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Cover Story
Print Edition> Cover Story
UPDATED: December 26, 2008 NO. 1 JAN. 1, 2009
Economic Outlook for 2009
Beijing Review interviewed 10 economists and experts to get their insights about China's economic prospects this year

Exports, a major propellant driving China's economic growth in the past decade, will be confronted with enormous pressure: first from bleak international demand, and on the other hand, from insufficient domestic demand, as so far there have not been enough policies encouraging exporters to sell goods domestically.

The Chinese Government is committed to making use of every weapon in its arsenal to cope with the economic slowdown. We will have no problem maintaining 8-percent GDP growth, given the massive stimulus plan and loosened monetary policy. But it will be hard to achieve 9-percent growth, because the effectiveness of the stimulus policies is still unknown.

If the 4 trillion yuan is deployed properly and used well in a large number of worthwhile projects, it could not only prop up the economy, but also restore investor confidence, which was shattered by the global credit crunch. But if the 4 trillion yuan is misused, deflation will be unavoidable, which will further bring down the economy.

Investor confidence is the key in reviving the domestic stock markets. The main bodies of the economy are companies and investors, not the government. Some worried that the large withdrawal of foreign funds had ignited the stock market crash. But the root cause was a lack of confidence after the fallout of the U.S.-led financial meltdown. The Chinese people have a lot of money in hand, but they dare not buy shares, as they are still haunted by last year's stock market plunge. The stock markets are currently dominated by a wait-and-see attitude, but will gradually turn better when the economic stimulus package takes effect.

The financial market supervisory commissions should work on forging a transparent trading environment for all investors to avoid a case such as the Bernard Madoff fraud in the United States. (Madoff, a former chairman of the Nasdaq Stock Market who ran his own investment advisory business, was arrested in December on a $50-billion fraud charge.)

There is still some room for further interest rate cuts. Domestically, the benchmark one-year deposit rate once dropped to its lowest level of 1.98 percent in 2002. Compared with that, there is still room for another cut of 0.27 percentage points. But judging from the international environment where major economies such as the United States have slashed their benchmark rates to nearly zero percent, China has more room for an interest rate readjustment. But the central bank will decide whether it should still cut the rate or not based on the economy's performance in 2009.

After investor confidence is fully restored, China's economy soon will take off.

(Zhao Xijun is Deputy Director of the Finance and Securities Institute, Renmin University of China.)

Guo Tianyong: China's banking sector can still see growth

China's banking sector can still see growth in 2009, although at a slower pace.

Banking gloom may further gather force as the economy continues to slacken and the weakening solvency of enterprises may jack up the non-performing loans of commercial banks and squeeze their margins.

Since September 2008, the central bank has slashed interest rates several times. Although the one-year deposit and loan interest rates dropped almost by the same margin, their real spread has shrank appreciably as the interest rate for current deposits has remained largely static. As the economic outlook darkens, the central bank has been greatly motivated to further cut borrowing costs this year, putting heavier pressure on banks. As a result, the banks, which rely on interest income to derive 80 percent of their total revenue, are expected to report less buoyant growth in 2009.

In November 2008, the central bank also lowered the interest rate for current deposits, a rarity in the country's banking history. This soothed the wounds of the banks and signaled rising concern among policy-makers over the banks' downside risks. It's therefore likely that the central bank will make similar moves to bail out the banks.

Despite a bleak picture for the sector, Chinese banks are still likely to reap profits in 2009. The country's monetary environment has significantly eased, leaving the banks larger room to ensure profits by expanding their lending. After years of restructuring, the major commercial banks have improved greatly in terms of corporate governance and risk control. They are now more able to increase loans and keep risks under control at the same time. If they flinch from lending for fear of risks, jitters about the economic slowdown would become even more entrenched, and in turn hurt the banks themselves.

The government's spending spree will shore up loans for businesses and help the banks to maintain growth. But the banks should also strictly screen projects. Only those profitable and beneficial to people's livelihoods should be promoted, such as rural infrastructure construction and health care projects.

The non-performing loans of the banks may well moderately increase because of the economic slowdown. In defense, the government is supposed to create more tax breaks for banks to help them pull through the difficult times.

Besides this, the banks should further explore their intermediary businesses to offset the squeeze on interest income. During the first half of 2008, the banks' intermediary businesses enjoyed spectacular growth in defiance of bearish stock markets, an indication of their great potential. Commercial banks, therefore, must make efforts to diversify their income sources for more sustainable development.

From the global perspective, the banking sector is actually not a highly profitable industry at all. There's nothing frightening about the country's banking boom cooling down amid the global economic downturn. Worries about its slowdown are unwarranted as it is a natural course for Chinese banks to mature.

(Guo Tianyong is Director of the Research Center of China Banking Industry, Central University of Finance and Economics.)

Mei Xinyu: Exports will continue to grow

The dismal November export figures have given rise to concerns about China's

exports. Many fear that exports in 2009 will drop sharply due to insufficient demand.

But taking cost fluctuations and international speculative money flows into consideration, Chinese exports might continue to grow in real terms in 2009.

First of all, the cost and price of products dropped considerably after inflationary pressure eased in the second half of 2008, which pushed down the values of exported products compared with the value of goods exported in 2007 when inflation was running high.

Second, speculative money, which poured into China under the nation's current account to take advantage of the capital market boom in 2007, is flowing out of the country under the disguise of trade to cover losses that investors made when they invested in financial assets in the crisis-hit developed countries.

The capital outflow will continue for a while and may last until the third quarter of 2009, after which, the customs figures will be able to reflect the true export value and may stop showing signs of a slowdown in exports. Therefore, we should not be overwhelmed by the November export decline, because exports did not shrink in real terms.

In 2009, traditional labor-intensive product exports will not continue their super growth of the past few years. China produces and exports 80-90 percent of such products in international markets. Shrinking international demand will unavoidably lead to dismal performances by relevant industries. If labor-intensive products this year can maintain the same export levels as they did in 2008, we can call it a victory.

Technology-intensive products are not our strength, thus exports of those products only make up about 20-30 percent of the international market share. Even if the entire world demand goes down, China's products and exports would still increase. This is because during times of crisis, price competitiveness begins to emerge, even when it comes to hi-tech products like cameras. The product prices will eventually determine consumers' purchasing habits. Meanwhile, high production and labor costs will force foreign manufacturers to shift their production and orders to China to get price advantages. As a result, China's exports will continue to grow thanks to the production shift.

All in all, China's exports can continue to grow in 2009, despite unsatisfactory customs figures (which are distorted by capital outflows) in the first two or three quarters.

(Mei Xinyu is an associate researcher at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.)

Khalid Malik: Government should invest in health, education and social security

This year 2009 might be tough due to the volatile international environment, but we should not be overwhelmed by the financial crisis. The international community was glad to see China's active participation in weathering the financial storm by launching a 4-trillion-yuan ($586 billion) stimulus package.

China will have two challenges in 2009: One is how to achieve sustainable growth; and the other is how to bridge the gap of inequality between urban and rural areas, between east and west, and between men and women.

I suggest a considerable portion of that package should be invested in health, education and social security in 2009 and the years ahead in order to achieve sustainable economic growth in China. People tend to see those as social issues, but actually they are economic issues that need to be tackled immediately. When people are healthy and educated, they will produce higher quality goods.

The savings rate is very high in China, and there is a reason why people save. They save for their children to go to school and for their health and old age, all because social security isn't enough to cover those expenses. If people keep saving but do not spend, the economy will suffer.

China can actually turn the financial crisis into an opportunity to enrich people's lives by making full use of the 4-trillion-yuan package. If China works on the above-mentioned three areas in particular, the Chinese people will have a lot of money at hand and will help shift the major momentum for Chinese economic growth from one that is industry- and export-based to one that is consumption-based, which are essential for the sustainable development that China has been longing for.

Second, I suggest China transfer money and liquidity into farmers' hands. Exports in China, especially in Guangdong, are suffering badly, so China needs to find a new social demand for extra goods. Rich people do not need extra money, but if you give the money to people in a low-income bracket, they will buy more consumer goods, which in turn will hold up economic growth.

People once projected there would be an 8-percent growth next year, but some are now projecting 7 percent or even 6.5 percent. No one knows exactly what will happen next year. Infrastructure investment will take a while to take effect, but if China wakes up farmers' consumption, the effect could be a major one.

If global financial conditions worsen this year, China's sovereign wealth fund should not just automatically think of New York and Europe when it invests. I suggest it look at investment opportunities in other developing countries. In the current economic downturn, the United States and Europe are suffering, but developing countries are still growing. Countries in Asia, Latin America and Africa are doing quite well. China's sovereign wealth fund should diversify its portfolio and increase its positions in the developing world for attractive returns and divert its risks at the same time.

I'm hoping that with the 4-trillion-yuan package and additional measures, China can find a way to maintain at least an 8-percent growth in 2009.

(Khalid Malik is the UN Resident Coordinator in China and UNDP Resident Representative in China.)

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