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ADB cuts China's growth prospects
25
Sep '15
The Asian Development Bank's Annual Development Outlook Update 2015 says China's economic growth moderated to 7 per cent in the first half of 2015 as industrial and agricultural growth slowed. The ADO forecasts growth to slow from 7.3 per cent in 2014 to 6.8 per cent in 2015. Services remained the driver of growth, as equity market firms benefited from a stock market boom and correction, and as real estate transactions were lifted by lower mortgage rates and more flexible purchase conditions.

On the demand side, the contributions of investment and net exports to GDP growth declined while that of consumption increased as wages rose. Inflation edged up in the first half of the year, but price pressures remained moderate as the impact of rising food prices was dampened by declines in other commodity prices and real renminbi appreciation.

According to the latest ADO, fiscal policy became more accommodative in the first half of 2015 as the consolidated budget surplus shrank; expenditure growth exceeded the budget target while revenue growth also accelerated but short of its target. Local governments' off-budget expenditures remained substantial, and plans to move them on budget progressed slowly. Monetary policy remained accommodative in the first half of the year with cuts in reserve requirements and benchmark interest rates. The broad money supply (M2) grew faster than nominal GDP, and debt continued to mount. In August, the central bank cut interest rates again in conjunction with other government policies that aimed to halt the fall in equity prices.

The renminbi weakened against the US dollar, reflecting market trends and the change in August to the procedure for fixing the exchange rate. Exports fell as recovery remained sluggish in major trade partners, and imports were lower owing mainly to falling commodity prices and growing import substitution. Trade and current account surpluses were up substantially over the same period in 2014. Net capital outflows pushed the overall balance of payments into a deficit, but gross international reserves remained sizeable.

As the economy has slowed more than expected in the first half of 2015, the growth forecast is revised down from ADO 2015 for both 2015 and 2016. Export demand, slowed down by delayed recovery in the developed economies, should strengthen over the forecast period as global growth rises, and, together with robust consumption growth, cushion the impact of decelerating investment growth. Consumer price inflation should remain low in 2015 as global prices for food and other commodities remain depressed, but likely rebound slightly in 2016 as those prices start to recover. Inflation forecasts are revised down for 2015 but less so for 2016. Foreign trade will benefit from global growth and trade, but current account surpluses will remain stable as global commodity prices recover.

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