Bank of China deputy governor Yi Gang yesterday shrugged off the possibility of China’s economy suffering a sharp slowdown as other economies falter in the wake of the financial crisis.
China’s banking and financial sector is in a very strong position to withstand shock waves spreading rapidly from the financial crisis in mature markets, he said.
Yi told Emerging Markets that his forecast – that China’s GDP growth will slow only from an expected 10% this year to 9% in 2009 – is based on the assumption that domestic demand can be stimulated sufficiently to compensate for an expected fall in exports as the global economy slows. “I hope that growth will come mainly from domestic consumption”, he said.
Yi’s upbeat assessment stood in sharp contrast to other observers, who expressed greater pessimism on the Chinese economy in interviews with Emerging Markets.
Raghuram Rajan, former IMF chief economist, said that there is a “real concern about a sharp slowdown”, to 5% annually or less. Many things are masked by high growth; “when it slows sharply, skeletons get unearthed”, he said.
Another former IMF chief economist, Ken Rogoff, told Emerging Markets that he believes the chance of a growth recession in China, i.e. at least one year of growth under 6%, is 50% during the next couple of years.
Yi delivered a very upbeat assessment of China’s economic and financial prospects to a meeting organised by the Institute of International Finance earlier yesterday.
China’s GDP growth reached 10.4% in the first half of 2008 and the growth rate for the entire year should reached 10%, declining only slightly in 2009, he suggested. Inflation should meanwhile fall from 5% in 2008 to 3% next year.
The global slowdown will impact China “through the trade channel” and the current account, said Yi, acknowledging that “exports have to slow down, especially given the “aggressive” appreciation in the real effective exchange rate of the renminbi. This will inevitably have an impact upon Japan, South Korea and other Asian economies that export parts and components as well as capital goods to China, he told Emerging Markets.
China’s export surplus will decline from its current level of around 10% of GDP to 8%, and then down to 6% or even 4%, but this decline will take place over a period of three to four years from now. During this time, the Chinese authorities will have time to develop domestic demand to offset the export decline, Yi argued.
Heavy investment in rural infrastructure building, education and environmental projects is at the centre of an economic development programme directed to “liberating the rural economy”, adopted yesterday by the central committee of the Chinese Communist Party.
Yi claimed at the IIF meeting that China’s financial system is is in good shape to withstand external shocks. China’s five major banks have been reformed and largely recapitalized, and “capital to asset ratios are at an historical high” in the banking system.
Mortgage markets are buffered by high down-payment requirements, Yi said. “There is ample liquidity in the financial system, while banking, insurance and securities markets are in good shape”, he added.
Others interviewed by Emerging Markets were more upbeat. Yi’s growth projections are “absolutely achievable,” said Andrew Sheng, a former Hong Kong government official and now a chief advisor within the China Banking and Regulatory Commission.