EO's Predictions for the Chinese Economy in 2011

News, page 7, issue 501, January 4
Translated by Tang Xiangyang
Original article: [Chinese]

As we enter the new year, the Economic Observer has invited five leading financial analysts to make predictions about the Chinese economy in 2011.

These five economic forecasters are: Yu Lixin, researcher with the Institute of Finance and Trade Economics under the Chinese Academy of Social Sciences; Chen Xingdong, chief economist with BNP Paribas Asia; Zhu Jianfang, lending economist with CITIC Securities; Ding Zhijie, dean of the financial college at the University of International Business and Economics and Wang Bangqi, foreign investment manager of China International Fund Management Co., Ltd.

Yu Lixin, Chen Xingdong, Zhu Jianfang, Ding Zhijie, Wang Bangqi

Prediction 1: An Overheating Economy

Chu Jianfang: The growth rate of China's GDP might be 9.5 percent in 2011. The growth rate of the first and second quarters might be lower than that of the last two quarters. The growth rate of the first quarter will only be slightly over 8 percent. The reason for this is that the Chinese government will issue tightening measures in the first two quarters of 2011 in order to curb inflation.

Ding Zhijie: It is difficult to predict the path of the Chinese economy in the second half of 2011, but I can offer some advice for the government. First, since the late stages of economic development will likely be accompanied by rapid growth in housing prices, the government should take certain preventative measures; second, the government should be on the alert for property bubbles; third, the government should also maintain a balance between GDP growth and social development. Fourth, if the government wants to target the property bubble, it must stem the loans available to property companies. Fifth, opening up to the world is a risk for any country.

Chen Xingdong: There are three core concerns for the Chinese economy in 2011: liquidity, inflation and the risk of overheating. Although currently, China’s growth rate is slowing, we should keep two things in mind: the uncertainty of export growth and upcoming industrial restructuring. To ensure that the industrial structures of eastern provinces are upgraded, structures in the central provinces must be deepened and that of western China must be expanded. The Chinese economy has to grow. But the more it grows, the greater the risks.

Prediction 2: Commodity Prices will Fall

Chen Xingdong: I expect the inflation rate for 2011 to be between 3.8 percent and 4.3 percent. Currently, four factors can affect inflation: the shortage of agricultural products, increased production costs, excessive liquidity and imported inflation. Out of the four, the government can control two by increasing supply and tackling market speculation. But it cannot control inflation caused by increased production costs and price surges of international commodities

Chu Jianfang: People are all worried about inflation. We believe the inflation rate will be relatively high in the first quarter of 2011, with a quarterly growth rate of 4.5 percent or 4.6 percent. The rate will fall to a reasonable level in the second half, and the annual inflation rate will be around 3.8 percent. The reasons are as follows: the actual economic growth of 2011 may not be as high as predicted, and will not cause prices to soar; second, up until now inflation expectations have been very strong, and will decrease during the coming year; third, food prices have entered their final period of increase; fourth, imported inflation this year will not greatly impact domestic inflation.

Predication 3: An Export Growth Rate of 20 Percent?

Yu Lixin: 2011 is the first year of China's 12th Five-Year Plan period. There will be new trends in China's export market First, the world economy will make major adjustments and its growth model will shift; second, transnational companies will push the transfer of high-end manufacturing industries to Brazil, Russia, India and China (BRIC); third, with increasing international competition, trade in services will develop dramatically; fourth, regional cooperation will intensify. However, China's export industry will face difficulties such as the European debt crisis, the political instability of the Korean Peninsula, and increased domestic production costs. China's export growth rate will be limited by the above factors; I predict it will be around 20 percent.

Chu Jianfang: The growth rate of China's exports during 2010 was 30 percent. I think it will fall to somewhere between 15 percent and 16 percent in 2011. The high export growth rate is harmful in many ways: it exhausts resources, pollutes the environment, and requires a high number of low-end laborers to sustain. In the future, we should aim to export for the sake of imports.

Prediction 4: Decreasing Investments

Chu Jianfang: Judging from current conditions, investments will decrease slightly in 2011, but without the risk of huge reductions. We predict the annual growth rate for investment to be 23 percent in 2011. We also anticipate another period of high investment in infrastructure in the next five years. Investment in the service sector and the agricultural industry, especially rural water conservation projects, will increase, while investment in the property market, especially commercial housing, will decrease.

Prediction 5: Leveling of Consumption

Chu Jianfang: The growth rate of the total retail sales for consumer goods in 2010 is likely to be 18.4 percent and the growth rate for 2011 will be about the same; it may be even lower. We predict that the growth rate will decrease for auto sales and increase for the service sector.

Prediction 6: Monetary Policy: Hedging

Chen Xingdong: The substantial credit expansion has left a large amount of money in the financial market. Money supply in 2011 will likely remain above 7.5 trillion yuan. To absorb the excessive money supply, the Chinese government must implement a prudent monetary policy. The required reserve ratio will be raised to 22-23 percent. The interest rate for loans will be raised, but interest rates will not be the main instrument for tackling inflation.  

Chu Jianfang: The central bank has set this year's monetary policy as "positive, stable, healthy, prudent and flexible", which means monetary policy may be fine-tuned if inflation slows in 2011. If inflation exceeds 4 percent, interest rates must be raised.

Prediction 7: Doubts about the US Economy  

Chu Jianfang: The US Dollar will not depreciate significantly. Overall, the American economy is in better shape than the European and Japanese economies; it is more durable and flexible, and is more likely to exceed expectations.

Chen Xingdong: The US just began a round of quantitative easing, cutting income taxes, and carrying out reforms for unemployment benefits and the inheritance tax. This will definitely benefit economic growth. Many American investment banks and research institutions have predicted that the US economy will grow by 0.4 to 0.7 percentage points; the growth rate could exceed 4 percent. But will the market believe the effects of these policies? "80 percent" is the key statistic for the American economy: 80 percent of the capital released by the Federal Reserve will not flow to the real economy, but into the financial sector and the capital market, 80 percent of the capital in the American financial sector will flow to foreign countries, and 80 percent of the money flowing into foreign countries will target developing countries. People are worried that America is playing with fire: how will they fund a deficit of over 1.5 trillion US Dollars? If China and other developing countries are not buying up their debts, the US will have no choice but to release more liquidity. 

Prediction 8: RMB Will Appreciate by 3 Percent

Ding Zhijie: The RMB will appreciate by 3 percent in the first half of 2011, exceeding appreciation rates in 2010. If things go as expected, the appreciation rate in 2011 will be the highest since 2005, when the reforms of the foreign currency exchange mechanism began. Reasons for appreciation include the debt crisis in Europe, America’s state and local government debt crisis and the world wide policy of loose liquidity. Another reason for a higher RMB appreciation rate is that although the RMB appreciated by 3 percent in 2010 on paper, since June, the effective exchange rate has actually depreciated. Recently, the RMB began accelerating its appreciation against the US Dollar.

Chen Xingdong: The RMB is appreciating, but the room for appreciation is limited. There are four predictions: the appreciation will be based on market supply, it will reference a basket of currencies, a mechanism to control the flexible exchange rate will be issued, and the basic value of the RMB will remain stable. What is stable? A stable appreciation should be within 3 percent. A 5 percent growth rate will be too high. Suppose the RMB appreciates by 5 percent in 2011, the dollar index will go up 6 percent. Since the US Dollar accounts for 65 percent of the currency basket, this means that the actual appreciation for the RMB will be 10 percent in 2011. I highly doubt it will appreciate on such a scale.

Prediction 9: The A-share Market

Chen Xingdong: The starting gun has been fired for the A-share market, and there are four possible outcomes in 2011.

First, if inflation peaks in March, international hot money and domestic liquidity are limited, we will not see a tightening monetary policy and stock market shares will increase; second, if inflation has not peaked by March and continues to rise, hot money problems will grow worse. This will cause a tightening monetary policy and the stock market will experience turbulence. Third, if the American economy is doing well and there is no need for third round of quantitative easing, hot money and capital will not retreat from emerging markets nor will it return back to the American capital market, reducing China's liquidity pressure. If China's macro economy is doing well, the stock market will also do well in 2011. Finally, if America's economic stimulus package isn't effective and the economy enters a period of stagflation, investors will transfer their assets to foreign countries.

Wang Bangqi: The stock market is tied to monetary policy. Shall we be afraid of lifting the interest rate? Should we be afraid of inflation? I like them both because I want to make money. Inflation will not harm the stock market as long as the stock market does not get out of control. The interest rate increase will also push the stock market up as long as it has not peaked. It is not bad for the deposit interest rate of emerging markets to peak as long as America, Europe and Japan have not increased their interest rates. Looking at the year as a whole, the performance of emerging markets will be better than that of developed countries.

This article was edited by Rose Scobie and Ruoji Tang