Friday, March 9, 2012

China GDP: target vs. forecast

This week’s announcement that China had lowered its target growth rate to 7.5% for 2012 caused some consternation in markets. We don’t see this as a forecast: we view it more as a “lower bound”, or the rate at which the authorities would not want growth to fall below. The new 7.5% target is down from the previous target of 8% which was in place over the period in which actual GDP growth averaged in excess of 10%.

We are still happy with our China GDP forecast of 8.5% for 2012. We expect growth to dip below 8% in the first half of the year on the back of the global slowdown and the continued transmission through the economy of the previous tightening in monetary conditions. However we expect growth to be recovering in the second half of the year on the back of further expected monetary policy easing and a return to (very modest) growth in Europe which will assist exports.

The lower GDP target is, however, a useful reminder of the structural challenges ahead for China. Notwithstanding our near-term GDP forecast, our estimate of long-term potential (or trend) GDP is 7.0%. That reflects the ageing of the Chinese population on the back of the one-child policy, the resultant decline in the savings rate, and the closing up of China’s competitive advantage as incomes rise.