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May 23, 2012

China expected to Stimulate Economy, Still in Economic Catch Up Mode and India expected to have 7% growth

China is expected to Moderatly Stimulate Economy

1. China's economic growth is likely to rebound some time this year due to government stimulus policies and a restocking of inventories, the Organization of Economic Cooperation and Development said Tuesday.

"As the inventory cycle turns, and fiscal and monetary policy become more expansionary, growth should pick up in the course of 2012 and stabilize at over 9% in 2013," the OECD said in its May 2012 Economic Outlook.

In response to slowing growth, authorities in recent weeks have unveiled support measures, including a cut in the reserve requirement ratio of banks and rolling out subsidies for purchases of some household appliances.

"Going forward, monetary easing should support activity, especially in the housing area, where prices have become more affordable," the OECD said in its report. "Fiscal policy will also boost consumption, with increased outlays being directed to social spending."

The OECD added that China should accelerate some planned infrastructure projects if growth weakens further in the second quarter of this year.




Inflation has also slowed considerably, and this trend is likely to continue because output will remain below potential for some time, the report said, despite higher oil prices and a possible hike in regulated electricity prices for households.

At the same time, the OECD said wage increases have been accelerating, and this could squeeze profit margins for some companies, especially exporters.

Resilient domestic demand means that China's current account surplus is likely to continue narrowing, to just over 1.5% of GDP by 2013, from around 2.7% of GDP last year, the report said.

China has financial room to Engineer Growth

2. Financial Times - China’s economic model is indeed inefficient by almost any measure. In terms of energy input, for example, in 2010 it used 2.4bn tonnes of oil equivalent, according to BP, a little more than the US, which used 2.3bn tonnes. With that China produced just $5.88tn of gross domestic product, not much more than a third of the US, with $14.66tn.

But the China bears are unlikely to be proved right just yet. China still has the firepower to engineer growth, something it badly needs in a year of fraught political transition. The budget deficit is negligible and central government debt is only 25 per cent of GDP.

China Still mobilizing Catch up Economy

3. Foreign Policy - The odds are that China will navigate economic problems and continue to grow at a fairly rapid pace of around 7 percent a year for the remainder of the decade, overtaking the United States to become the world's biggest economy around 2020. Article is by Arthur Kroeber is managing director of GK Dragonomics, an economic research firm in Beijing, and editor of the China Economic Quarterly.

Considerably less certain, however, is whether China's secretive and corrupt Communist Party can make this growth equitable, inclusive, and fair. Rather than economic collapse, it's far more likely that a decade from now China will have a strong economy but a deeply flawed and unstable society.

China's economic model, for all its odd communist trappings, closely resembles the successful strategy for "catch-up growth" pioneered by Japan, South Korea, and Taiwan after World War II. The theory behind catch-up growth is that poor countries can achieve substantial convergence with rich-country income levels by simply copying and diffusing imported technology. In the 1950s and 1960s, for instance, Japan reverse-engineered products such as cars, watches, and cameras, enabling the emergence of global firms like Toyota, Nikon, and Sony. Achieving catch-up growth requires an export-focused industrial policy, intensive investment in enabling infrastructure and basic industry, and tight control over the financial system so that it supports infrastructure, basic industries, and exporters, instead of trying to maximize its own profits.

China's catch-up phase is far from over. It has mastered the production of basic industrial materials and consumer products, but its move into sophisticated machinery and high-tech products has only just begun. In 2010, China's per capita income was only 20 percent of the U.S. level. By most measures, China's economy today is comparable to Japan's in the late 1960s and South Korea's and Taiwan's around 1980. Each of those countries subsequently experienced another decade or two of rapid growth. Given the similarity of their economic systems, there is no obvious reason China should differ.

For catch-up countries, growth is mainly about resource mobilization, not resource efficiency, which is the name of the game for lower-growth rich countries. Historically, about two-thirds of China's annual real GDP growth has come from additions of capital and labor. Mainly this means moving workers out of traditional agriculture and into the modern labor force, and increasing the amount of capital inputs (like machinery and software) per worker. Less than a third of growth in China comes from greater efficiency in resource use.

In a rich country like the United States -- which already has abundant capital resources and employs all its workers in the modern sector -- the reverse is true. About two-thirds of growth comes from efficiency improvements and only one-third from additions to labor or capital.

Despite articles about "ghost cities" of empty apartment blocks, the bigger truth is that urban China has a housing shortage -- the opposite of what typically happens at the end of a bubble.

Nearly one-third of China's 225 million urban households live in a dwelling without its own kitchen or toilet. That's like the entire country of Indonesia living in factory dormitories, temporary shelters on construction sites, basement air-raid shelters, or shanties on city outskirts.

Over the next two decades, if present trends continue, another 300 million people -- equivalent to nearly the entire population of the United States -- will move from the countryside to China's cities. To accommodate these new migrants, alleviate the present shortage, and replace dilapidated housing, China will need to build 10 million housing units a year every year from now to 2030. Actual average completions from 2000 to 2010 were just 7 million a year, so China still has a lot of building to do. The same goes for much basic infrastructure such as power plants, gas and water supplies, and air cargo facilities.

4. The OECD says India’s potential growth, which averaged 7.4% per annum during 2001-07, will be lower at 7.2% during 2012-17 and will fall further to 6.5% per year between 2018 and 2030.


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