Wednesday, December 30, 2009

>Back to normal: Economic recovery and policy exit

Economic fundamentals (growth, inflation and profitability) to recover substantially. The economy is expected to recover further in 2010 with GDP growth to rebound to about 10.1%. 1Q GDP growth is expected to be higher while that in 2Q and 3Q would fall; 4Q should see some rebound. From a QoQ perspective, GDP growth is expected to be more stable and would rebound gradually. As we bid farewell to deflation and move into moderate inflation, CPI is expected to rise by about 2.6% and PPI by about 3.5%. Demand is to rebound rapidly providing strong support for industry earnings growth; industry earnings growth is expected to rise sharply by 30%.

Revival of end-user demand with investment growth normalising. With the upturn in the economic climate and improvement in resident expectations, consumption growth is expected to accelerate. Global economic upturn and external demand are expected to drive export recovery. Contribution from exports to economic growth is expected to turn from a fairly large negative contribution to a positive one. End-user demand – demand that does not involve further production process, generally referred as consumption and exports – is to become the key driving force of economic growth and its effect in supporting GDP growth would exceed that of investment. Government investment is expected to fall and investment growth is to normalise.

Policy to gradually normalise after a period of proactive and moderate easing. Around mid-2010, policy is expected to turn from an extremely loose stance towards neutral. Interest rate raise is expected in 2010 with an increase of 27-54 ppts. New loans are expected to fall to RMB7-8 tn. The RMB exchange rate may appreciate slightly by about 3-5%. Proactive fiscal policy is expected to continue but structural changes may occur of policy focus; it is estimated that the budget deficit would account for about 2.9% of GDP, with a size of about RMB1 tn. Fiscal policy would move from one single emphasis on maintaining economic growth to multiple emphases of stimulating internal demand, spurring employment and guaranteeing sustainable economic growth.

Liberalisation of monopoly industries and encouragement of private capital participation to be the major theme of structural adjustments. We expect the government to aggressively liberalise monopolies and control as well as to encourage private capital participation in service sectors such as oil, railway, telecommunications, municipal public utilities and such social sectors such as healthcare, social insurance, education and media, hence forming of new growth sectors.

To read the full report: CHINA ECONOMIC OUTLOOK