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China looks internally to keep growth

Andrew Batson, Beijing | January 25, 2008

EVEN as China reported a second year of annual growth above 11 per cent, the prospect of a US-led global economic slowdown looked likely to force a shift in priorities from curbing the boom to sustaining momentum.

The Government wants to generate 10 million urban jobs this year. Doing that is likely to require a sharper focus on the domestic economy after a period when trade has been a big growth driver.

China's export engine started to slow near the end of the year, and the wider effects of that are already being felt.

The economic giant's growth peaked at 11.9 per cent in the second quarter, then eased to 11.5 per cent in the third quarter.

In the fourth quarter, the economy grew 11.2 per cent, China's National Bureau of Statistics said yesterday in Beijing.

For all of 2007, gross domestic product increased 11.4 per cent, the bureau said.

Some exporters, seeing orders from the US fall off, are planning to trim staff, which could have a broader effect on households and consumer spending.

That is happening even as inflation in China remains high, and as drops in stock markets and property prices also threaten to erode savings.

Top leaders are still focused on combating inflation, which reached nearly 5 per cent in 2007. They have resorted to freezes on prices of electricity and fuel, and price controls on some foods.

The persistence of inflation limits the Government's ability to lift the economy through measures such as interest rate cuts.

That could change quickly if inflation eases and the US and Europe continue to take a turn for the worse.

"The Government has already started to pay attention to the possibility of a US recession," says Zuo Xiaolei, chief economist for China Galaxy Securities in Beijing.

Although even the most pessimistic forecasts call for China's growth to ease to 9 per cent or so this year, that would be a sharp relative slowdown, she says.

"They should stimulate domestic consumption to compensate for the loss of external demand," she says.

A boom in construction of housing, infrastructure and new factories has been the major driving force of China's expansion in recent years.

Such investment has been so fast many officials worry that more is being built than is really needed. To avoid excess capacity, the Government has repeatedly moved to curb investment and warned that future growth will have to be less reliant on such spending.

Those concerns may fall by the wayside if the leadership decides more infrastructure projects are needed to offset weaker exports.

"If the major economies do retrench fairly heavily, maintaining a degree of growth that is consistent with social stability will require a boost in construction and investment," Societe Generale Asia economist Glenn Maguire says. An increase in jobs could well outweigh more abstract concerns about excess capacity or wasted investment. So, he says, "We may see a temporary pause in this desire for more balanced growth."

A mild global slowdown could actually ease some of China's recent economic problems: domestic food prices pushed up in part by tight global agricultural markets, and a banking system flooded with cash from an ever expanding trade surplus.

Government think-tanks forecast only a modest slowdown in growth this year, in the range of 10 per cent to 11 per cent.

(Source: The Australian, 2008)

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