ADB Raises China’s GDP Growth Forecast to 9.6%, Highlights Challenges

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Apr. 14 – The Asian Development Bank released its Asia Development Outlook 2010 on Tuesday, raising China’s GDP growth forecast to 9.6 percent, up from the 8.9 percent estimate made last September.

The bank lowered its forecast for 2011 to 9.1 percent in anticipation of expected monetary tightening policies.

The growth rate for fixed asset investment is expected to ease slightly to 25 percent in 2010, compared with 30 percent in 2009, according to the ADB forecast. Indicating that GDP growth would be strong in the first half of 2010, but the shortfall in investments would be offset by larger contributions from consumption and net exports.

Strong growth could lead to risk of inflation and asset bubbles the bank said. The consumer price index may average 3.6 percent in 2010 and 3.2 percent in 2011.

“The stress on investment has also led to overcapacity in some industries and unsustainable use of natural resources,” the report said. “Expanding investment is relatively easy in a system where state-owned enterprises are fed with substantial amounts of public investment that they promptly channel into expansion. Increasing private consumption, in contrast, requires raising purchasing power and changing saving habits across the population.”

The report also stated that China’s high GDP growth rates over the past three decades have not been accompanied by any increases in employment generation. This has led to “large labor surpluses, mainly in rural areas, compounded by rigidities in the labor market.” The ADB advocated that China address this issue through a profound reform of the labor market, including a relaxation of the hukou system.

“Expanding the services sector would strengthen the domestic engine of growth, generate new sources of employment, and raise living standards,” the report said, while acknowledging that opening up the sector would require policy action on a long list of constraints including excessive market concentration and entry barriers, restrictions on direct foreign participation, incentive bias toward manufacturing, inefficient allocation of capital, incomplete urbanization and labor market rigidities, underinvestment in education and training.