China in Transition

China's Economy Likely to Achieve Double-Digit Growth Driven by Recovering Exports - Worries of downside risk misplaced -

Chi Hung KWAN
Consulting Fellow, RIETI

The Chinese economy decelerated sharply following the collapse of Lehman Brothers in September 2008, with exports declining significantly. However, it has since recovered ahead of advanced economies, thanks to the successful outcomes of the expansionary fiscal and monetary policies that were promptly taken by the government. China's GDP growth turned upward after bottoming out at 6.2% (year-on-year) in the first quarter of 2009, achieving a V-shaped recovery, with 7.9% in the second quarter, 9.1% in the third quarter, 10.7% in the fourth quarter and 11.9% in the first quarter of the current year.

While recovery was initially driven by investment, mainly in infrastructure and domestic demand such as private consumption, exports are also improving now. In 2009, GDP growth exceeded 8%, the level initially targeted by the government, reaching 8.7%. When broken down into demand components, ,consumption contributed 4.6%, while capital formation (investment) contributed 8.0%., both higher than their respective year-ago levels. The contribution of capital formation was particularly large thanks to the government's stimulus package, amounting to four trillion yuan, in place since November 2008 ( figure 1 ). In contrast, the contribution of net exports was -3.9%, dragging down economic growth, as exports slumped because of sluggish overseas markets. In the first quarter of 2010, however, although the contribution of capital formation fell slightly to 6.9%, that of consumption rose to 6.2%, so that the contribution of overall domestic demand exceeds the level in 2009. At the same time, the negative value of the contribution of net exports contracted substantially to -1.2 %.

Figure1 : Changes in Contribution of Demand Components to GDP Growth (Real)

Figure 1: Changes in Contribution of Demand Components to GDP Growth (Real)

(Note) First quarter only for 2010. Capital formation includes an increase in inventories (inventory investment).

(Source) China Statistics Summary 2009 of the National Bureau of Statistics of China, the website of the National Bureau of Statistics of China

Of these components, the contribution of consumption is remarkable. Robust consumption can be confirmed also by the rise in the retail sales of social consumer goods. It is worth noting that retail sales in real terms, excluding changes in price (inflation), should be viewed here, instead of those in value (nominal) terms ( figure 2 ). It is true that growth in retail sales have been falling from 23.2% at the peak in the third quarter of 2008 in nominal terms (to 17.9% in the first quarter of 2010), but this is primarily a reflection of the falling inflation rate. In real terms, growth in retail sales has in fact been accelerating since the Lehman collapse. It has been widely reported in the Japanese media that sluggish consumption, as shown by the slower growth in retail sales in value terms, is impeding the economic recovery in China. However, this is clearly a misinterpretation of the facts.

The fact that the contribution of capital formation, the other component of domestic demand, to growth dropped slightly in the first quarter of 2010 indicates that the effect of the government's stimulus package of four trillion yuan has been diminishing. Although the package will continue to be implemented until the end of 2010, it is inevitable that growth will slow, given the enormous scale of public investments in 2009. Fortunately, with private investment likely to increase with the economic recovery, it should underpin overall investment.

On the external front, exports, which fell sharply following the Lehman collapse, began rising year-on-year in dollar terms in the fourth quarter of 2009, with growth accelerating to 28.7% year-on-year in the first quarter of 2010 ( figure 3 ). At the same time, growth in imports increased to 64.7% in the first quarter of 2010, much higher than 22.3% in the fourth quarter of 2009. In China, imports are a leading indicator of exports, with a lead time of approximately one quarter, as parts and intermediate goods need to be imported from overseas first to increase exports, given the high percentage of processing trade. The sharp increase in imports in the first quarter suggests that growth in exports could rise further in the second quarter.

Figure2 : Retail Sales of Social Consumer Goods: Nominal vs. Real

Figure 2: Retail Sales of Social Consumer Goods: Nominal vs. Real

(Source) National Bureau of Statistics of China

Figure3 : Recovering Imports and Exports

Figure 3: Recovering Imports and Exports

(Source) National Bureau of Statistics of China

At the National People's Congress held in March 2010 and in the subsequent press conference, Chinese Premier Wen Jiabao mentioned the possibility that the world economy could experience a double-dip recession, suggesting an extremely cautious outlook for the Chinese economy, leaving the growth target of 8% unchanged. In fact, the IMF and other international organizations have revised their forecasts for economic growth upwards in major countries, and the global economy appears to have emerged from the crisis to achieve a steady recovery. China, meanwhile, is likely to see annual growth in double figures in 2010, for the first time since 2007, with net exports joining domestic demand as another engine for expansion.

Following the sharp economic recovery, some signs of overheating are becoming noticeable, such as increasing inflationary pressure and rising real estate prices. In response, the Chinese authorities are moving to tighten monetary policy, and in particular have begun to apply the brakes to real estate-related lending. With these appropriate policies, the Chinese economy is likely to manage a soft landing and sustain stable growth.

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April 28, 2010