News that the World Bank has lowered its forecast for China Gross Domestic Product (GDP) growth from 7.5% to 6.5% may seem a dramatic fall from grace.
For a country which has experienced GDP growth of above 7% in every year since 1991, including during the Asian crisis of the late nineties, the news of a fall from 11.4% in 2007 to 6.5% appears extreme.
In context, however, the deceleration of the economy looks less drastic. While the developed world suffers from a severe global recession, the debate surrounding China’s economy has focused not on whether it will grow but simply on how much.
The World Bank acknowledges numerous pressures facing the Chinese economy. The key problem posed by the crisis has been the impact on exports of weakening global demand, since the sector was a key driver of GDP growth in the country in the past.
Exports fell by 21% year-on-year in the first two months of 2009 in dollar terms, and the trade surplus, which had averaged $40 billion (£29 billion) for the three preceding months, fell sharply to $4.8 billion in February.
Yet despite these worrying figures – which show a deceleration of activity in the usually dynamic economy – there are growing signs that domestic spending is picking up.
In contrast with western economies, China’s credit markets have been growing rapidly following a policy shift by the government. The World Bank estimates that total outstanding credit rose by 24.2% over 12 months to February after credit controls that had held up lending in the past were removed last October.
The key to a recovery to trend growth in the country relies on an increase in domestic spending. The problem is that like their western counterparts, Chinese consumers are being financially squeezed: retail sales by large retailers fell 12% in the fourth quarter of last year. The problem is especially pronounced among the rural population.
Massive government spending on infrastructure projects, aimed partly at keeping the rural population in employment, should help the country remain resilient. The World Bank Chinese export collapse heralds more bad news
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