Center

ADB raises China's economic growth forecast to 10.4%

(Xinhua)
Updated: 2006-09-06 15:05

The wider challenge of economic stabilization in China is complicated by a variety of factors, said the bank.

Provincial officials often have incentives to boost investment, which may be at odds with the goals of the central government, said the bank.

Furthermore, interest rates in China do not have the same impact on credit demand and allocation as they do in a full market economy, the bank said.

Constraints on the effectiveness of monetary and fiscal policies, and difficulties in fine-tuning administrative controls create significant uncertainty surrounding the outlook for 2007, according to the update.

The rate of increase in the trade surplus is likely to moderate as export growth slows alongside somewhat softer conditions in the world economy, it said.

Despite rapid economic growth, consumer price inflation has remained tame. This reflects the supply-side nature of the current upswing and a rapid expansion of industrial capacity, said the bank.

A good grain harvest also helped keep prices in check. Inflation is now expected to average 1.6 percent in 2006, down from the 2.3 percent forecast in April. Inflation is forecast to be 1.8 percent in 2007.

"Risks are finely balanced," said Ali.

"If investment doesn't slow, growth in 2007 could again surprise on the upside, raising the possibility of more difficult adjustments later. But if the authorities brake too hard, GDP growth could fall more than forecast," said the bank.

China has had mixed success in reining in growth. In 1989-1990, when the government stopped approving new investment projects, its GDP growth slumped from about 12 percent to 4 percent.

By contrast, in the late 1990s, the government successfully engineered a soft landing, with growth slowing from above 12 percent to 7 percent to 8 percent.

The update also examines widening income inequality in China.

"While some deterioration in income distribution is inevitable as the PRC (China) moves from a largely agrarian and centrally planned economy to an urban-based, industrialized market economy, the degree to which the gap has opened is a concern," said the bank.