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Business
Print Edition> Business
UPDATED: April 23, 2012 NO. 17 APRIL 26, 2012
In the Midst of a Slowdown
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MOVING RIGHT ALONG: Cars roll down the assembly line at a SAIC Group factory in the Shanghai Lingang Industrial Zone (CHEN FEI)

The Chinese economy is slowing down, albeit slowly. GDP growth slowed to 8.1 percent in the first quarter. In its latest China Quarterly Update released on April 12, the World Bank projects China's GDP growth will be 8.2 percent in 2012 and 8.6 percent in 2013. Edited excerpts of the update follow:

The Chinese economy is in the midst of a gradual slowdown driven by a weaker global environment and tighter domestic conditions. GDP growth eased modestly from 10.4 percent in 2010 to 9.2 percent in 2011.

Slow growth in the euro zone and a sluggish recovery in the United States limited the contribution of net exports. Tighter domestic policy conditions dampened investment, particularly in infrastructure and real estate. In contrast, consumption growth remained robust as consumer confidence was sustained and household income continued to grow rapidly.

Inflation, which was a policy concern over 2011, has been declining. Food inflation receded as one-off factors faded, and non-food inflation eased in line with global and domestic slowdowns. Wage growth remained robust, but the continued rapid rise in labor productivity acted to dampen unit labor costs. Efforts to curb inflation led to somewhat tighter monetary and financial conditions.

The balance of payments has softened under these conditions. The trade balance fell into a deficit in early 2012 as manufacturing exports slowed while commodity prices remained high. Foreign direct investment weakened as uncertainty built up. These developments in turn dampened foreign exchange accumulation as well as the pace of nominal and real exchange rate appreciation.

Forecasts

Cyclical weakness is expected to dominate the near-term outlook, with growth projected at 8.2 percent in 2012 and 8.6 percent in 2013.

Domestic demand will contribute 8.4 percentage points to growth in 2012 as consumption growth slows partly due to base effects and investment growth decelerates rather sharply. As world trade is anticipated to remain weak, external demand will subtract some 0.3 percentage points from growth.

Significant price adjustment is in the pipeline. Inflation will trend to 3.2 percent in 2012, as growth slows, commodity price impulses fade and property markets cool further. China's external terms of trade will likely improve as import prices dependent on commodities decelerate more than export prices dominated by manufactured goods. Exchange rate appreciation is expected to slow as long as the weak external environment continues to weigh on export volumes and prices.

The current account surplus is projected to increase slightly to 3 percent of the GDP in 2012 and 3.3 percent in 2013. Terms of trade improvements offset an initially lower trade balance driven by export weakness and import robustness. With trade volumes recovering in 2013 and the terms of trade improving further, the surplus would also expand in 2013. Despite continued net capital inflows, foreign exchange reserves would accumulate more slowly.

Our central projection remains for a gradual slowdown, but two downside risks remain significant.

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