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The global economy in 2011: China
January 24, 2011, Monday
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EDITOR'S note:
This is the first in a series of four articles by Wharton Business School analyzing the global economy in 2011.
IN the United States, most experts are betting that the economy will grow stronger in 2011, but they warn that high unemployment, a depressed housing industry and other problems could dampen growth.
Meanwhile, the fate of the euro is still in question, and the specter of inflation looms large in China, Latin America and India despite their resilience to the recent global downturn. In the Middle East, observers expect renewed growth, but they note that resource constraints will become an increasing problem.
Knowledge@Wharton spoke with Wharton faculty and other experts to get their views on what's ahead.
China watchers are beginning 2011 much as they did 2010 - concerned about inflation.
Still low by international standards, consumer price inflation early last year was hovering at less than 2 percent. But since the massive monetary expansion of late 2008, liquidity continued to flood in, putting upward pressure on prices.
Housing and food prices surged during the year, and a wave of discontent among workers seeking long overdue pay raises swept across the country. By November, consumer prices were up 5.1 percent year on year.
In a December report, the London-based Economist Intelligence Unit (EIU) predicted that average year-on-year consumer price inflation will be 3.9 percent in 2011, helped largely by intense price competition among goods manufacturers. But this could change if, for example, wages increase and push up the cost of manufacturing, causing price hikes.
Agriculture, which accounts for a sizable portion of the country's consumer price index, is arguably a greater concern. Local newspapers are reporting that blue-collar workers in cities like Shanghai are unable to stretch their meager paychecks to cover the rising costs of staples, such as milk and vegetables.
"Having stimulated the economy tremendously, the government now has to deal with the consequences of it," says Wharton management professor Marshall W. Meyer.
He and others note that the country's enviable growth - the EIU estimates that real GDP growth in 2010 will average 10.2 percent - has been fueled by a massive expansion of money supply. The inflationary consequences have been largely hidden in the form of rising asset prices, he says.
Levers to pull
According to Meyer, the government has some levers to pull, as it did when the country went through a similar cycle three years ago. "First, raise interest rates," he says. In October, the central bank raised benchmark interest rates by 25 basis points. "But they are still much lower than before the crisis and they will have to go up more," wrote Louis Kuijs, senior economist in Beijing at the World Bank, in a recent blog.
Another step is raising the amount of capital reserves banks must set aside, largely to help slow rampant lending to local governments and state-owned enterprises.
The reserve requirement is about 19 percent today, says Meyer, "which is a big number." In mid-January this year, the central bank raised requirements for the seventh time from 2010.
Third, says Meyer, the government is putting caps on the new loans banks can make. State media recently reported that the government set the ceiling for 2011 at 7.5 trillion yuan (US$1.1 trillion) But that's the same amount as 2010, which many observers believe was already surpassed by the fall of last year.
Even among more bullish observers, inflation is seen as problematic when set in a broader social context, notes Horst Loechel, economics professor of China Europe International Business School in Shanghai.
"I'm quite optimistic about the Chinese economy. We'll see an average inflation rate of around 4 percent. This should be fine for an economy that is growing at around 10 percent," he says. "The main point for China in 2011 is how can they transfer the success of the country to the income of the people and really improve consumption levels."
Loechel notes that consumption levels as a percentage of GDP in China are dramatically low. "We're talking about 35 percent to 37 percent," he says. "In a normal economy, it's 60 percent to 70 percent, and even in India, you have more than 50 percent." Rising prices won't ameliorate that. "If we look at this overall picture, inflation has a role. It means decreasing purchasing power."
The EIU says from 2011 through 2015, real GDP growth will slow to an average of 8.3 percent a year.
(Reproduced with permission from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved.)
This is the first in a series of four articles by Wharton Business School analyzing the global economy in 2011.
IN the United States, most experts are betting that the economy will grow stronger in 2011, but they warn that high unemployment, a depressed housing industry and other problems could dampen growth.
Meanwhile, the fate of the euro is still in question, and the specter of inflation looms large in China, Latin America and India despite their resilience to the recent global downturn. In the Middle East, observers expect renewed growth, but they note that resource constraints will become an increasing problem.
Knowledge@Wharton spoke with Wharton faculty and other experts to get their views on what's ahead.
China watchers are beginning 2011 much as they did 2010 - concerned about inflation.
Still low by international standards, consumer price inflation early last year was hovering at less than 2 percent. But since the massive monetary expansion of late 2008, liquidity continued to flood in, putting upward pressure on prices.
Housing and food prices surged during the year, and a wave of discontent among workers seeking long overdue pay raises swept across the country. By November, consumer prices were up 5.1 percent year on year.
In a December report, the London-based Economist Intelligence Unit (EIU) predicted that average year-on-year consumer price inflation will be 3.9 percent in 2011, helped largely by intense price competition among goods manufacturers. But this could change if, for example, wages increase and push up the cost of manufacturing, causing price hikes.
Agriculture, which accounts for a sizable portion of the country's consumer price index, is arguably a greater concern. Local newspapers are reporting that blue-collar workers in cities like Shanghai are unable to stretch their meager paychecks to cover the rising costs of staples, such as milk and vegetables.
"Having stimulated the economy tremendously, the government now has to deal with the consequences of it," says Wharton management professor Marshall W. Meyer.
He and others note that the country's enviable growth - the EIU estimates that real GDP growth in 2010 will average 10.2 percent - has been fueled by a massive expansion of money supply. The inflationary consequences have been largely hidden in the form of rising asset prices, he says.
Levers to pull
According to Meyer, the government has some levers to pull, as it did when the country went through a similar cycle three years ago. "First, raise interest rates," he says. In October, the central bank raised benchmark interest rates by 25 basis points. "But they are still much lower than before the crisis and they will have to go up more," wrote Louis Kuijs, senior economist in Beijing at the World Bank, in a recent blog.
Another step is raising the amount of capital reserves banks must set aside, largely to help slow rampant lending to local governments and state-owned enterprises.
The reserve requirement is about 19 percent today, says Meyer, "which is a big number." In mid-January this year, the central bank raised requirements for the seventh time from 2010.
Third, says Meyer, the government is putting caps on the new loans banks can make. State media recently reported that the government set the ceiling for 2011 at 7.5 trillion yuan (US$1.1 trillion) But that's the same amount as 2010, which many observers believe was already surpassed by the fall of last year.
Even among more bullish observers, inflation is seen as problematic when set in a broader social context, notes Horst Loechel, economics professor of China Europe International Business School in Shanghai.
"I'm quite optimistic about the Chinese economy. We'll see an average inflation rate of around 4 percent. This should be fine for an economy that is growing at around 10 percent," he says. "The main point for China in 2011 is how can they transfer the success of the country to the income of the people and really improve consumption levels."
Loechel notes that consumption levels as a percentage of GDP in China are dramatically low. "We're talking about 35 percent to 37 percent," he says. "In a normal economy, it's 60 percent to 70 percent, and even in India, you have more than 50 percent." Rising prices won't ameliorate that. "If we look at this overall picture, inflation has a role. It means decreasing purchasing power."
The EIU says from 2011 through 2015, real GDP growth will slow to an average of 8.3 percent a year.
(Reproduced with permission from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved.)
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