How Much of China's Growth Can Be Supported by Domestic Demand?
Chief Economist, BNP Paribas Asia Ltd.
Dr Chen sums up the reasons of current financial crisis. Firstly, dramatic innovations in the financial market confuse the investors. Investors are convinced by sophisticated models that risks are extremely low. Secondly, the relation between virtual economy and real economy become weaker and weaker in recent years. Thirdly, the incentive mechanism is distorted. Finally, the market has been driven by both greedy and fear. As confessed by Greenspan before the Congress, he was overconfident about the self-discipline of financial market.
Certainly, the US and Europe are heading for recession. What is uncertain is the length and depth of the recession. It will neither duplicate the Great Depression nor follow a V-shape path. It is likely to following a U-shape path, yet we don't know how long the bottom will last.
As the biggest beneficiary of globalization, China has a fast trade growth rate. Compared with the world average of 14.3%, the annual trade growth rate of China is 27.6% in the past decade. Without export growth, China's GDP growth rate in 2007 will have been 7.5%. As the result of the unnecessary policies implemented since last year, the current growth rate will have declined to 5.5-6.5% without export growth. Therefore, the macroeconomic policy has to contribute 2-2.5% to accomplish a growth rate of 8% in the next year.
Among the components of consumption, rural consumption has been growing slower than urban and public consumption. Rural consumption is a potential driving force. While the investment on manufacture and real estate will decline, policy should encourage the pace of infrastructure investment.