Domestic brake on Chinese growth

The recent slowdown in China’s economic growth has largely been domestically led, according to the World Bank. Its China Quarterly Update, published last week, shows domestic growth slowing while the country’s highly competitive export sector is thriving.

The latest findings suggest that exports are once again overtaking domestic consumption and fading government-led stimulus as the main driver of short-term growth.

As a result of these shifts, Chinese economic growth has slowed from 10.6% in the first half to 9.6% year-on-year in the third quarter. The overall fall in economic growth was mainly a result of at least temporarily weaker domestic demand and investment.

China’s domestic economy has cooled as economic stimulus ebbs away and its monetary stance is normalised. The World Bank’s findings may defeat short-term hopes of a restructuring of China’s economy away from exports.

Yet Louis Kuijs, a senior economist in the World Bank’s China office and the main author of the report, expects domestic demand to be supported by the traditional growth drivers and a robust labour market. (article continues below)

The bank expects China’s economic growth to ease further as global growth decelerates and the macroeconomic stance is normalised further. It has edged up its projection for 2010 to 10% following recently published data, and for 2011 to 8.7%.

“Exports will face some headwinds from the expected deceleration of global growth in the short term,” Kuijs says. “However, China’s manufacturing is very competitive and the underlying growth pattern has not changed much yet.”

Kuijs says domestic demand will be strong but not sufficient to maintain growth at the rate the government would like.

China’s trade is set to rise again. Over the past quarter its exports have continued to outpace imports. Inevitably, the country’s massive external surplus has increased ­further.

The World Bank’s latest findings are in stark contrast to its stated policy on China for several years: to boost domestic consumption and make its growth more balanced and sustainable.

Some of the country’s policies include reducing the purchase tax on passenger cars as well as sub­sidising rural households to buy electrical goods and agricultural equipment.

Before the gradual withdrawal of economic stimulus, China’s economy grew because of government-led investment and domestic consumption. In 2009, imports were strong and external trade had decreased heavily as global demand for China’s goods had fallen.

This had fuelled hopes that the global rebalancing and the restructuring of the Chinese economy was under way. But with China remaining heavily dependent on its export ­sector, the overall outlook for the economy is still vulnerable to external risks.

One of its main difficulties, as identified by the World Bank, is the weaker outlook for high-income countries, which could weaken purchases of Chinese exports. Other areas of concern are international liquidity, as well as global imbalances and possibly contentious policies triggered by these, all of which could fuel inflation.