Towards Financial Freedom
China: Growth Outlook and Economic Policies Ahead
- China ended its central economic work conference lately with no surprises on macroeconomic policy stance or direction.Monetary policy for next year will remain 'prudent' with a proactive fiscal policy. The key objectives and central tasks for 2013 would continue to include the expansion of domestic demand; keeping the yuan stable; boosting private and public investment (particularly basic infrastructure); industrial restructuring, innovation and urbanization; enhancing the quality and efficiency of economic growth; as well as maintaining property control policies and overall price stability. While there was no mention of the 2013 targets for GDP growth and inflation as yet, we believe they are likely to remain at 7.5% and around 4.0%, respectively when the National People's Congress meets in Mar next year. According to some estimates, China could achieve the goal of doubling its 2010 GDP by 2020 even with an average annual growth of 6.85% from 2013 to 2020.
- Our 2013 forecast is that the Chinese economy may grow by 7.7% after posting a projected 7.9% in 2012. Tolerance ofslower growth aside, a key assumption behind our modest growth outlook is a weak global recovery, which should further curb China's export growth at about 9.0% in 2013. In our view, the recent pickup in growth momentum (mainly as a result of policy easing in 1H12 and acceleration of investment projects) may not be sustainable in 2H13 due to weak external demand and the lack of fresh monetary stimulus. Manufacturing investment should continue to be constrained by overcapacity and weak export growth; while any significant increase in housing prices would likely lead to escalated intervention by the authorities, thus limiting the scope of a property-led recovery in the near-term.
- Private enterprises are expected to remain cautious in their investment plans over the course of the year mainly due tocontinuing difficult business environment along with weak global activity. With public investment accounting for less than 40% of the total urban fixed asset investment (FAI) and investment efficiency deteriorating generally, overall urban FAI is expected to expand at a slightly moderate pace of 20.6% in 2013 (vs. around 21% in 2012). Although private consumption may benefit from various government measures (such as tax rebates and subsidies) and a stable job market in 2013, the shift to consumption-led growth remains challenging with consumption share to GDP registering only 35% in 2011.
- On inflation, we expect price pressure to pick up gradually in 2013 due to diminishing base effects and weather-related pricehikes that may lead to higher imported inflation, including temporary increases in food and commodity prices. We expect inflation to climb to 3.3% in 2013 from estimated 2.6% in 2012, with a peak of 3.5% in 3q13 before easing to 3.1% in the final quarter. We expect the key interest rates to remain unchanged in 2013 as property speculation and inflation risks are likely to remain an issue. Liquidity management, as in 2H12, may continue to be enhanced through open market operations and total social financing though there is still room to lower required reserve ratio to stabilize growth. The yuan, on the other hand, may gain by another 2% against the USD in 2013 on continuous capital inflows and positive trade surpluses.
- As in 2012, the key risks to our 2013 growth outlook relate largely to the uncertainties surrounding the external situation,including a worsening of the external environment and possible weaker global recovery and world trade. Domestically, a disorderly decline in the property sector and a broad range of related sectors could potentially bring growth lower. For now, we believe the risks in the Chinese financial system and local government finances remain manageable.
Source: OSK
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