The Chinese economy has undeniably lost momentum this year. China’s export sector is gradually feeling the pinch of the weak global economy and the steep rise in domestic labor costs in recent years. And the current correction in asset prices is also likely to leave a slight mark on the domestic economy. Above all, we expect investment in the real estate sector to ease.
Nonetheless, the most important growth factors in China (high capital formation and foreign direct investment) remain intact. Moreover, the government is in a position to take countermeasures should the economy turn down sharply. First and foremost this would involve the activation of state infrastructure investment, particularly as many projects have been shelved in recent years because of the Olympic Games. And the current tight lending policy can also be relaxed substantially at any time. The political leadership in China still places the highest priority on high economic growth and the creation of jobs. All told, we do not see a hard landing. Economic growth will ease back to 10 % this year and 8-9 % next, bringing growth rates down to a more sustainable level. This slowdown in the economy will also help alleviate commodity prices on the world market.
You can find a detailed examination of this theme in our Working Paper No. 104 “China: Will the lights go out after the Olympics?" at www.group-economics.allianz.com (Publications/Working Papers).
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