China’s economic growth to drop

Beijing, October 25:

Economic growth in China could slip back into single-digit territory in 2007 under the impact of a US slowdown, the nation’s top planner said on Wednesday.

A cooling US economy will have a negative impact on Chinese exports while on the plus side, China will benefit from falling prices of oil and other raw materials, the National Development and Reform Commission said in a report.

“We believe that economic growth will drop below 10 per cent in 2007,” the commission said in its report, published in the China Securities Journal. “Investment, industrial production and exports will all see a relatively obvious correction,” it said. China’s economy, which expanded by 10.7 per cent in the first three quarters, will likely grow 10.6 per cent for full-year 2006, the commission said. “As the US economy may see a rather significant correction, Chinese exports could see a fairly large impact,” the commission said.

“But at the same time, a weakening of prices of oil and other raw materials will be beneficial for economic development.” The forecast is in line with estimates for 2007 by major investment banks, which also predict single-digit growth next year, even after recent upgrades of their predictions for the world’s fourth-largest economy.

Deutsche Bank has upgraded its forecast from the previous 8.9 per cent to 9.5 per cent, basing its revision on an “increasingly benign policy outlook as well as the healthy state of the economy.” JP Morgan raised its 2007 forecast from 9.0 per cent to 9.5 per cent and said Chinese authorities would probably seek to further tighten liquidity, seeing a two-thirds chance of another interest rate hike before the New Year.

The commission also said China needed to pay more attention to interest rate tools in controlling economic growth, rather than adjustments to the yuan’s exchange rate. China can increase benchmark interest rates “at an appropriate time” next year, and should move to reduce expectations of a yuan appreciation, keeping the currency basically stable, it said.

But it added the introduction of some flexibility was warranted, including a widening of the yuan trading band.

Currently, the exchange rate is not allowed to move outside a 0.3-per cent trading band around a parity rate set by the central bank at the start of every trading session. The commission said that the government must implement macroeconomic measures more firmly. Specifically, it needs to control new development projects, curbing excessive growth in fixed-asset investment and preventing rapid price rises in the property market.

The reluctance by some government officials to implement measures that may produce large adjustments in property prices has undermined efforts to rein in the overheating sector, it said. The government should also gradually lower export tax rebates and make policies attracting foreign investment less aggressive to maintain better economic balance.