Moderate growth to continue in People's Republic of China in 2014-15: ADB

Reform efforts expected to weigh on headline growth include state-owned enterprise reform and higher prices or taxes for energy, water, and other utilities

April 01, 2014 10:04 IST | India Infoline News Service
Slowing investment growth and active implementation of structural reforms are expected to push economic growth slightly lower in the People’s Republic of China (PRC) in 2014, continuing a more moderate but still robust pace of growth, says a new Asian Development Bank (ADB) report.

“The authorities are tightening credit growth and working to bring local government debt under control. At the same time, they have embarked on an ambitious reform agenda that will impact key areas of the economy,” said ADB’s Deputy Chief Economist Juzhong Zhuang. “The reform agenda is critical and well-designed. It has the potential to improve the quality of growth, make growth more inclusive, and ensure it is sustainable over the long term. But as the changes roll out growth could slow further before it stabilizes or rises again.”

ADB’s flagship annual economic publication, Asian Development Outlook 2014 (ADO), released today, says the PRC ? the world’s second largest economy is set to post gross domestic product (GDP) growth of 7.5% in 2014, and 7.4% in 2015. The economy expanded by 7.7% in 2013, the same rate as in 2012.

Reform efforts expected to weigh on headline growth include state-owned enterprise reform and higher prices or taxes for energy, water, and other utilities. Incentives for senior local government officials to focus less on quantitative growth targets will also affect growth.

Support for growth is expected from more equitable income growth and higher social spending, which will sustain expanding consumption. The upturn in developed economies is expected to lead to higher demand for PRC exports despite the stronger renminbi and rising unit labor costs.

A main external risk to the forecast is weaker than expected recovery in the advanced economies affecting demand for exports. Principal domestic risks stem from uncertainties around the effectiveness of monetary management and the concern over credit quality.

ADO says the key challenge facing policy makers in the PRC is to manage the deceleration of investment growth in a controlled manner. The People’s Bank of China (PBOC) needs to find the right balance between subduing credit growth and supporting economic growth. Rapid slowing of credit growth could place more stress on enterprises and financial institutions, eroding investor confidence. However, if the current pace of credit growth continues – with associated debt increases, including debt of local governments and state-owned enterprises – it could aggravate asset quality problems, which also risks undermining investor confidence.

Responding to this bind requires strengthening monetary, fiscal, and exchange rate policies in a coordinated way, ADO says. The PBOC can be expected to target a monetary growth rate in 2014 that exceeds nominal GDP growth but is less than in 2013; invigorate competition in the financial sector to help allocate credit more efficiently; and strengthen sector oversight to prevent excessive risk taking.

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