Caution in growth

Officials and economists alike seem to be sure that China's year-on-year growth will exceed 8 percent this year. While the existing data underpin such optimism, China faces both domestic and international challenges in maintaining stable growth.

The world's second-largest economy successfully avoided a hard landing by expanding 7.9 percent year-on-year in the fourth quarter. And seemingly buoyed by the International Monetary Fund's forecast that this year China's economy may expand by 8.2 percent, officials and research institutions have struck a similar note of optimism about the country's growth prospects.

Indeed, if the world economy fares better this year, as the IMF has forecast, it will provide solid support for China's growth, which remains heavily dependent on the external environment.

But the IMF's prediction that "the worst may have passed" does not mean the global economy will recover instantly. The expected recovery, if any, is set to be gradual and mild, and it will not provide a strong shot in the arm for the Chinese economy.

Apart from increased financial market volatility from the European debt crisis and uncertainties regarding the US fiscal position, Japan has vowed to start monetary loosening. As many have rightly pointed out, it has the potential to bring about a "global currency war" by triggering a chain effect.

For China, the volatility resulting from international financial turbulence is very harmful, as it can cause fluctuations in the domestic financial and real estate markets, and can push up inflation, all of which will force policymakers to tighten their monetary stance, which will in turn cause an economic slowdown.

The heads of the central bank and the National Development and Reform Commission have expressed their concern about rising inflation this year. Yi Gang, deputy head of the People's Bank of China, warned during the World Economic Forum in Davos last week that China could see its inflation rise to 3 percent this year, possibly more. Some research institutions have forecast that it may exceed 4 percent.

China's policymakers need to be aware of the possible pitfalls ahead. While the international community should refrain from launching new monetary loosening policies, China needs to issue more consumption-friendly policies to increase its endogenous vitality. Boosting domestic consumption will help it avoid short-term measures, such as increasing the money supply, which could cause more harm than good in expanding the economy.

(China Daily 01/29/2013 page8)