China's effective exchange rate continues to fluctuate even as it stays unchanged against the U.S. dollar. Since end-2008 the RMB (yuan) has been re-pegged to the dollar.[4] However, a large and increasing part of China's trade is with countries other than the United States. Thus, as a result of movements of the U.S. dollar versus other currencies, movements in China's trade-weighted exchange rate have differed significantly from movements against the U.S. dollar. China's nominal effective exchange rate (NEER) has appreciated 12.3 percent between July 2005 and early March 2010, after depreciating in 2000-05, and is now broadly at the same level as in 2000 (Figure 9). This is also true for the (CPI-based) real effective exchange rate (REER). Also, large movements in the U.S. dollar versus other currencies have meant that since the re-pegging against the U.S. dollar in end-2008 the RMB (yuan)has moved up and down recently against the currencies of the bulk of its trading partners.

Reflecting the robust economic growth, China's labor market conditions have improved. Job shedding in export-oriented manufacturing was substantial, in early 2009 (Figure 10). However, new job creation in the domestic economy remained significant, notably in services, construction, and the public sector. Overall, both employment growth and wage growth remained positive and started to pick up again around the summer.[5] Survey data on the balance between demand and supply on the labor market also suggest improving labor market conditions through early 2010, while recent press reports suggests strong demand for migrant labor in coastal areas, compared to supply.

Consumer price inflation has picked up. After price declines earlier in 2009, consumer prices picked up in the second half (yoy), predominantly because of higher food prices. In February they were 2.7 percent up on a year ago. Food prices increased together with international food prices (Figure 11) and because of unusually cold weather in China in the last months of 2009. The residential component of consumer prices also rose as imputed housing rent increased in line with higher house prices and utility prices were raised (Figure 12). Meanwhile, with industrial raw commodity prices higher, producer prices are now also rising. This implies some further price pressure in the first half of 2010, although industrial raw commodity prices, including food, are not projected to continue to rise strongly in the medium term.

In a heated real estate market, housing prices have risen rapidly recently. Despite the strong economic growth and ample liquidity, stock market prices have not moved much in recent months. However, after having gone through a downturn, the housing market has heated up and property prices have risen rapidly, particularly in large cities. The nation-wide average property price was up 10.7 percent on a year ago in February, while the average price in 36 large cities jumped 32 percent on this basis in January.

Surging property prices triggered policy measures to expand supply and curb speculation. These included clarifying and enforcing the policy on the minimum down payment ratio for second houses (to 40 percent); removing the "discount" on the mortgage interest rate; raising the minimum down payment ratio for buying land from local governments by companies from 20/30 percent to 50 percent; and resuming the previously suspended turnover tax for real estate transactions. Meanwhile, according to surveys, the rapidly rising property prices boost people's inflation expectations.

Economic prospects

After the recession of 2009, global growth prospects for 2010-11 appear favorable. Global output bounced back in the second half of 2009, after falling precipitously in late 2008 and early 2009. In addition to help from restocking, the bounce back was supported by extraordinary amounts of fiscal stimulus and highly expansionary monetary policy globally, which brought interest rates in most high income countries down to unprecedented lows. On the back of the recent growth momentum, with the policy stance remaining expansionary, globally, the World Bank projects world GDP (in market exchange rates) to rise 2.7 percent in 2010, after falling 2.2 percent in 2009 (Table 1).[6]

However, the recovery in 2010-11 is likely to be sluggish in high income countries and global import demand subdued. The World Bank anticipates growth in high income countries to be 1.8 percent in 2010, and to edge up to 2.3 percent in 2011. Coming on the back of a large decline in output in 2009, such growth means that most economies will continue to operate substantially below capacity in the coming years,with high unemployment and large output gaps. The Bank expects growth in emerging and developing economies to be more robust, at 5.2 percent in 2010 and 5.8 percent in 2011. But even there output gaps are generally projected to be unusually large in the coming years. In this scenario, world imports (excluding China) rise by 3.3 percent in real terms this year, after a fall of 15.9 percent in 2009 (other forecasters have broadly similar numbers). Thus, compared to the rebound in global growth this year, much less of the decline in world imports is projected to be recouped. This is in part because investment in machinery and equipment, which is import-intensive, is expected to be relatively weak.

Globally, price pressures are likely to remain subdued. The substantial spare capacity in the global economy is set to continue to moderate pressures on prices of manufactured goods and raw commodities in the coming years. For 2010 as a whole, the World Bank expects international raw commodity prices, including those of energy and food, to rise modestly, with most of the rise because of whole year effects of increases that already took place in the latter part of 2009 (Table 1). [7]

Significant risks pertain to the global outlook. On the growth front, risks include premature exits from fiscally supportive policies by governments, but also deepening financial market concerns about the fiscal health of some high income countries in Europe and possible resulting economic impact. Another key risk is household spending in high income countries remaining restrained in the face of rising unemployment. On the price front, raw commodity prices may be higher than expected.

In China, building on the momentum shown in the first months of 2010, growth is likely to remain strong this year. Our projection of 9.5 percent GDP growth for the year as a whole calls for average quarter on quarter (qoq) growth of 8.8 percent (SAAR), slower than the almost 10 percent qoq (SAAR) pace in the second half of 2009 (Table 2). Growth should remain robust in 2011.

The composition of growth is set to shift markedly in 2010. We project a recovery in exports and, as a result, a halt in the negative contribution of net trade to growth (see below). Moreover, with housing starts rebounding swiftly, real estate investment is likely to add significantly more to growth than in 2009. On the other hand, government-led investment, the key driver of growth in 2009, is bound to decelerate. Spending under the stimulus package may rise somewhat in 2010. However, this implies a large deceleration after the spectacular growth in 2009.[8] We project overall investment growth in 2010 to be around half of the rate last year, in real terms (on national accounts definition) (Figure 13). Amidst favorable labor market conditions and expected continued fiscal support for households, income growth should remain solid. Despite some headwind from inflation, consumer sentiment remains strong, as evidenced by the Chinese New Year retail sales. Thus, consumption growth should remain robust.