China Ready for 2010

China has just come out with its 2010 economic growth predictions. As expected, they are once again world-beating. But are they correct?

At the end of December 2009, China gave out the predictions about their growth prediction for 2010. The country is targeting 8 percent growth in 2010 partly because of a “fragile” global recovery. Are the Chinese people able to do this?

The year of 2009 meant a lot for China. The most populated country took a lead in the economic recovery when the world was fighting against the global financial crisis; it saw the crazy increase of its domestic property market; it had to argue with the Americans with the appreciation of Renminbi (RMB); it went on quarreling with the developed countries in Copenhagen for the matters of climate change and carbon emissions.

In 2010, China is believed to replace Japan as the world’s second largest economy. The world hopes that it can play a more important role in the global economic system; the developed countries want it to shoulder more responsibilities in economy as well as environmental protection; the ordinary Chinese people have already written a happier life and bigger income in the wish list.

What will happen to China’s economy in the year of 2010? What measures will the Chinese government take to deal with the coming challenges to realize its goals?

Fast Growth and Low Inflation

Wang Qing, chief economist of Morgan Stanley Greater China said that China’s economy will take on a trend of fast growth and low inflation. The central government’s macroeconomic policies may shift from focusing on stimulus in 2009 to mild and normal policies in 2010.

He forecasted that China’s GDP would see 10% year-on-year growth and the CPI would increase by 2.5%

According to him, China’s economic growth will be more balanced in 2010. The balance will be reflected in the proportion between investment and consumption, as well as the ratio between public investment and private investment. However, China’s economy will face two uncertain factors which are the recovery situation of the developed countries and China’s economic policies.

“It is very likely that the central government will adopt non-stimulating policies in 2010,” said Wang. China is likely to maintain or consolidate its economic recovery starting from 2009. China’s economic policies in 2010 may not focus on stimulus like in 2009 and the developed countries may still be haunted by the dim prospect for economic recovery. If Wang’s forecast is right, China will face a good opportunity of economic development in 2010 through which it can realize the fast growth pace without increasing the commodity prices.

If the other important economies’ economic growth rate is faster than expected, China’s export will recover in 2010. If so, the prices of resources may increase further, which will result in the risk of high inflation. The Chinese government will have to take some adjustment measures by then.

Credit as the Key

In order to maintain the economic growth rate, the Chinese banking industry made a drastic increase in the newly-added credit loans which are said to be a key element for the Chinese banks in 2010. The banks have to seek balance between the amount and quality of credit loans if they want to keep their profits increasing and lower the proportion of bad loans. The government policies will directly exert influence upon it.

At the beginning of 2010, the impact of the financial crisis will still haunt the world. The Chinese domestic banks may continue to lend a lot of credit loans like they did in 2009. But they have to pay attention to the capital adequacy ratio. Influenced by the shadow of financing, the stock prices of domestic banks in the Hong Kong stock market fell by 10% to 17% in December 2009; however, optimistic opinions that the capital adequacy level in Mainland China is better than the one in other places still prevail.

“What needs attention concerning credit is the stress from the fast increasing credit over the capital quality and capital principal,” said Standard & Poor’s credit analyst Liao Qiang. He considered the inflation stress as the biggest one for China’s economy. “The stress will form and increase if the credit loans increase by 25% in 2010,” said he. “The banks will lend a lot of loans in 2010. But if the inflation stress is too big, the government will undoubtedly take measures to change the situation.”

According to the survey made by Reuters, China’s broad money supply is expected to increase by 19% in 2010 and the increase at the same rate will occur to the RMB credit balance. At the beginning of 2009, China’s central government once targeted lending 5 trillion yuan (USD 732.4 billion) of the newly-added RMB credit. The goal was realized in four months. From January to November 2009, the amount of newly-added RMB credit loans in China reached 9.21 trillion yuan (USD 1.35 trillion), up 5.06 trillion yuan (USD 741.2 billion) from last year.

According to the report from the Chinese media, the Chinese central economic working conference has decided the credit amount for 2010, which was about 7.5 trillion yuan (USD 1.09 trillion).

Post-crisis Industrial Structure Adjustment

In 2010, China will accelerate its pace of industrial structure adjustment, which is an important factor for China’s sustainable development. According to Tan Ruyong, professor from Shanghai University of Finance and Economy, the financial crisis depressed the need of China’s trade partners, striking a fatal blow at the export-oriented enterprises. The trade protectionism made China’s exports situation worse, making it necessary to conduct the industrial structure adjustment.

In Prof. Tan’s opinion, to develop the high-tech industry is the key for the optimizing and upgrading of a country’s industrial structure as well as the fast and efficient growth of the country’s economy. The financial crisis urged the development of the high-tech industry. The government plays an important in this process, which means the government can help the high-tech enterprises to fight against the high risk of this industry and the unpredictable market.

In addition, the development of manufacturing industry is also necessary for China which is haunted by great employment stress. During the financial crisis the country which kept the manufacturing industry in their country suffered much less than the ones having transferred it our. Therefore, China should not neglect the development of the manufacturing industry while boosting the high-tech industry.

“It is quite important to develop the third industry after the financial crisis,” said Prof. Tan. Compared with the industry, the service industry is featured with lower energy and resource consumption and less environmental pollution, which are helpful for the sustainable development. The service industry can promote the consumption and improve the proportion between investment and consumption. The fast development of the industries of science, education, culture and so on is helpful for the overall development of the society. What’s more important is that service industry is the best solution to the problem of employment that is causing a headache for the Chinese government.

Threats from Trade Protectionism

China is going to replace Japan as the global second largest economy in 2010. There will be more voices asking China to settle the trade imbalance and trade disputes with its increasing wealth.

Though some people consider China as a confident super power or the new powerhouse for world economy, the Chinese leaders think it necessary to deal with the risks in economic diplomacy cautiously in 2010.

Chu Shulong, professor from Tsinghua University, said: “We don’t want to be seen as a super power or the leader. But we could be really active in some fields, such as the international financial reform.”

He added that China’s economic diplomacy in 2010 will be like the one in 2009, which was cautious and stable. “This situation will last for many years in the future.”

China will be more defensive in the foreign trade. Because the stable exchange rate China adopted dissatisfied many countries, especially the USA, they will continue to impose higher duties on the products from China like they did this year.

In 2009, China’s trade surplus decreased by 30%, but it was mostly attributed to the decreased demand of the world. With the recovery of the world economy, the trade surplus may move up again. Michael Pettis from Carnegie Endowment for International Peace said: “If (China’s) trade surplus moves up again (next year), the trade tension between it and its trade partners must arise. I think it is inevitable.”

In 2009, China once again became the largest victim to the trade protectionism. In the last three months of 2009, anti-dumping probes were launched against the made-in-China steel, shoes, tyre and many other products. The Chinese government is worried that the developed countries may launch more anti-dumping probes into a wider range of Chinese products in 2010.

The Way of Low-carbon Economy

At the end of 2009, all the people in the world paid their attention to Copenhagen, Denmark where the World Climate Conference was held. This was called the most important conference for human beings after the Second World War. The low-carbon economy has never received so much attention in the past time.

China, as a responsible country, has already listed the development of low-carbon economy into their agenda. On December 23, 2009, an insider from the National Development and Reform (NDRC) said that China would actively boost the low-carbon economy in order to deal with climate change and promote the sustainable development.

According to the insider, China will continue to carry out the National Plan for Dealing with Climate Change. It will accelerate the construction of industry, architecture and transportation systems which are featured with small carbon dioxide emission. More trees will be planted; more propaganda activities will be seen to make more Chinese ordinary people know the low-carbon economy better and understand what they can do to help realize this goal.

In order to boost the low-carbon economy, China will also change the industrial and products structure. Meanwhile, the central government will attach more importance to the development of renewable energy, such as nuclear power, wind power and solar energy.

The Chinese government will also encourage the development of circular economy by publishing the related polices, compiling the national plan for the development of circular economy and building the index and statistical systems corresponding with the circular economy.

2010 is the decisive year for China to realize the goal of energy saving and emission reduction of the 11th Five-year Plan (2006-2010). The relevant departments will give more support to the regions having difficulties in reaching the target. Simultaneously, comprehensive energy-saving and emission-reduction programs will be launched among ordinary people.

With the cautious economic predictions, China stepped into 2010. This is not only a year when the World Expo 2010 happens. This is a year for China to improve itself, to fulfill its commitments and to display new images to the world.