What will macro-economic movements do tothe price of Chinese cabbage?
Even theexperts can't agree about inflation, which islikely the single
economic factor that averageconsumers encounter every day. (Photo:Xinhua)

By Xin Zhiming

This year has been a tough onefor policymakers. Since it began, they have been racking theirbrains to rein in inflation andbattle rising home prices withoutprovoking a sudden economicslump.

The bad news: 2012 will be even tougher.

China Daily surveyed numerous economists - allopinion leaders in Chinese economic studies - andwhile they differ on many topics, they seem to agreeon one thing: The Chinese economy is set to slowdown.

No one is sure how serious that slowdown might be, just as few anticipated that GDP growth in China, inthe first quarter of 2009, would drop to slightly morethan 6 percent (from its usual 10-plus percent) in thewake of the global financial crisis.

As one economist said, China risks a hard landing ifthe economies of the European Union and the UnitedStates are worse than expected and the country'sproperty market slumps too fast.

Meanwhile, China faces other uncertainties, thesurvey found, including currency revaluation, localgovernment debt, a weak capital market and thereduction of carbon emissions.

None of them will be easy to tackle, especially forpolicymakers who are preoccupied with the problemof growth.
China Daily surveyed economists about their expectations forChina in 2012. Here are the questions, with two answers eachfrom the experts.

1. Will China face a hard landing next year?

Ardo Hansson, lead economist for China at the World Bank

China may face the risk of a hard landing if the European Union's and the United States' economies decline more than expected and the adjustment in the country's property markethappens too fast. Such a likelihood, however, is small. And consumption, which is now thedriver of China's economy, remains strong.

The World Bank has lowered its gross domestic product (GDP) growth forecast for China to 9.1 percent for this year and 8.4 percent for 2012, amid growing concerns about the effect of theEuropean debt crisis on the world's second-largest economy.

I would be more cautious about the monetary loosening, because the consumer price index (CPI) has softened for two months and our forecast of 9.1 percent growth is still above thegovernment's GDP target this year.

I would suggest the government stop the tightening measures for a while to see what happensnext.

The World Bank estimated that China's inflationary pressure will ease further next year, predicting that CPI will grow 5.3 percent this year and 4.1 percent next.

Pan Jiancheng,deputy director-general of the China Economic Monitoring Analysis Center atthe National Bureau of Statistics

I don't think China will encounter a hard landing next year because the slowdown in theeconomic growth is a result of the government's active adjustment.

As for the three key drivers for China's economic growth - investment, consumption and export - the first two sectors are not expected to see a big slide next year.

Meanwhile, the employment figure is also encouraging. From January to October, theemployment of industrial enterprises with annual sales above 20 million yuan saw a growth of 9.2 percent, indicating a still strong growth momentum.

Moreover, we should strive for a growth in high quality instead of a growth only in speed.

2. Will inflation continue to calm down next year?

Sheng Laiyun, spokesman for the National Bureau of Statistics

China's inflationary pressure may have continued to fall in the last two months of this year, thanks to decreasing food prices. In addition, the downward movement of global commodityprices has helped tame soaring imported inflation. However, China may have entered into along-run period of moderate inflation. In 2012, the nation's consumer prices may increaseagain because of increasing labor and energy costs. It is an inevitable stage of China'sindustrialization process.

Another factor that may fuel inflation next year is that some developed economies, such as theUnited States, are likely to continue their monetary easing policies to stimulate economicrecovery, which means commodity prices are expected to go up as more liquidity is injected.

Peng Wensheng,chief economist with China International Capital Corp Ltd

Along with cooling economic growth, China's inflation is expected to decrease gradually nextyear. The consumer price index is forecast to be as low as 3 percent in 2012.

The main contributors to the soaring inflation in 2011 were cyclical factors, in that suppliescouldn't satisfy market demands so prices were raised. The situation has changed now and it isclear that consumer prices are likely to further decline.

The easing of inflationary pressure will provide more space for policymakers to loosenmonetary policy because maintaining a GDP growth rate of more than 8 percent is likely to bethe top task of the government in 2012.

3. Will the property market collapse next year?

Wang Haifeng, director of the International Cooperation Center affiliated with the National Development and Reform Commission

If the word "collapse" refers to the bankruptcy of some property developers, I believe such a correction should be allowed in regions that have seen too much price growth and speculation over the past few years. Such a collapse is necessary and healthy for the long-term development of China's property sector and the overall economy. If the government doesn't address the excessively high property prices right now, it will become more problematic to the economy in the long run.

Meanwhile, the government's tightened measures regarding real estate should remain until prices fall to a reasonable level. An annual growth rate of 7.5 to 8.5 percent is acceptable for such an active adjustment. And the government should let the market play a bigger role in this round of adjustment.

Wang Tao,head of China economic research at UBS Securities Co Ltd

I don't think so. The weakness in the property market has been largely driven by the government's tightening measures, including purchase restrictions, higher mortgage down payment requirements and price restrictions.

We have been surprised that sales and prices have held up so well after more than a year of policy tightening. We had expected them to decline by 10 percent in 2011.

As the government continues its current property tightening policies, we expect to see sales decline in the coming months while prices may finally start to drop.

We expect the private (commodity) housing market to weaken as the government continues the tightening policy, but we do not expect a collapse in that market.

Meanwhile, we think social housing will support overall construction in the next 12 to 15 months. The government has set an ambitious target of starting the construction of 10 million units in both 2011 and 2012.

4. Will China suffer a trade deficit in 2012?

Wei Jianguo, former vice-minister of commerce

The ongoing European debt crisis will hurt China's economic growth and the nation's exports. China's exports are expected to slow down to single-digit figures in 2012 from the double digits we have been seeing. We cannot exclude the possibility that China will see a trade deficit next year.

Although the European nations are striving to rescue the economy, I am still pessimistic about the prospects. The suspension of European debt will lead to decreasing demand for China's goods and drag down China's exports, probably causing a trade deficit for 2012.

We noticed orders from the European Union shrank during the 110th Canton Fair (China's largest foreign trade fair) held in October. Chinese exporters need to transfer their focus onto emerging markets rather than just betting on developed nations.

China needn't intentionally seek a trade balance. The top priority for China is to maintain its economic growth. China's stable economic growth will be a big contribution to the worldwide economy.

Huo Jianguo,director of the Chinese Academy of International Trade and Economic Cooperation affiliated to the Ministry of Commerce

I don't think there is any possibility that China will see a trade deficit in 2012, or even for a few years.

Although the year-on-year growth for China's exports has been on the decline during the past few months and the trend is expected to continue, we should not be too pessimistic about the prospects for China's exports.

Demand from developed nations including the United States and European Union is still there, although the growth is not robust. And China has been diversifying its markets for exports, with shipments to countries including Brazil, Russia and South Africa rising fast during the past year.

On the other hand, China's imports are not as strong as expected as the nation's economy slows down.

I expect double-digit exports growth for China will be sustained in 2012 and the nation's surplus will narrow to around $120 billion next year.

5. Will China's currency become more internationalized?

Shen Jianguang, chief economist for China with Mizuho Securities

The internationalization of the yuan can help China adjust the US dollar-based and passive accumulation of foreign exchange reserves. It can also greatly enhance China's role in international trade and investment.

Meanwhile, the lift to the yuan's global profile will help upgrade China's exports and make it easy for China to adopt balanced measures to reduce trade surpluses and increase imports. The anticipation of the yuan's appreciation will help boost China's purchasing power of energy and raw material products and strengthen national and corporate competitiveness.

The internationalization of the yuan will also help boost domestic demand and help shift the growth model from being export-driven to consumption-driven.

Huang Yiping,chief economist for emerging Asia with Barclays Capital

It is the international markets rather than China itself that can determine whether the yuan is a true international currency. Overseas investors want to hold the yuan but they are unwilling to pay in yuan.

Given the very limited investment channels for the Chinese currency, the only motivation for foreigners to hold the currency is the expectation of the yuan's further appreciation. But once the yuan loses the potential to appreciate, the international demand for the yuan may drop significantly.

Using administrative measures to push for a wider use of the yuan is not going to bring real benefits to China. The focus of China's currency reform should still be on the reform of the exchange rate system, the gradual opening of the capital account and the development of yuan-denominated assets.

6. Will the yuan appreciate further or depreciate?

Wang Tao, head of China economic research at UBS Securities Co Ltd

Although in recent months the trade surplus of China has declined dramatically and capitaloutflows have occurred, we predict in 2012 the exchange rate of the yuan against the dollar willcontinue to appreciate moderately.

The Chinese government may still hesitate to revalue the yuan faster and more dramaticallybecause it worries that it may further shock the weak exports and pose a negative impact onasset prices as well as financial industries. However, to avoid a trade war and facilitateeconomic restructuring, we think the authorities would prefer the yuan to appreciate 3 to 5 percent year-on-year in 2012.

And the exchange rate of the yuan against the dollar will rise to 6.25 by the end of this year, before it increases to 6 by the end of 2012. After that, the currency rate between the yuan andthe dollar is likely to remain stable.

Zhuang Jian,senior economist at the Asian Development Bank

The capital outflows in October demonstrated that international investors are increasinglyworried about the very likely slowdown of China's economic growth over the next year. And theyare very concerned about the risks from the loans made to local governments through financialvehicles, and the gloomy capital market.

The most likely destination of these capital outflows is the United States because the dollar isstronger than the euro.

Another factor attributable to a possible depreciation of the yuan lies in the shrinking tradesurplus. As the trade surplus continues to narrow in 2012, the appreciation of the yuan willdecelerate against the dollar and there will even be a depreciation in the future as a tradedeficit develops.

7. Will the Chinese stock market continue to see volatility?

Frank Gong, vice chairman of China Investment Banking at JP Morgan Chase & Co

The valuations of the A-share market have fallen so low that the systemic risk in China'seconomy may have already been factored into current market prices.

While inflationary pressure will continue to ease, the policymakers are likely to further loosencredit tightening. China could also benefit from lower commodities prices that were pusheddown by the poor prospects for the world's economy.

It seems that the most painful period for investors has passed. If the reserve requirement ratiois lowered by the central bank to 18 percent, it may help improve liquidity and trigger a bull runin the market that could last for several years.

Ye Tan,financial commentator and professor at Fudan University

The loosening of China's monetary policy may help boost market sentiment in the short termand improve liquidity in the market. But it cannot help improve corporate earnings.

The volatility in the stock market reflects the fact that investors' confidence remains fragile andthe rally triggered by the monetary loosening is unlikely to last long.

A long-term bull run in the market is built on the expectation of good corporate profits andinvestment returns. What the global economy needs is not money but new growth points. Giveninvestors' clear expectations of poor earnings results of listed companies in the fourth quarter, any rally in the market will likely be short-lived.

8. Will China be hit by a backlash in its energy saving and emission reducing efforts?

He Jiankun, director of the Institute of Low Carbon Economy, Tsinghua University

The Chinese economy has shown signs of slowing down, but mainly as a result of macro-control measures. That is a good thing for energy conservation and greenhouse gasemissions.

China set a lower annual economic growth rate at about 7 percent for 2011 to 2015, showingthe country's resolution in transforming its economic structure. As a result, energy-guzzling andhigh-polluting industries will be further controlled.

As the measures that the government introduced to target inflation took effect, the coolingproperty market also affected the demand for steel, cement and other building materials. Themomentum is expected to be sustained. It is also good for energy saving and emissionreduction.

Slower growth would be better for China's longer-term sustainable growth prospects andrealizing the country's targets for conserving energy and reducing emissions.

China intends to cut energy intensity - energy consumption per unit of GDP - by 16 percentfrom 2011 to 2015, which means the nation need to achieve an average cut of about 3.2 percent during the next five years.

However, in the first three quarters of the opening year of the 12th Five-Year Plan (2011-2015), energy intensity fell just 1.6 percent. Tougher measures are expected to beadopted in 2012 to achieve the country's target in energy-saving and emission-reduction.

Christoph Frei,secretary general of the World Energy Council

China is in a new arms race. We have already seen areas of the country affected by brown-outs as the infrastructure developments struggle to keep pace with increased demand.

Only vision-led and coherent energy policies that address the "energy trilemma" will gain publicacceptance and investors' trust in delivering a sustainable energy future. This is particularlytrue in the case of energy efficiency, which is not the "low-hanging fruit" that manycommentators have suggested.

China has made significant headway in delivering energy-efficiency programs. The 1,000 Enterprise Program is aimed at reducing energy consumption per unit of GDP by 20 percentover five years. Our findings suggest that this program has contributed to a considerablereduction in energy consumption and carbon emissions in the target enterprises.

As China continues its inexorable growth, becoming the world's No 1 energy consumer, thechallenge is to build on these successes and balance the need for energy security and socialequity. However, environmental-impact mitigation remains the country's greatest challenge, especially in the context of increased urbanization, with up to 50 megacities projected by 2050.

Potential stresses in the energy-water nexus will need to be carefully monitored. Car ownershipis also growing at a rate of 12 percent a year and our transport scenarios will show that clearpolicies are essential to limit the increase in greenhouse gas emissions.

9. Will China see a sharp decrease in foreign direct investment?

Jack Perkowski, founder of JFP Holdings

China will remain a magnet for foreign direct investment in 2012. While all major internationalcompanies are already here, most are planning to increase their investments in the country. Moreover, we are now seeing many small and medium-sized companies coming to China for thefirst time.

For many companies, China's intellectual property rights (IPR) is their biggest concern. However, if these companies truly have a product that is needed in China and they don'tmanufacture it here it because of the IPR issue, some company in China will eventually figureout how to make it and they will have new competitors anyway.

My advice is to manufacture the product in China so that these companies can meet thecompetition head-on and be most competitive.

One reason that some international companies feel business is getting more difficult in China isbecause local companies are becoming stronger and gaining market share month to month.

While many companies may not be as enthusiastic about manufacturing products in China andshipping them back to the United States or Europe because costs in China are going up andthe yuan is appreciating against the dollar, they will still want to produce in China in order togain access to the market.

Li Xiaogang,director of the Foreign Investment Research Center at Shanghai Academy ofSocial Sciences

A new frontier area for attracting investment in 2012 will be the service industry. The Ministry ofCommerce and 33 other departments have just released the outline for the service tradedevelopment plan during the 12th Five-Year Plan (2011-2015) period.

The volume of service import and export will hit $600 billion over the next five years with anannual growth of more than 11 percent.

For companies with a competitive edge in the service industry, the years ahead will be a goldenchance to invest in industries such as healthcare and design as service demand from thedomestic market surges. The service industry accounts for only about 40 percent of China'sGDP.

Inflows of investment from Europe and the United States slipped in China in 2011, mainly due totheir grim economic prospects. Once their crises ease, China will be an attractive destinationfor direct foreign investment from Europe and the US.

More than 80 percent of foreign companies investing in China prefer to build wholly-ownedcompanies in the country now that China has opened up so much and has enormous growthpotential. They want to enjoy all the benefits.

Foreign-invested companies in China are gradually shifting their focus to China's domesticmarket, which has put greater pressure on China's legal environment. Improvements to thelegislative system will be crucial for China to continue to attract foreign investment in thecoming years.

10. Will China's local government debt see default on a large scale in 2012?

Jia Kang, director of the Ministry of Finance's research institute for fiscal science

Overall fiscal risks are under control because the authorities have been given a clear picture ofthe debt scale and are thus more sure about tackling the major risks within it. The 4 trillion yuan ($627 billion) stimulus package in late 2008 has often been criticized for causing the problem, but we should not forget that every penny goes to a worthy cause, such as reconstruction afterthe Wenchuan earthquake and improvements to Beijing's traffic system.

There are no signs yet of bad debts on a threatening scale. Although 20 percent of localgovernments at municipal level have a debt ratio of more than 100 percent, it does notnecessarily mean they will default given that most of them have strong growth rates.

Even if a default is inevitable, local officials will try every means to fill the hole so as not to affecttheir track record. For undeveloped areas, the central government will probably come to therescue.

Charlene Chu, head of China Financial Institutions, Fitch Ratings

The massive influx of liquidity since the crisis has helped corporations meet obligations onprevious debt. However, a loose credit policy can't remain in place forever, particularly in anenvironment of high inflation.

Credit risk has risen from an overextension of loans to local governments and property firms, both of which have questionable medium-term repayment capacity. Off-balance-sheet activityhas also grown, adding fire to the credit boom and providing banks with new channels towindow-dress financials.

If local governments were to encounter repayment issues, this could extend beyond theirobligations to banks to their obligations to contractors and subcontractors of projects etc. Inthis regard, the entire transport and infrastructure portfolio could be affected.

Source:xinhuanet