Abstract
Prospects for the future remain favorable, provided that policy actions are taken to address the risks and challenges that China faces. The government recognizes the need to contain investment and credit growth, and has tightened the monetary policy in response. Greater exchange rate flexibility will play a role in contributing to an orderly process for resolving global current account imbalances. Center-local fiscal relations need to be reformed, and such reform will help to rebalance the economy and spread the benefits of growth.
1. This statement contains information that has become available since the staff report was circulated to the Executive Board on July 11, 2006. The thrust of the staff appraisal remains valid.
2. Economic growth accelerated in the second quarter of 2006. GDP grew by 11¼ percent (year-on-year), up from 10¼ percent in the first quarter, reflecting continued high investment and rising net exports. Despite some tightening measures, investment growth topped 30 percent (year-on-year) in the second quarter, while the trade surplus increased, as growth in exports outpaced that of imports. Inflation in June was slightly higher at 1½ percent (year-on-year). With GDP growth in the first half of 2006 at about 11 percent, there are upside risks to the current staff projection of a 10 percent GDP growth rate for the year as a whole, as noted in the staff report (paragraph 13).
3. Money and credit growth slowed modestly in June, but liquidity in the banking system remains high. Broad money (M2) grew by about 18½ percent (year-on-year) in June, down from 19 percent in May. Total loan growth also moderated to 14¼ percent (year-on-year) in June, from 15 percent in May. In an effort to further mop up the liquidity and curb credit growth, the People’s Bank of China on July 21 raised the required reserve ratio on bank deposits by another 50 basis points (effective August 15), adding to the 50 basis point increase in early July. Despite these recent steps, as noted in the staff report, a significant risk remains that macroeconomic policies are not sufficiently tight to rein in lending and investment growth.
4. The renminbi/US$ rate remains tightly managed although its variability has increased. In the past two weeks, the daily rate has generally traded below RMB 8 per U.S. dollar with inter-day changes ranging from an appreciation of 0.14 percent to a depreciation of 0.08 percent. Foreign exchange accumulation remains rapid with total reserves reaching $941 billion in June reflecting a $122 billion accumulation in the first half of 2006.