Country Report China October 2009

Outlook for 2010-11

• The government's main priority is to support the economy amid concerns that rising unemployment could increase social unrest. But even if unrest grows, it is unlikely to result in a nationwide anti-government movement.
• Little improvement is likely in the strained relations between the majority Han ethnic group and Tibetan and Uighur minorities. The government will maintain its hard line against separatism, stoking wider ethnic grievances.
• Despite some tightening, monetary and credit policy will remain relatively loose. The Economist Intelligence Unit forecasts that real GDP will grow by 8.6% in 2010, before slowing to 8.4% in 2011.
• As manufacturing and rural investment boosts industrial and agricultural output, consumer price inflation will remain weak but producer costs will rise. Asset price bubbles will emerge in property and shares.
• An economic recovery, as well as the reintroduction of several of the taxes that were cut in 2009 to support the economy, will lead to a gradual narrowing of the budget deficit in 2010-11.
• Exports should recover gradually in the forecast period, after a sharp slump in 2009. The trade surplus will remain large, but, as imports are set to outperform exports, the current-account surplus will narrow.

Monthly review

• Ethnic unrest returned to Xinjiang province in September. The unrest centred on syringe attacks by ethnic Uighur people on Han Chinese. Around 600 people claimed to have been stabbed in such a manner in the last month.
• The central government will be worried that the latest unrest may disrupt preparations to celebrate the 60th anniversary of the founding of the People's Republic of China, which takes place on October 1st.
• At the World Economic Forum in a northern Chinese city, Dalian, in mid-September, the Chinese premier, Wen Jiabao, signalled that China would continue its loose monetary policy for the foreseeable future.
• Trade relations between the US and China are at risk of deteriorating after a decision by the US president, Barack Obama, to impose tariffs on imported Chinese-made tyres.
• In August economic activity remained buoyant, with industrial production, fixed asset investment, retail sales and the latest purchasing managers' index all showing continued strong growth.
• China's politically controversial trade surplus shrank further in August, as the contraction in exports again exceeded that of imports.

Source: Country Report