Highlights

After having rebounded to 8.1% in the first quarter, China's economic growth would slow in the coming months due to weakening exports. Apart from faltering overseas demand, exports will also be hit by the recent depreciation of Asian currencies, which has made Chinese goods less competitive in the global market. The slowdown of the economy would, however, be brief and modest, as improved consumer and business confidence will boost domestic spending and ease the impact of sluggish exports on GDP growth. Economic prospects should improve again in 2002, as exports will regain momentum thanks to US economic recovery. China's economy would benefit further from surging investment after the country's expected entry to the World Trade Organization early next year. Accordingly, real GDP growth would rise to 8.2% in 2002, after easing moderately to 7.9% this year from 8% in 2000.

China's real GDP growth rose to 8.1% in the first quarter of this year, compared to 7.3% in the fourth quarter of 2000. After the rebound in the first quarter, the pace of economic growth would slow in the coming months, dragged by weakening demand for China's exports in the overseas markets. Despite the Federal Reserve's aggressive interest rate cuts, US economic growth is likely to remain subdued in the coming months. Meanwhile, the European market has shown further signs of weakening while Japan is struggling to avert recession. Apart from faltering external demand, China's exports will further be hit by the recent weakening of Asian currencies, which has made Chinese goods less competitive in the international market.

The slowdown of GDP growth is, however, expected to be relatively brief and modest, as robust domestic demand will ease the impact of slowing export growth on the economy. Thanks to increased urban household income and the positive wealth effect from the booming stock market, consumer confidence has been rising in recent months. Business confidence is also strengthening, helped by the prospects of greater business opportunities after China's expected entry to the World Trade Organization (WTO), possibly by early 2002. In addition to stronger consumer and business confidence, the increase of government spending on infrastructure in developing the western provinces and the holding of interest rates unchanged at very low levels by the central bank will provide a further boost to domestic spending.

Supported by a large and vibrant domestic economy, China's real GDP growth is likely to slow only modestly from 8.1% in the first quarter to an average of 7.9% for the whole of 2001. Economic prospects should improve in 2002, as exports will regain momentum thanks to an expected recovery of the US economy. The economy would benefit further by a possible surge in investment by local and foreign firms if China is granted the WTO membership early next year as expected. Against these favorable developments, real GDP growth is expected to edge up to 8.2% in 2002.

Despite buoyant domestic spending, inflation would remain contained this year as China has millions of under-employed workers and large surplus capacity that should keep the cost of production stable. The recent strengthening of the Renminbi against other Asian currencies would also keep imported inflation low. As pressure on inflation picks up next year due to the faster growth of the economy, the central bank is also likely to raise interest rates to keep prices from surging. Inflation is, therefore, likely to rise only moderately from 0.4% in 2000 to 1% this year and 2% in 2002.

Externally, as a result of sluggish exports and increasing demand for imports, China's current account surplus is projected to decline from US$ 20.5 billion in 2000 to US$ 13.5 billion this year and further to US$ 9.9 billion in 2002. However, an expected increase in foreign direct investment should more than offset the dwindling current account surplus. Supported by a favorable balance-of-payments position, the Renminbi would remain stable and could even appreciate if China decides to widen the currency trading band shortly after its WTO entry as speculated.

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Jason Kwok
North Asia Chief Economist

Joe Lo
Senior Economist

Ellen Cheuk
Economist

Alice Chan
Senior Information Officer