Olympic Year, Olympic Challenges
While we expect GDP expansion to continue to slow in 2008, we nonetheless feel that spill over
effects from 2007 and continuing loose monetary conditions will prevent the authorities from successfully
cooling the economy substantially and are thus forecasting economic growth of 10.7% in
2008. This would represent a continued moderation from Q 07, when annual GDP growth slowed
to 11.2% y-o-y, from 11. % in Q 07 and 11.9% in the March-June period. However, full-year growth
in 2007 nonetheless reached a 1 -year high of 11. %, meaning that the Chinese authorities will
maintain their tightening bias in 2008.
The 2008 Olympic Games to be held in Beijing in August will be China’s highest-profile public event
to date, and will - at least symbolically - mark its emergence on the world stage. Thus China’s
top priority in the run up to the Games is to ensure that they pass smoothly and that they cast
the country in the best possible light. However, Beijing’s heavy-handed approach in doing so is
attracting increasing criticism and threatens to undermine the government’s efforts. Meanwhile,
attentions will be focused in the short term on China’s five-yearly reshuffle of the National People’s
Congress (NPC, parliament) in March.
China will continue to struggle in its fight against runaway inflation, which hit an 11-year high of
6.9% in December 2007. The People’s Bank of China (PBoC) elected to raise the one-year
lending rate by 18bps to 7. 7% and the one-year deposit rate by 27bps to .1 % on December
20 2007, but we retain our view that the bank’s ability to implement further rate hikes will remain
limited. With options running out, the Chinese authorities appear to have relaxed their crawling
peg currency regime to allow faster currency appreciation. Having gained 6.86% in 2007 to close
the year at CNY7. 0 1/US$, we are forecasting the yuan to rise to CNY6.7000/US$ by the end of
2008, implying gains of approximately 9.0%. We also expect this pace to be matched in 2009 as
the unit moves towards CNY6.1 00/US$ by year end.
With its vast supply of cheap labour and rapid economic growth China remains the top destination
for foreign direct investment (FDI) in the developing world. Positively, the Chinese government is
increasingly giving more protection and encouragement to the burgeoning private sector, which is
now the most dynamic in the economy and accounts for most of the country’s job growth. However,
the command nature of its economy means that bureaucracy remains a key obstacle to doing
business within the country and the legal framework is still weak despite two decades of reform.
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