As China’s National Statistical Office announced today, the Chinese economy grew by a provisional 9.8% on a year earlier in the fourth quarter, after 9.6% in the previous quarter. In 2010 as a whole growth came in at 10.3%. Investment was once again one of the main drivers. Further impetus also came from private con-sumption, as flagged by retail sales which rose by almost 15% in real terms last year.
China: Controlled slowdown in 2011
Although the latest economic indicators, such as the purchasing managers’ index, basically point to a continuation of the Chinese upswing this year, growth rates of 10% or more are probably no longer on the cards. We see average annual growth of around 9% in 2011. The reason: China is currently battling on several fronts against overheating. Above all, rampant bank lending and the steep rise in real estate prices have been a cause of concern for a while now. The rise in consumer prices has now joined the list of headaches, with considerable potential for social tension. In November consumer prices were 5.1% up on a year earlier, with the trend in food prices particularly worrisome. Even though the rise in consumer prices eased somewhat in December, inflationary pressure is likely to remain high, particularly in the first half of 2011. The government is trying to curb inflation by setting price caps for basic products (e.g. foodstuffs and household energy). The central bank is also countering the rising inflationary pressure. Having already stepped up the minimum reserve requirements for banks several times last year, it also jacked up its key lending rate in October and December. Further rate hikes are likely in the course of this year. Only recently, the central bank announced a renewed increase in the minimum reserve requirements from 20 January. The stock markets have reacted with marked reticence to the monetary tightening in China. However, in an environment of galloping GDP growth rates and an appreciable rise in price pressure, it makes sense for the central bank to tighten its stance. Currently the key rate stands at 5.81%, more than 1½ percentage points below its peak in the last cycle in 2007 and 2008. This puts the scale of the monetary tightening into perspective, even assuming further rate hikes in the months ahead.
We believe that the Chinese government will successfully master the balancing act inherent in a “controlled growth slowdown”. To reduce domestic price pressure, the government is also likely to allow the renminbi to appreciate slightly further against the US dollar. This renders imports cheaper and boosts purchasing power. Even with growth of “only” around 9%, China will remain a stable growth engine of the world economy this year as well.