International | Mar 26 2009
By Chris Shaw
Having reviewed its outlook for the Chinese economy, the Bank of Finland expects economic growth in the country of just 5% this year. This forecast allows for the impact of the previously announced fiscal stimulus package. While there is some risk of growth coming in a little higher than expected, the central bank takes the view the poor outlook for exports given the global economy downturn will limit any quick recovery in the Chinese economy.
The central bank’s forecast of 5% growth this year compares with the more than 10% GDP growth in year-on-year terms China was generating in the first half of last year and is down from the below 7% growth achieved in the December quarter. The BoF believes this reflects the fact it is imposible to de-link China’s economic development to the state of the global economy given the inability of boosting domestic demand by enough to offset the impact of lower exports.
Overall export volumes are expected to be lower this year than in 2008 but there should be some sign of a recovery in volumes emerging by the end of 2009, while imports will also be down given reduced industrial demand for raw materials.
Import levels should bounce more quickly than for exports however, given the effect of the stimulus package on domestic demand, meaning while China will continue to run large trade and current account surpluses these will decrease in magnitude.
What should also help stimulate domestic economic activity, in the central bank’s view, is the recent easing of inflationary pressures, as this will provide policy makers with scope to further ease monetary policy. This process is already underway as in recent months benchmark interest rates and reserve requirements for commercial banks have been reduced.
One good point is while the current stimulus package measures US$590 billion, the BoF notes the Chinese government still has significant room in which to extend the program as central government debt in China is less than 20% of GDP and there is little in the way of foreign debt.
Growth of 5% this year for China would be very strong compared to the expected performance for the rest of the global economy. The BoF does acknowledge some risks are associated with the fiscal stimulus package, not least being the potential for money to be wasted and the potential for abuse of the system given a lack of transparency associated with the package.
The BoF also notes there is speculation the increased pace of bank lending is not necessarily all of the sound variety and this increases the potential for investment to be mis-directed, while also increasing the scope for a higher proportion of non-performing loans and therefore longer-run price pressures.
The other issue the BoF sees is in the labour market, as export industries are believed to have shed as much as 20 million jobs since the onset of the economic downturn. This increase in unemployed and the downward pressure on wages given greater competition for jobs is unlikely to help in terms of boosting domestic demand.
Bigger questions in the bank’s view are how China goes about not only repositioning its export sector overcapacity and resources to servicing the domestic consumer and the consideration of how the structure of domestic consumption best corresponds to the nation’s long-term needs.
Here the bank suggests the stimulus package achieves little given its focus on infrastructure, when additional investment in social security, health care and education may deliver more in terms of China achieving its long-term development goals.
Post this year, China’s growth is expected to “slowly accelerate” to 7% by the end of 2011 helped by the fact that economic growth will revive in Europe and North America.