Five Predictions for the Chinese Economy in 2010

Five Predictions for the Chinese Economy in 2010

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-Yiping Huang 2

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s the year 2009 fades into the distance in the rear view mirror, the Chinese economy has entered into unknown territory in 2010. Investors are universally far more upbeat than one year ago.

Policymakers talk busily about adjusting economic structure as the new top policy priority, seeing no risk in achieving above 8 per cent growth.

For some, China's ability to achieve strong growth amid global recession was the biggest surprise of 2009. To me, it was not. The Chinese government's abilities in mobilising resources have strengthened, not weakened, significantly during the past decade. If the government really believed that 8 per cent growth was critical, then that would happen.

But I also had my share of surprises in 2009. The first surprise was the stable job market. I predicted that labour market conditions would deteriorate sharply, as job creation from the capital-intensive infrastructure projects would not be sufficient to compensate for the job losses in the labour-intensive export sector. But job markets remained stable during the economic downturn. The country even experienced widespread shortage of migrant workers. It turned out that construction of capitalintensive projects is actually very labour intensive.

The second surprise was the resilient private sector. As the economy became more dependent on state-dominant investment, it was natural to expect the private sector, mostly small and medium enterprises (SMEs), to decline.

But, in fact, SMEs continued to grow much faster than state industry throughout the economic downturn. At least three factors contributed to SMEs' outperforming the stateowned economy: they had advantage of more flexibility in response to the crisis; they benefited indirectly from contracts associated with the stimulus measures; and there were new policy initiatives ensuring that SMEs got finance through the banking system.

And, finally, the third surprise was rapid rise of asset prices.

I expected GDP growth to be strong but microeconomic conditions to deteriorate, with negative implications for the asset market. Asset prices, especially housing prices, started to surge from the second quarter. The turnaround of the asset markets was probably driven by bottoming out of the Chinese economy. But the abnormal liquidity conditions also played an indispensible role in building-up of the asset bubbles.

So how will the Chinese economy look in 2010?

The truth is nobody knows. But available information does suggest that the global economy will likely do much better in 2010 than in 2009. The U.S., E.U. and Japan all climbed out of recession during the third quarter of 2009. The global economy will probably achieve 3 per cent growth in 2010.

While prices may move upward, inflation is not likely to be a major macroeconomic risk any time soon. The central banks can take time before tightening the policies.

In the spirit of the upcoming "Year of Tiger", I offer here five predictions about likely macroeconomic trends in China in 2010. I am almost certain that many of these predictions will turn out to be false. What is important is not the conclusions, but the reasoning behind these conclusions.

Prediction 1: The renminbi will probably begin to appreciate against the dollar.

Some economists worry about inflation risks given extraordinary credit growth in 2009. But in the near term inflation is likely to be capped by the overcapacity problem.

As the economy recovers and prices move upward, the central bank will start to tighten monetary policies, most likely around the middle of the year.

The soft peg of the renminbi against the dollar in the wake of global crisis was unfortunate. But policymakers remain committed to greater flexibility of the exchange rate and are likely to return to a managed float regime with reference to a basket of currencies during 2010. This should set a new path of steady and gradual appreciation of the renminbi in many of the years to come.

Prediction 2: Job market pressures may rise again even as the economy recovers.

Construction of infrastructure projects has absorbed the vast labour force released by the export sector. But these jobs are not permanent. Once construction works are completed, migrant workers will have to find new jobs again. And stable jobs can be created only when domestic demand other than state investment picks up. This could point to a brief period of recovery of economic growth and accompanied by a weakening of labour markets.

1 The article appeared in East Asia Forum on 10/01/2010. See http://www.eastasiaforum.org/2010/01/10/five-predictions-for-the-chinese-economy-in2010/ 2 Yiping Huang is professor in the Chinese Center for Economic Research at Peking University and in the China Economy Program at the Australian National University (ANU)

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Prediction 3: Housing prices will probably begin to weaken.

Factors that could influence housing markets in 2010 are mixed. For instance, higher personal incomes and corporate profits could support further increases in housing prices. But overall tightening of monetary policies, particularly slower growth of bank loans and hikes in policy rates, could add to pressures on the housing market.

A prediction of weakening housing prices, however, is based on two main factors. First, the market already shows important signs of a bubble, whether judging from the income/housing price ratio or looking at the rental/price ratio. Second, policy makers already worry about consequences of asset bubbles, given the fresh lessons from the U.S. The authorities recently removed all preferential treatment for housing investment and will likely take more actions in the coming year.

Prediction 4: Structural imbalances are likely to worsen.

Almost all policymakers, from the Premier down, are talking about adjustment of economic structure in order to improve quality of growth. This is very positive. But the measures being considered, such as better credit allocation, remain administrative in nature. In fact the government has been doing the same for at least seven years. But the imbalance problems continued to worsen. I don't see any difference this time round.

So, for instance, when the global economy recovers, the government may reduce spending on infrastructure, which would eventually lower investment share of GDP. But at the same time, export growth may recover. This could mean a rebound of the current account surplus.

The root cause of the structural imbalance is distorted incentive structures, especially depressed factor costs. Until

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more decisive steps are taken to liberalise factor markets, adjusting economic structure could remain on the top of policy agenda every year for a very long time.

Prediction 5: The government will likely introduce another stimulus package Although most analysts expect China's GDP growth to be at 9-10 per cent in 2010, it is unclear whether strong growth can sustain itself without the helping hand of the government. The ideal scenario is that when the RMB 4 trillion spending runs out, either exports or consumption or private investment or a combination of these would be strong enough to carry forward the growth.

But it is not clear that this will happen in the near term.

Exports should recover but they are unlikely to return to the levels achieved before the crisis. The growth potential of the global economy has shifted lower and rising saving ratios further limits potential for China’s export growth.

Consumption has been resilient, partly as a result of the stimulus measures. Without strong income growth, the consumption momentum could weaken. Private investment remains weak outside the housing sector.

By mid-2010, the government may be forced to consider further measures supporting growth. Clearly, any new measures will likely be more oriented toward social infrastructure.

Overall, I see a partial return of the pre-2008 growth model, which, according to Premier Wen Jiabao is not balanced, is inefficient and thus unsustainable. The government has been talking about improving quality and sustainability of growth but so far it has achieved little in that regard.

Perhaps 2011 will be a more critical year for China’s longterm growth outlook.

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NEWS BRIEFS China is the World's Top Exporter of Goods, in 2009 The Wall Street Journal reported on Jan 6, 2010, that China is likely to export more goods than Germany in 2009. China took over the mantle of the world's top merchandise exporter from Germany in 2009, according to the latest figures, aided by a global economic crisis that has taken a greater toll on other trading powers. China exported $957 billion of goods in the first 10 months of 2009, compared with $917 billion for Germany, according to customs data compiled by Global Trade Information Services, a Geneva-based firm. No changes in November or December are expected to overturn the Chinese lead, trade experts say. China is likely to publish trade figures for the full year next week.

China and India in the Decade Ahead As 2009 came to a close, and the new year dawned, two prominent Indian economists and columnists picked up their crystal balls, and looked at the decade ahead. Among other things, both of them compared the future economic trajectories of both China and India. Sawminathan Aiyar makes eight predictions in his article "India to overtake China in 2020" in Times of India, on Jan 1, 2010. The first prediction compared China and India. India will overtake China as the fastest-growing economy in the world. China will start ageing and suffering from a declining workforce, and will be forced to revalue its currency. So its growth will decelerate, just as Japan decelerated in the 1990s after looking unstoppable in the 1980s. Having become the world's second-biggest economy, China's export-oriented model will erode sharply - the world will no longer be able to absorb its exports at the earlier pace. Meanwhile, India will gain demographically with a growing workforce that is more literate than ever before. The poorer Indian states will start catching up with the richer ones. This will take India's GDP growth to 10% by 2020, while China's growth will dip to 7-8%. In a more ominous vein, Mr Aiyar foresees the possibility of a water war between China and India. China, alarmed at India's rise, will raise tensions along the Himalayan border. China will threaten to divert the waters of the Brahmaputra from Tibet to water-scarce northern China. India will threaten to bomb any such project. The issue will go to the Security Council.

UPDATES ON LAWS IN INDIA & CHINA New Laws and Regulations in China for 2010 China's laws and regulations can often be confusing. Here are a few new ones that will take effect beginning in the 2010 New Year. l Immigrant workers in Guangdong province with stable incomes and permanent lodging and who have paid social

insurance for at least seven years are allowed to apply for a permanent residence permit if have a clean criminal record. l Starting January 1, 2010, China will raise the pension by 10 percent from the 2009 level, or 120 yuan ($17.57) a month per

person. In addition, migrant and urban workers would be able to transfer their pension accounts when they find new jobs in other provinces. l There are several small changes to laws regulating security guards. If one dies on duty, they will be honored with the official

title of martyr, usually reserved for those the government says have died for justice. Second, security guards are banned from performing body searches or using violence. l Mobile phone users will be charged less next year. Previously, when making a long distance call, they were charged both

local and long distance fees. Beginning in the new year, the local fees will not be charged for long distance calls.

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