OECD projects China growth at 9.3%

Updated: 2011-11-29 09:30

By Fu Jing and Hu Yuanyuan (China Daily)

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BRUSSELS / BEIJING - The rapidly deteriorating crisis in the eurozone has worsened the global economic outlook and decisive policies are urgently needed to stop the contagion of sovereign debt turbulence spreading, the Organization for Economic Cooperation and Development (OECD) said.

Despite the worsening situation, the OECD did not lower its forecast for China's growth in an economic outlook report released on Monday compared with announcements it made in October. The OECD projected that the nation's output growth will average just over 9 percent from 2011 to 2012.

It previously said China's economic growth will drop to 8.5 percent in 2012, from this year's estimated 9.3 percent. In 2013, it will pick up to 9.5 percent. Last year, it was 10.4 percent.

Experts said China needs internal reforms and adjustments to cope with this round of external challenges and sustain its economic and social development.

The OECD said the eurozone crisis remains the primary threat to the world economy. Concerns about sovereign debt sustainability are increasingly widespread and, if not addressed, recent contagion to countries thought to have relatively solid public finances could massively escalate the economic disruption. Pressures on bank funding and balance sheets increase the risk of a credit crunch.

The OECD said another serious downside risk is that no agreement is reached on action to offset the heavy fiscal tightening inherent in the current law in the United States and that this could tip the economy into a recession that monetary policy could do little to counter.

"The prospects improve only if decisive action is taken quickly," said OECD chief economist Pier Carlo Padoan at a news conference in Paris on Monday. "In the euro area, the risk of contagion needs to be stemmed through a substantial increase in the capacity of the European Financial Stability Fund, together with a greater ability to call on the European Central Bank's balance sheet," he said.

Improved prospects would also depend on the enactment of a credible medium-term fiscal program in the United States, he added.

Duncan Freeman, a senior researcher with the Brussels Institute of Contemporary China Studies, said the effect on China of an imminent recession in the European Union and the worsening world economy is that its exports, especially to the EU, would suffer.

"The last few months, exports have already fallen, and if the EU goes back into recession, then that is bad for Chinese exports. Also, the US export market is not looking good at the moment, either, so Chinese exporters are facing a problem," Freeman said.

He also said the scale of the effect of the problems in the world economy also depends on the Chinese domestic economy; if there is strong growth domestically, the effect of the crisis will be much lower. "There is not much China can do for the EU with regard to the recession. It has to continue rebalancing its own domestic economy, continuing its shift toward an economy of domestic consumption," Freeman said.

According to Wang Haifeng, director of the International Cooperation Center affiliated with the National Development and Reform Commission, this global economic adjustment may last eight years, starting from 2008, due to the liquidity trap - deflation and a low interest rate environment - in major economies such as US, Europe and Japan and the high commodity prices.

"Moreover, as this round of financial crisis has hurt the global financial system, it needs more time to heal," Wang said.

The major risks facing China, Wang said, are internal rather than external.

"We should focus on adjusting the economic structure and ensure GDP growth at a pace ranging from 7.5 percent to 8.5 percent, a speed that will allow the country avoid to high inflationary pressure," Wang added.

Xu Wei, a researcher with the China Center for International Economic Exchange, said stimulating domestic consumption is on the top of the agenda, but keeping strong investment is also important when China's exports are about to slow due to the weakening external demand.

"Though all the major economies are working together for global recovery, the process is not so easy. In fact, the coordination among the different economies has been more difficult," Xu said.

Jonathan Holslag, also a researcher at the Brussels Institute of Contemporary China Studies, said: "Beijing is starting to get worried about long-term prospects and is starting to get worried about keeping the Chinese economy on track. A difficult period is approaching."

But, he said, China has a good national plan to make its economy sustainable and to make it less dependant. China is already doing a lot to make sure it will get through the crisis - the Five-Year Plan (2011-2015) clearly demonstrates that the Chinese government is aware of the challenges that lie ahead.

Eveline Filon contributed to this story.