CHINA’S ECONOMY EXPECTED TO SLOW IN H2

Headlines out of China overnight:

CHINA: PBoC adviser Xia Bin warned that the economy is likely to slow in the second half of the year but urged further measures to discourage speculation in the property sector such as a home transaction tax. Regarding inflation, Xia Bin said price pressures may rise in June/July, but overall will not be substantial for the year. On a related note, another short/medium term PBoC auction saw rates rise on expectations of higher inflation – PBoC sold 3-yr bonds at 2.77% v 2.68% prior and 5-yr bonds at 2.9% v 2.53% prior. Elsewhere, Foreign Trade Center Director Wang Zhiping reflected on the impact of the fiscal crisis in Europe, pointing to May export growth to the region below 20% – much worse than expected.

In related news, the World Bank is out with their quarterly update on China.  It is painting a bit more rosy picture:

China’s economy has continued to grow robustly, with some softening recently, according to the World Bank’s latest China Quarterly Update released today.

The Update finds that, despite concerns about fiscal risks in some high income countries, the global growth outlook remains favorable, in large part because of the strength in emerging markets. Nonetheless, risks around this global outlook are large.

In China, after a rapid start to 2010, growth is likely to ease, mainly because of a partial normalization of the macro policy stance and the measures towards the property market introduced in April.

“We project GDP growth of 9.5 percent for 2010 and 8.5 percent for 2011, with risks both ways,” says Ardo Hansson, Lead Economist for China. “Growth should be less investment-driven this year and benefit from more favorable external trade, while consumption is likely to remain supported by a strong labor market.” The external surplus should decline somewhat further this year. Inflation is likely to remain contained this year by the absence of price pressures globally while a wage-price spiral is not likely.

“In light of the robust growth prospects, it makes sense to further normalize the overall macroeconomic stance to contain the key macroeconomic risks,” says Louis Kuijs, Senior Economist and main author of the Update. “Substantial uncertainty around a favorable outlook calls for policy flexibility rather than continued stimulus by default.” The central authorities are rightly aiming to control lending by local government investment platforms. However, interest rates remain low. China could usefully let interest rates play a larger role in monetary policy.

Looking further ahead, policy making needs to take into account several features of the medium term outlook. Considering the prospects for its key determinants, trend growth is on course to decline in 2010-20, although to a still respectable rate. In setting growth targets for the coming decade, the likely slowdown in potential growth needs to be acknowledged. The expected deceleration of potential growth also places a premium on policies that can increase sustained productivity growth, including via more reallocation of labor, enhanced human capital, and innovation.

Stocks in Shanghai were trading down over 1% as of this writing.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.