CHINA: ECONOMIC POLICY

IS FISCAL STIMULUS NECESSARY?

Syetarn Hansakul

China Daily, June 8, 2012

China's economy is slowing. Since 2002 China's annual real GDP growth has always been above 9 percent year-on-year; this may not be the case in 2012. Real GDP growth slowed to 8.1 percent year-on-year in the first quarter of this year; down from 8.9 percent in the fourth quarter of 2011, and recent data in April suggest that a strong rebound is not on the cards.

The slowdown can be attributed to the impact of slowing external demand on China's export sector as well as the deliberate policy to discourage unproductive investment. This is not necessarily a cause for concern. One should not see growth of less than 9 percent as a sign of China losing its competitiveness. China's current focus on the sustainability of growth is appropriate. What is important is that growth remains sufficient to absorb new job seekers and continues to deliver the income growth that improves the livelihood of the majority of the population. Judging from the experience of other countries, achieving strong economic growth but having the wealth concentrated among a minority of the population will create problems later on.

Most economists, including Deutsche Bank's, continue to expect China's real GDP growth to stay above 8 percent year-on-year in 2012 and 2013. This is not a disaster for China, especially considering that demand from key trading partners such as the United States and the European Union is unlikely to grow as strongly as it did in the past decade. As for domestic demand in China itself, there is indeed untapped potential. However, it is correct to tread cautiously in order to avoid over-stimulating to the extent of creating overheating or new asset bubbles, which would lead to a hard landing.

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