Highlights

Despite a moderation of exports due to an expected global economic slowdown, China's strong growth momentum will continue into 2001. Thanks to falling real interest rates and an increase of civil servant salaries, consumer spending will remain robust. Further expansion of fixed asset investment would provide another boost to growth. While the government will increase construction spending to upgrade the nation's infrastructure and develop the country's western region, domestic enterprises will also step up investment to prepare for the intense competition after China's entry to the World Trade Organization. Stronger domestic demand should largely offset the moderation of exports and help China sustain a robust real GDP growth of 7.9% this year. Although China's current account surplus will narrow due to weakening exports and rising imports, large inflow of foreign investment should help to maintain a favorable balance of payments position.

ECONOMIC OUTLOOK

Thanks to a rebound of exports and robust domestic demand, China's real GDP growth rose to 8% in 2000, reversing its falling trend since 1992. The strong growth momentum is expected to continue into 2001, despite an expected slowdown of the global economy, which would slash the growth of China's exports this year.

In the US, although the Federal Reserve's aggressive interest rate cut should help avert a recession, real GDP growth is likely to fall from 5% in 2000 to only 1.6% this year. In Japan, renewed weakening of domestic demand is likely to slow real GDP growth from 1.6% in 2000 to 0.7% this year. Given that these two markets together directly accounted for about 60% of Chinese exports, the economic downturn of the US and Japan would inevitably put a drag on China's export growth. The extent of moderation, however, should not be overstated as Chinese exports are mainly low-cost consumer products that are less sensitive to the contraction of income and wealth in America and Japan. Chinese exporters are also less vulnerable to the downturn of the information technology industry in the US, as electronics goods accounted for only 19% of the country's US-bound exports.

Meanwhile, domestic demand will remain robust and become the main growth engine of China's economy. With inflation expected to continue to edge up fuelled by a steady recovery of the retail market, real interest rates would trend further downward. At end-2000, the after-tax real return on one-year bank deposit slipped to only 0.3%, the lowest since September 1996. The meager return on savings should continue to encourage consumers to increase spending. Falling borrowing cost and more active promotion of mortgage and personal loans by Chinese banks will also help to boost the expenditure on housing and other consumer goods. In addition, the government's plan to raise the salaries of civil servants by 30% this year will increase consumers' purchasing power and further bolster the growth of private consumption.

Robust expansion of fixed asset investment would provide another boost to domestic demand. To upgrade the nation's infrastructure and develop the country's western region, the government planned to issue RMB150 billion special Treasury bonds this year to finance public construction spending. Meanwhile, to prepare for increased foreign competition after China's entry to the World Trade Organization (WTO), possibly by mid-2001, domestic entrepreneurs would also increase investment in new technology to boost their competitiveness.

Given that exports accounted for only 23% of China's GDP, stronger domestic demand should largely offset the moderation of exports and help China sustain a robust real GDP growth of 7.9% this year. Economic growth is likely to pick up to 8.2% in 2002, when exports grow more rapidly due to a recovery of US economy. Despite the strong domestic demand, inflation will remain contained as China still has a large under-employed labor force that should keep wages stable. Increased imports of foreign goods as China lowers trade barriers after WTO entry would also prompt keener competition between domestic and foreign producers and keep local price increase at bay. Consumer price inflation is, therefore, likely to rise only modestly to 1% and 2% in 2001 and 2002 respectively.

As a result of weakening exports and increasing demand for imports, China's trade and current account surpluses will decline in the medium term. In 2002, the country's current account balance may even post a shortfall of US$ 3.3 billion, its first deficit since 1993. However, the expected increase in foreign direct investment should more than offset the deterioration of current account balance, and help maintain an overall balance-of-payments surplus. With growing foreign exchange reserves, the Renminbi would likely appreciate if China decides to widen the Renminbi trading band shortly after its WTO entry as speculated.

CHINA MAJOR ECONOMIC FORECASTS

Jason Kwok
North Asia Chief Economist

Joe Lo
Senior Economist

Ellen Cheuk
Economist

Alice Chan
Senior Information Officer

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