Full Steam Ahead
Executive Summary
We project growth of 7.5% to 8% in 2014, as long as the domestic and foreign environments are stable. GDP grew 7.7% in 2013, a steady rise from previous years. Quarterly growth was relatively stable, with the slowest rate at 7.5% in Q2, and the fastest at 7.8% in Q3. Strong domestic demand supported those rates, although tighter monetary policy constrained growth.
Investment and consumption rose quickly, bolstering 2013 growth. The role of trade and industrial output in promoting growth is fading. The strong performance of investment is attributed to the booming real estate market. It will be difficult for investment to grow rapidly this year, considering the real estate market risk.
Both monetary and fiscal policy were neutral in 2013. The Central Bank kept its baseline interest rates, and bank deposit reserve requirement ratio, unchanged. The RMB/dollar rate was appreciating, and is expected to appreciate more slowly this year.
Fiscal revenue and spending rose 10.1% and 10.9%, respectively, in 2013. Those growth rates were low, compared to previous years. A large part of the increase came from real estate-linked taxes. Growth in 2014 might be lower, but stable, as the real estate market cools.
Export growth rose 7.9% in 2013, and is expected to continue modest in 2014. Though import growth was slight, the trade surplus nonetheless increased. Weaker export growth to the U.S., and strong imports, narrowed the trade surplus, which lowered RMB appreciation pressure.
Fed QE tapering poses risks for China, as some hot money could flow out. We estimate the amount of hot money, and argue that it is small relative to China’s financial and aggregate economy. China lacks traits that tend to trigger larger capital outflows in other emerging markets, such as a trade deficit, slim foreign reserves, and political instability. We therefore don’t expect hot money to pose a risk to the economy.
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