Economists around the world have agreed that China's decision makers face a tricky situation this year as they attempt to maintain sound economic growth. Many of these same analysts have cut China's growth forecasts in recent weeks to reflect weak global demand.
The unfolding global credit crisis that began with problems in the U.S. subprime sector has led to global slowdown just as China faces increasing domestic inflationary pressure, they said.
On Wednesday, the Asian Development Bank lowered its 2008 forecast for China's economic growth to 10 percent from 10.8 percent. That revision came a day after the World Bank cut its 2008 forecast for China by 0.2 percentage points to 9.4 percent --its second reduction in as many months.
And less than a week ago, the United Nations Economic and Social Commission for Asia and the Pacific said in a report that China's economic growth would decelerate in 2008 because of slowing exports and the government's cooling measures.
Investment banks including Goldman Sachs and China International Capital Corp. have also agreed that growth would be lower, indicating rising concerns over the impact of slower world demand and rising domestic inflation.
"The continued global slowdown under the impact of the U.S. credit crisis in the past two months was the major reason behind our further cut to China's forecast economic growth," said Louis Kuijs, a senior economist with the World Bank. The bank cut its 2008 China growth forecast from 10.8 percent to 9.6 percent just two months ago.
"The Chinese economy is faced with a complicated mix this year," Kuijs said. The U.S. financial turmoil and the ensuing global slowdown, rising international energy, industrial materials and food prices, and domestic inflationary pressure were major risks to the Chinese economy, he said.
Chinese Premier Wen Jiabao admitted at a press conference last month: "This year might be the most difficult one for the Chinese economy. There are many unpredictable factors at home and abroad, so decision-making will be very difficult."
Kuijs pointed out that the expansion-oriented policies needed to deal with weak external demand due to the credit crisis and the tightening policies needed to fight domestic inflation were "contradictory" to each other.
"This would make China's macroeconomic controls more complicated, and the art and competence of the government's macro control efforts would be tested," he said.
"Whether decision makers can accurately take the pulse of developments and changes in the domestic and world economies could be vital," said Wang Qing, Morgan Stanley's chief economist for greater China.
The impact of the credit crisis has continued to unfold and it's still unclear how it will play out. The World Bank said in a report on Tuesday that the damage caused by the U.S. financial turmoil to the global economy and to trade and capital flows was highly uncertain.
