MercoPress. South Atlantic News Agency

China surged 9,5% in first half, despite some softening

Fuelled by strong external trade real gross domestic product (GDP) in China grew a stronger than expected 9.5% in the first half of 2005, according to the August issue of the China Quarterly Update.

With merchandise exports up by 33% in the first half and by 29% in July, China reached a trade surplus of 50 billion US dollars in the first seven months. Imports, meanwhile, decelerated significantly from 33% in 2004 to 14% in the first half.

The report says growth is expected to slow to about 9% for the whole year of 2005, and about 8% in 2006, because of slower world economic activity and trade, on top of already slowing domestic demand. Global trade growth is projected to fall from 12% in 2004 to 6.4% in 2005, which is likely to affect China's exports.

"Despite some softening, the macroeconomic outlook for China remains favourable. The focus ahead should be more on the structural issue of rebalancing growth. The rebalancing would be away from the relatively volatile export and investment-based growth to more stable consumption-based growth" says David Dollar, World Bank Country Director for China.

According to the report, slower credit and profit growth, lower foreign direct investment and modest growth in machinery and equipment imports are pointing to a further slowdown in investment to a more sustainable pace. Signals are that the government's measures to slow the real estate sector are also starting to work. National accounts and customs data also suggest a slowdown in domestic demand in the first half of 2005.

"Despite an unavoidable slowdown in exports, external risks appear modest," says Bert Hofman, World Bank Lead Economist for China. "Domestically, a two-way risk is formed by the considerable uncertainty on the extent to which domestic demand, notably investment, is slowing."

Thus, on economic policies, the report suggests that sustaining rapid growth means finding the right balance between preventing a sharp investment-led downward correction and, at least as important, avoiding excessive investment, deflation, and a large decline in profitability that would risk an even harder landing.

The report says the change in China's exchange rate regime represents a desirable move in the direction of greater exchange rate flexibility. Greater flexibility should eventually give the authorities more room for manoeuvre in conducting independent monetary policy, the report says. Nonetheless, in the immediate future careful management, including of expectations is required. On the impact of a stronger exchange rate, the report says that the exchange rate move does not significantly address the small role of consumption in the economy or remove the structural imbalance between saving and investment that cause China's current account surpluses.

These issues will have to be addressed by structural policies, including shifting government spending, financial sector reform, improving corporate governance, and increasing dividend pay-out, including for state-owned enterprises.

Measures in social security and shifting government spending away from investment towards health, education, and the social safety net could help increase consumption's share in GDP directly. More importantly, such measures would help remove the current uncertainty household face as to future pension provision and costs of health care and education, thereby stimulating household consumption.

There is also room for increasing dividend pay-out in China, which would help increase the role of consumption. To maintain growth and employment creation as consumption increases, however, more efficient investment as well as a shift of investment to services is needed. Financial sector reforms and better corporate governance could be measures towards that goal.