December 16, 2010

Bank of America Merrill Lynch forecasts for China from 2011-2020

Bank of America Merrill Lynch has a report "Asia-Pacific Macro Year Ahead 2011: Certain growth in an uncertain world" Nine pct gdp growth expected to be new normal for Chinese economy.

China GDP Growth Forecasts
2011 9.1 percent
2012 9
2013 8.5
2014 8.5
2015 8
2016 7
2017 7
2018 7
2019 7
2020 7




Lu Ting, China economist with the Bank of America Merrill Lynch, attributed the "inevitable slowdown" to two major factors -- diminishing gain from institutional reforms and loss of demographic dividends.

"But two drivers also help buck the slowing trend: innovation as a result of rising Research & Development spending and within - country instead of outbound industrial relocation, thanks to the low capital base in China's poorer inland areas," Lu said.

Bank of America Merrill Lynch also said in the report China's consumer price index (CPI), a major gauge of inflation, is likely to rise to 4.5 percent in 2011, from 3.3 percent forecast for this year.

Lu Ting attributed China's rising inflation to three factors -- credit supply and high broad money growth, surge in wages of migrant workers and increasing inflation expectations in the wake of the second round of U.S. quantitative easing (QE2).

"With 9.1 percent GDP growth, nominal growth of migrant wages could just be around 18 percent to 20 percent, which will contribute to 10 percent of food inflation and 3.3 percent of CPI inflation," said the report.

It also maintained that China would have to get used to an economic slowdown in the long run with a relatively high inflation.

"Looking ahead, trend growth in China is likely to decline, reflecting worsening demographics and lower growth of labor productivity," it said.

Inflation will have a similar effect to currency appreciation.

The currency (yuan) will probably appreciate at about 5-8% per year.

I had a projection for China's growth which is similar to the Bank of America Merrill Lynch forecast. I have made some minor modifications over the last few years but the forecasts have not had that many adjustments. Here is what I published in August, 2010.

I think that currency appreciation will probably be slower that what I had in August, 2010 but there will be more inflation which will keep the GDP in yuan converted to US dollars close to this projection. The farther into the future the projection then the more likelihood there is of major technological, political and economic shifts. Those shifts could start to alter the likely outcome.

Projected GDP:

Year GDP(yuan) GDP growth USD/CNY China GDP China+HK US GDP  US Growth 

2011e 42            9.6    6.49       6.47      6.7   14.9   2       
2012 45             9      6          7.5       7.7   15.1   2.1
2013 49             9      5.6        8.7       8.9   15.4   3
2014 53             9      5.1       10.4      10.7   15.7   3
2015 58             9      4.7       12.3      12.6   16     3
2016 63             9      4.4       14.3      14.7   16.4   3       
2017 68             8      4         17.0      17.3   16.8   3 Past USA
2018 74             8      3.7       19.9      20.2   17.2   3
2019 80             8      3.4       23.5      23.8   17.6   3
2020 86             8      3         28.6      28.9   18.1   3
2021 93             8      3         30.9      31.2   18.7   3
2022 100            8      3         33.4      33.7   19.2   3
2023 108            8      3         36.0      36.3   19.8   3
2024 117            8      3         38.9      39.2   20.4   3
2025 126            8      3         42.0      42.3   21.0   3
2026 136            7      3         45.4      45.7   21.6   3
2027 146            7      3         48.6      48.9   22.3   3
2028 156            7      3         52.0      52.3   23.0   3
2029 167            7      3         55.6      55.9   23.6   3
2030 179            7      3         59.5      59.8   24.4   3

If the slightly lower growth in the Bank of America Merrill Lynch forecast is correct and the currency appreciation and inflation are about as predicted and the US GDP growth is in the 2-3% per year range then China would pass the USA on a nominal GDP basis in about 2017-2018.

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