With inflationary pressures building and a tightened monetary policy, China's GDP growth was forecast moderate this year, compared with a growth of 10.3 per cent in 2010, said the ADB in its 2011 Asian Development Outlook, which expected a growth of 9.2 per cent in 2012.
The inflation rate, which averaged 3.3 per cent in 2010, will pick up to 4.6 per cent in 2011, lifted by abundant liquidity and higher food and commodities prices, the ADB said.
Fixed asset investment will remain a key driver of growth, although the expansion rate is set to decelerate slightly from past levels, standing at 22 percent in 2011 and 20 per cent in 2012, respectively, due to the winding back of fiscal stimulus measures and tighter monetary policy, the bank said.
The new five-year plan, starting from 2011, will put more emphasis on consumption and services as drivers of growth, said the Manila-based bank.
The bank's forecast growth for developing Asia, comprising of 45 economies in the region excluding Japan, has been at 7.8 per cent in 2011, with an inflation rate of 5.3 per cent.
Yu Yongding, Academician with Chinese Academy of Social Sciences (CASS), suggests letting the yuan float freely and stopping the purchase of new US treasuries
It is time for China seriously to consider allowing the yuan to float freely, while reserving the right to intervene when it must, and tighten the management of cross-border capital flows.
Given the trade and current account surpluses, the People's Bank of China (PBOC) must intervene in currency markets, buying the dollar and selling yuan, to prevent - or moderate - the appreciation of the country's exchange rate. But such interventions inevitably translate into more holdings of US government securities.
To stop this accumulation of foreign exchange reserves, and so minimise China's welfare and capital losses, the simplest solution would be for the PBOC to call a halt to intervention. But this implies that China must allow the yuan to float freely, and thus to appreciate. But nobody knows how much the yuan would appreciate.
The true risk lies in the possibility that the yuan is significantly undervalued, and that appreciation would have a major impact on China's trade balance. In that case, China would have to accept an export slowdown and an increase in unemployment to avoid huge capital losses on its dollar reserves.
At present, the government is trying to slow the GDP growth rate, and job shortages are emerging in coastal areas. With the fiscal position still strong, the government should be able to help enterprises and workers who suffer undue pain from the yuan's appreciation.
While exchange rate policy is not an instrument for dealing with China's domestic inflation, yuan appreciation would certainly help the government meet its goal of keeping the annual rate below 4 per cent this year.
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