China's rate of real GDP growth slowed in the first quarter of 2012, to 8.1% year-onyear, compared with 8.9% in the last three months of 2011. However, on a quarter-onquarter basis, the picture was much more stable, with the seasonally adjusted growth rate slowing only marginally. The National Bureau of Statistics (NBS) stated that consumption had contributed 76% of total economic growth in the first quarter of 2012. This appears to be a relatively strong performance, given that the value of retail sales in January-March was up by just 14.8% year-on-year, representing a slowdown from growth of 17.1% in 2011 as a whole. Further support has come from rapid wage growth — per-head disposable income for urban residents was up by 14% year onyear in the first quarter of 2012, according to the NBS, while the equivalent figure for rural residents was 17% (EIU, May 2012).
Slowing down on investment lies at the root of the recent moderation in economic activity. Fixed asset investment growth has slowed notably, although it remained fairly rapid in the first quarter of 2012, at 20.9% year-on-year. Those looking out for an upturn in investment will have been given hope by relatively strong credit growth in March, which helped to lift the net increase in renminbi-denominated lending in January-March to Rmb2.5 trillion (US $395bn), compared with Rmb2.3 trillion in the year-earlier period. Much of the slowdown in investment has been concentrated in the housing sector. It is estimated that new residential-construction starts were down by 5.2% year-on-year in January-March, to record their first contraction since 2009. Property prices are falling in many cities, and some distress sales of landholdings are taking place.
The picture for net exports is similarly poor. However, according to China's customs authorities, merchandise exports expanded faster than imports in the first quarter of 2012: exports increased by 7.6% year-on-year, while imports rose by 6.8%. The country posted a trade surplus of $1bn on a customs basis in January-March this year, compared with a deficit of $2 bn in the year-earlier period. The swing largely reflected weak imports of raw materials, in line with the slowdown in domestic construction. Although exports are no longer as important to China as formerly, rebalancing the economy away from its dependence on investment will be a crucial goal. Economic growth will nevertheless continue to rely on rates of investment that are unsustainable in the long term, even as consumption is boosted. This implies the need for economic reforms on several fronts.
The China 2030 report, published in February by the World Bank with backing from the People's Bank of China (PBC, the central bank) and the Development Research Centre (a think-tank under the control of China's cabinet, the State Council), showed that the authorities in China are in agreement that a series of well-planned and administered reforms is required for more harmonious and inclusive economic growth. Financial reforms, in particular, are mentioned in this report and other official reports as being among the priorities. China raised its official rural poverty threshold in late 2011, thereby more than quadrupling the number of residents eligible for income support. Redistributive tax reforms, further to those announced in 2011, could be enacted in 2012–16. Officials will also support workers' efforts to secure substantial pay increases, but state welfare services will remain underdeveloped, despite growth in spending on health, education, pensions and poverty alleviation.
China recorded an estimated budget deficit equivalent to 1.1% of GDP in 2011, although this does not include a large amount of off-budget expenditure. Expenditure on education, healthcare and other forms of social welfare will continue to grow faster than other areas of public spending. At central government level, revenue growth will remain strong, as the domestic economy continues to expand rapidly. On the monetary policy front, the People’s Bank of China (PBC, the central bank) raised interest rates several times between October 2010 and July 2011, but it has shifted towards a policy more supportive of economic growth since late 2011. It is expected that the PBC will move to boost domestic liquidity, notably through reductions in bank reserve requirements, open-market operations and guidance to the state-owned banking sector on credit issuance. It will also step up efforts to deepen the domestic bond market in order to reduce companies' dependence on banks when raising capital (EIU, May 2012).
In an important move for the future of China's currency, on 14 April the Chinese authorities widened the band within which they will allow the renminbi to trade, doubling the permitted daily adjustment from 0.5% to 1%. Given that the renminbi has recently been subject to bouts of depreciation, as well as appreciation, the change may not imply a faster strengthening of the local currency. However, it may presage greater volatility in the path of China's exchange rate. This will be an important step, as the government tries to prepare international traders for a move towards a more market-determined (and volatile) exchange rate. Although the renminbi's value probably remains some way below the level that would be set by a free market, there is a growing sense in foreign-exchange markets that China’s currency is no longer guaranteed to rise automatically.