk
Economist

Alice Chan
Senior Information Officer

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