http://www.chinadaily.com.cn/business/2012-12/20/content_16036197.htm

china daily 2012-12-20

Editor's Note:

In 2012, China's economy encountered more difficulties than it would in a normal year. Some difficulties are, so to speak, imported - like the sluggish demand from its major trade partners while they were trying, with difficulty, to solve the problems brought by the financial crisis of four years ago.

Other difficulties stem from precautions the country has taken to prevent wider trouble - controlling inflation, repressing surging prices in the real estate market, and slowing resource-and energy-intensive industries. The main purpose of these efforts is to make the economy less dependent on exports and inexpensive labor, and more on quality production and domestic consumption.

A new phase of this endeavor began as the new national leadership, headed by Xi Jinping, emerged from Beijing's power transition in November. At the Central Economic Work Conference last week, policy makers decided to muster "greater courage and wisdom" to take the nation's reform and development forward.

Society's initial response to the renewed commitment to reform was clear. The Shanghai stock market saw its strongest rally in two years. But how do economists assess China's opportunities in 2013 after studying the Central Economic Work Conference communique? What changes are they looking forward to? And what dangers do they think China should watch out for? We invited five of them to share their views.

The economy slowed for two main reasons: The global economy was weak, and this hit Chinese exports. The other reason was due to property-tightening measures and credit controls which led to a slowdown in property and infrastructure investment starting in late 2011. The government changed its policy direction in the spring, easing credit conditions and reversing infrastructure spending, which has led to a moderate recovery in recent months.

Corporations reduced their inventories throughout much of 2012, and excess capacity became a concern as demand weakened. Corporate profits dropped sharply. But there is less of a push now to reduce inventories, and industrial profits are increasing again in the fourth quarter.

The new leadership has set the tone for next year: They will continue proactive fiscal and prudent monetary policies. The new leadership is concentrating on urbanization being the big driver of domestic demand, which should attract more investment on public infrastructure. But it's unclear how they will stimulate consumption.

We expect the leadership to push forward in 2013 with measures that have already won wide support. These may include reforms to energy prices and resource taxes, as well as developing the bond market and expanding pension and health insurance. I think various services, particularly healthcare and public services, should be developed more rapidly.

We expect GDP growth to recover from 7.6 percent this year to 8 percent in 2013. I'm not sure how much change we will see to the country's growth model. That will only happen slowly. We think consumer price index inflation will rise in 2013, mainly as a result of rising food prices. We think CPI will average 3.5 percent. Non-food inflation may rise because of reforms to utility and energy prices.

The most important reform should be increasing public spending on services so that migrants can have better access to schools and healthcare, and can have better healthcare insurance, pensions and other benefits associated with a social safety net. This will involve tax and public finance reforms, and will be difficult. I think true urbanization will stimulate investment as well as consumption.

We expect the US economy to maintain a modest growth rate (2.3 percent), Europe to stagnate and Japan to grow very little. Emerging markets may recover somewhat from 2012 as their exports become more stable and they no longer have to worry about inflation when setting their monetary policies. For China, this means the rate of increase for exports will become stable at about 8 percent.

In the best case, the US will show strong growth if it avoids the fiscal cliff. And the crisis in the eurozone will be resolved. In the worst case, the US will go over the fiscal cliff, driving down the country's growth. Or the eurozone crisis will worsen.

----- Wang Tao

chief China economist with UBS AG

Despite the slowdown, China's economic performance this year is still satisfactory, given the global recession and compared with other emerging markets.

The country's fiscal and monetary policies this year were appropriate, showing the government's good assessment of the international situation.

The country's GDP growth this year, I estimate, may be in the range of 7.5 to 7.8 percent. The economy bottomed out in the third quarter and stabilized in the fourth quarter, but it is still hard for the economy to rise above 8 percent for 2012.

Looking forward, the global economy still needs five to six years to completely shrug off the recession.

Meanwhile, the government has approved a number of mass transit rail projects this year, which will help to boost investment in the coming two to three years.

The economy for 2013 should improve a bit, with a GDP growth probably ranging around 7.5 percent to 8 percent.

Considering the leadership transition next year, steady development should be a primary concern for the central government. They may first promote reform in social security and income distribution.

If GDP growth does not exceed 8 percent, it is not difficult to keep the CPI between 2 to 3 percent, as China's CPI pressure is mainly decided by the country's monetary policy.

Consumption growth next year will be around 13 to 15 percent, almost the same as this year.

Urbanization will be the key driver for China's economic growth in the coming decade. I would suggest an urbanization model centered on the second- and third-tier cities instead of super-big cities. Given the imbalances in such a huge country, it could be a down-up model initiated by provincial governments based on their own experiences. The process mainly stimulates real-estate-related investment.

The European Union and Japan may still face a sluggish economy next year, while the US economy will see a slow expansion. Deflation, instead of inflation, is one of their major economic concerns.

Emerging economies, which face very similar challenges to China, will see a slowdown in their GDP growth.

All that means China's imports and exports are not likely to improve much next year.

----- Wang Haifeng

director of international economics at the Institute for International Economic Research

Back in December 2011, Fitch said it expected China's economy to grow about 8 percent in 2012, and it looks like this has been borne out. We took seriously the authorities' stated intention to get asset and consumer price inflation under control, and this has more or less been achieved, without a sharp increase in unemployment.

The key limitations are as follows: limited progress so far on rebalancing towards a more consumption-led growth model, and still a lack of clarity about how the buildup of debt in 2009-10 will be dealt with. That debt overhang, as we see it, is a key factor behind the Negative Outlook on China's local currency rating of "AA-". The foreign currency "A+" rating, meanwhile, remains well supported at Stable Outlook by China's exceptionally strong foreign currency sovereign balance sheet and $3.3 trillion in official reserves.

Rebalancing the economy is imperative, not optional, if a further buildup of structural vulnerabilities is to be avoided.

Investment cannot go on growing faster than GDP, or it will start to outstrip even China's huge domestic savings, and China would become a current account deficit country, which we think the authorities would wish to avoid. One key question is how quickly the authorities make progress on structural reforms to facilitate rebalancing. These could include, but are not limited to, financial liberalization and strengthening of household incomes.


We think China's economy will grow about 8 percent in 2013. The Central Economic Work Conference conclusions included language on accommodative fiscal policy and prudent monetary policy, which we see as a signal authorities want to prevent a re-emergence of inflation and strong house price growth. We expect consumption to grow faster than investment.

China's urbanization rate of about 50 percent on official data - and probably a little higher in reality - is still well below 80 percent for South Korea or the US.

The point is how efficiently capital is invested, along with the fundamental macroeconomic constraint of the investment-savings balance. There is another constraint in terms of the ability of the financial system to grow the credit to fund further sharp rises in investment, which we think is pretty limited, given the banking system's weak capitalization and emerging strains in liquidity.

The main risk facing the Chinese and world economy is the resolution, or not, of the US fiscal cliff. On our base case forecasts, the US does not fall off the cliff, but there will be a meaningful fiscal tightening of about 1.5 percent of GDP in 2013, and the US economy grows about 2.3 percent. For Japan, we expect growth of 1.5 percent. For the eurozone, we expect stagnation in 2013. Fitch forecasts emerging markets will grow 4.8 percent in 2013, up from 4.3 percent in 2012.

----- Andrew Colquhoun

head of Asia-Pacific Sovereign Ratings with Fitch Ratings

The economic situation in 2012 was beyond previous expectations. Many anticipated that the economy would bottom out in the second quarter, but stabilization failed to occur so early.

The highlight of the economic situation in 2012 was the increasing contribution of consumption. In the past 10 years, the contribution of final consumption expenditure to GDP has lagged behind that of investment, but that trend was reversed in 2012.

The proactive fiscal policy and the prudent monetary policy will remain in the coming year. Although some experts are talking about the political cycle's impact on economic development, it seems unlikely that the new leadership will launch new stimulus measures merely to safeguard "steady growth".

But that doesn't mean that some investments, especially those needed to accelerate urbanization, won't be made.

A host of reforms could be launched in 2013, including the overall plan for income distribution, pricing reforms of energy resources, and measures to improve equality of public services. Industries related to people's livelihoods, such as education and healthcare, are facing a period of opportunities to meet the current gap between supply and demand.

We expect the economic growth rate in 2013 to be around 8 percent. It may fluctuate by 0.2 percent up or down. The consumer price index will likely be around 3 percent in 2013 and may fluctuate by 0.1 percent without taking the external situation into account.

However, external factors also matter as the latest rounds of quantitative easing in the United States may trigger higher imported inflationary pressure.

The key step ahead to promote urbanization is to help China's 160 million migrant workers settle down in cities, which would not only boost equality, but also could unleash huge demand.

Most of the migrant workers still face barriers when trying to access equal social welfare. Local governments must reduce their reliance on land finance deals, and urbanization should be market-oriented instead of led by administrative orders.

The US economy may see weak growth of around 2 percent, while the eurozone is still trapped in a recession, and its performance won't be better than this year.

The worst scenario is a breakup of the eurozone, but that's not likely. The economic situation in emerging economies may be a bit polarized in the coming year. The Indian and South African economies may face greater pressure, while the outlook for the Chinese, Russian and Brazilian economies is more optimistic.

----- Kuang Xianming

director of Economic Institute at the China Institute for reform and Development

China's economy saw a significant slowdown in 2012 and its economic growth rate declined to less than 8 percent. The economy was mainly driven by consumption and investment as weak external demand continued to put pressure on the country's exports. Tightening measures on real estate have affected the country's fixed-asset investments and, as a result, consumption's literal contribution to GDP has been boosted.

But still there is not much of a driving force for economic growth. A large portion of investment has been wasted without carefully calculating possible output and long-term interests. The quality and cost of local government financing vehicles needs to be given more attention.

As the hope of seeing reforms is rising, the new leadership has issued a call for fresh economic reforms. The biggest priorities are for reforms in income distribution, financing and taxes, as well as the financial system. The first step should move toward increasing people's incomes and expanding value-added tax reforms to more industries.

According to the Asian Development Bank's forecast, China's economy should expand by 7.7 percent in 2012 and 8.1 percent in 2013, but this may be revised later. The coming year will be the (third) year of the 12th Five-Year Plan (2011-15), and construction of big investment projects usually begins in the second or third year, so investment is expected to increase steadily in 2013. If the new income distribution plan offers help to increase low-income people's incomes, that will give consumption a boost.

Inflation could rise slightly in the next year. Food prices will remain uncertain. If there is extreme weather, the rising price of grains and vegetables may offset the falling prices of manufactured goods.

China's urbanization rate has surpassed 50 percent, but the data also take into account a large percentage of migrant workers who haven't become official urban residents. Without reforms to the hukou (household registration) system, these migrant workers cannot really become urban residents. According to research, a city dweller spends about three times as much as a rural resident. Rapid urbanization doesn't only lead to housing and real estate development. It should also be accompanied by more job opportunities, public services and improvements to the quality of educational and medical systems. All of this will bring opportunities to more public and private investors.

According to our research, Asian economies, excluding Japan, will grow by 6 percent this year and 6.6 percent in 2013. Both figures are 0.1 percent lower than what was expected in October. The US economy is seeing signs of recovery and the European economy won't be worse than it was this year, although its debt troubles persist. I think external conditions will see some improvements in the coming year.

----- Zhuang Jian

senior economist with the Asian Development Bank