(EnergyAsia, July 30 2012, Monday) — China has successfully engineered a “soft landing” for its red-hot economy to expand by 8% this year and 8.5% next year, said the International Monetary Fund (IMF).
In proclaiming its confidence that the Chinese economy will be able to sustain annual growth of seven to eight percent, the fund said the government must shift its economic model from investment to consumption-led growth.
According to the head of the IMF China team, Markus Rodlauer, the Chinese economy has been slowing for six consecutive quarters due partly to the global environment, and partly to Beijing’s policies to deliberately cool its housing sector and investment-led spending.
The slow-down has resulted in a soft-landing for the Chinese economy, with GDP expanding by a better-than-expected 7.6% in the second quarter of 2012.
China’s influence and impact on other countries have has grown alongside with the size of its economy, now the second largest in the world after the US.
The IMF notes that whatever happens in Chinese today affects both commodity exporters and manufactured goods producers like Germany.
“We find that a very sharp slowdown in investment in China would have a fairly significant impact on growth and exports of goods from countries like Japan, Germany, Chile, and other countries in Asia,” said Mr Rodlauer.
Proclaiming himself an optimist on the Chinese economy, he added that Chinese economic growth at around 7% to 8% a year is sustainable.
“It is also what the government set itself as a goal in its own five-year plan, which was put in place last year. That being said, in order to achieve that pace of growth over the medium term for many more years, China will have to change its growth model,” he said.
“Over the past few years, growth in China has relied very much on high and rising rates of investment. So, investment has been very strong, capacity has been built, infrastructure has been added, but it cannot continue at this rapid pace forever.
“Instead, over the next few years, there needs to be a smooth handover from investment to domestic consumption as the main source of growth in China.”
Noting that savings in China are extremely high compared to international levels, he said its people and companies have room to consume.
While most developing and developed countries tend to spend between 70% and 80% of their incomes, China consumes just half.
“Savings should come down, and people need to spend more on goods for everyday life: consumer goods, furnishing their homes, but also maybe on better health care and other services like travel and insurance. It’s domestic consumption that really will need to provide more of an engine of demand in China going forward,” said Mr Rodlauer.