China faces two risks behind economy slowdown

0 Comment(s)Print E-mail People's Daily, January 20, 2012
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Mainly due to the weak external demand and a slowdown in investment growth, China’s economic growth rate fell for four consecutive quarters last year. Growth in investment and export will probably slow in 2012, leading to a continued slowdown in its economic growth.

Support policies, further increase in people’s income, and declining inflation will ensure steady growth in consumer demand in 2012. A large number of affordable houses, whose construction began a few years ago, are likely to be sold to the people in need this year, which will increase housing-related consumer expenditure.

Due to the weak external demand and economic slowdown, the Chinese government will increase investment in public faculties and infrastructure to ensure steady growth in household consumption.

At present, China is faced with two major risks. The first is a possible rapid outflow of short-term capital. Due to the deteriorating European sovereign debt crisis, temporary appreciation of the U.S. dollar, growing concern over a hard landing in the Chinese economy, and expectations of the RMB depreciation, short-term foreign capital may flee China on a large scale, which will cause volatility in the country’s foreign exchange, real estate, and stock markets.

The second risk is that certain local governments may default on their debts. 2012 is a peak year for local governments to pay off their debts. However, as China’s economic growth continues to slow down, and its real estate sector remains under considerable pressure, certain regions may witness a decline in their fiscal revenue this year. So certain local governments, especially those below the municipal level, are likely to default on their debts this year.

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