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Print Edition> Business
UPDATED: May 6, 2011 NO. 19 MAY 12, 2011
Growing Tenaciously

READY TO GO: Workers assemble an intercity train to be exported on April 26 in Zhuzhou Electric Locomotive Co. Ltd. in Hunan Province, a subsidiary of China South Locomotive & Rolling Stock Corp. Ltd., a major producer of railway transportation equipment (LONG HONGTAO)

The World Bank upgraded its forecast for China's GDP growth in 2011 to 9.3 percent from last November's prediction of 8.7 percent. The World Bank's China Office released its latest China Quarterly Update on April 28. The update, a biannual assessment of China's economy, also said inflation risks and the property market call for full normalization of the macroeconomic stance to keep growth on track. Edited excerpts follow:

The global growth outlook remains favorable despite recent shocks. After upgrades to the forecasts in 2010, the global outlook has recently been challenged by high prices of oil and other natural resources and the disasters that hit Japan. Overall, though, global growth prospects remain robust.

Domestically, growth is likely to ease this year and next to a still healthy rate. This year, headwind from a normalized macroeconomic stance, inflation, and somewhat slower global growth should be partly offset by solid corporate investment and a still robust labor market.

Healthy growth

We project real GDP growth to slow to 9.3 percent in 2011 and 8.7 percent in 2012.

Investment growth is likely to slow down, affected by the monetary policy normalization. Overall financing conditions should remain reasonably supportive because of robust financing via the capital market and generally healthy profit prospects and balance sheets in the corporate sector. This is despite the fact higher commodity prices may put downward pressure on profits in sectors that find it difficult to pass on higher input costs because of strong competition. However, the rapid expansion of infrastructure investment in recent years reduces the room for it to further drive investment growth. Real estate investment is also expected to slow down in response to several rounds of property tightening measures, although the government's ambitious plans for social housing construction are likely to keep overall property construction growing this year. In all, despite significant stock building, we project growth in gross capital formation to come down from an estimated 11.6 percent last year to 10.7 percent this year and 9 percent next year.

Consumption should remain supported by a robust labor market, but inflation is creating headwinds. Household income should benefit from solidly rising wages and employment, although this is likely to continue to be tempered, especially in the second and third quarter, by substantial inflation which will reduce real income growth and consumer confidence. We expect total consumption (including government consumption) to grow 8 percent this year, as in 2010.

Net trade should be broadly neutral with respect to growth. With global imports expected to rise 7.4 percent in 2011, and global market share gains expected to be moderate, we project China's exports to rise 12.4 percent this year. With domestic demand growth remaining steady, imports can be expected to outpace exports somewhat, growing 13.2 percent.

Hovering risks

Inflation is unlikely to escalate, but there are risks. Food price increases seem to have slowed for now, and the year-on-year increase of these prices is likely to diminish later in the year. Upstream price pressures may continue to build because of the hikes in oil and industrial commodity prices. Importantly, however, so far core inflation pressures remain in check. Based on the above global price outlook, we expect the moderation in food price inflation in the next 12 months to more than offset the rise in non-food inflation, resulting in a slowdown in headline CPI inflation, with the pace of deceleration in part depending on factors such as the possible adjustment of some utility prices. Meanwhile, we have revised downwards our projection for the current account surplus because of the higher commodity prices, which affect China's terms of trade substantially.

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