China Economic Growth Forecast Revised Upwards
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The Guardian (story here) has reported that China’s growth is forecast to be 9.5% this year, rather than the 8.7% predicted previously. This article presents IB students a nice snapshot of the links and trade-offs faced by economic policymakers.
The Guardian describes how China’s growth rate is set to almost reach 10%, continuing the trend of double digit growth seen since Deng Xiaoping’s economic reforms opened up the once planned economy.
Economics students would expect that growth figures such as those to put inflationary pressure on the economy in the absence of similarly large increases in aggregate supply. However, the Beijing government’s policies of investing in public works and infrastructure have mitigated this pressure to an extent. It is also clear that capital widening and deepening policies on the mainland are further ameliorating the demand-pull inflation. The World Bank has predicted inflation of 3.7% which, though would be viewed as excessive in the Eurozone, is a manageable figure in a LEDC.
One possible fly in the tiger balm is that loose monetary policy - designed to increase domestic consumption in the face of falling export demand - has fuelled a rise in property investment. Given the volatility of stocks and the poor returns from safer forms of investment worldwide it is not difficult to see why property price rises have attracted speculators and contributed to a self-fulfilling property bubble. The World Bank are right to warn of the disastrous consequences of that bubble bursting as it would have catastrophic consequences on levels of FDI and domestic consumption as seen in the UK after the 1989 bubble burst.
Higher interest rates would dampen down property demand in particular but put a brake on price rises in general as consumers opted for less liquidity. The United States would welcome this policy, particularly if the effects were allowed to feed through into the currency markets. A rise in interest rates should lead to an appreciating Yuan and an improvement in the USA balance of payments. However, Wen Jibao has this week reasserted his belief that a low exchange rate is key to Chinese growth and development suggesting that China are not likely to cave in to USA pressure on this issue. The article suggests that last years recession in China’s key trading partners meant that exports accounted for -3.9% of economic growth last year, if the RMB remains undervalued then the global recovery could lead to even better times ahead for the Chinese economy.
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