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GDP growth in China dependent on maintaining social stability

Problems in the eurozone will affect China’s economy, but the impact should not be overestimated, say analysts

Economic developments in China have come under scrutiny as the eurozone crisis intensifies, but the country's fate lies in its own hands, say analysts.

Recently, the Chinese economy has not performed as highly as in previous years. In October, export growth slowed to an annual pace of 9.1% from 9.5% in the second quarter, as the European debt crisis negatively influenced demand from one of China’s key trading partners.

Indeed, a recent report by UBS predicts that slower GDP growth will continue for China in 2012, reaching a level of 8.3% – its lowest level since 2003.

To a certain extent, it is the decline in exports to the eurozone that has affected Chinese GDP growth. A recent report issued by DBS noted that, in August, Chinese exports to the European Union grew by 22.3% year on year. In September, however, this dropped to 9.8%.

Perhaps one of the main affects of the eurozone crisis is a widespread negative outlook for investors in China. As Charles Chen, associate director of equities research at UBS in Shanghai, says: “In the short term, turmoil in Europe will create negative market sentiment in China.”

However, decreasing exports to Europe and the affect on the Chinese economy should not be overestimated.

“China’s economy ... does rely on exports and imports, although recently this reliance has reduced,” says a senior China banker at a leading foreign bank in Shanghai. And as Chris Leung, senior analyst at DBS in Hong Kong, states: “Trade has been contributing less and less to headline GDP growth in recent years.”

Despite the knock-on effects of the eurozone crisis in China and the rest of Asia, the main threat to economic growth in the developing country comes from the Chinese population itself.

   
 Dean Owen, Newedge  
   

“In effect, the biggest threat to China’s rise to prominence comes from within,” explains Dean Owen, chief representative and senior vice president for Newedge in China. “China focuses on the domestic markets for economic growth. For the economy to grow, China needs consumption-driven growth, not higher levels of exports."

Indeed, China’s trade surplus as a share of GDP – down from a high of nearly 11% in 2007 to 3% or 4% last year – suggests that China’s economy is increasingly consumer-driven.

Internal focus of the Chinese government is reflected in government officials’ actions in the country.

At the beginning of the year, Premier Wen Jiabao visited the State Bureau for Letters and Calls, the top government department for addressing people's petitions. This visit was the first time a Chinese Premier personally met with petitioners in Beijing since the founding of the People's Republic of China.

During a time of global economic turmoil, “ensuring social stability has never been higher on the agenda [for China]”, continues Owen.

For China, maintaining stable economic growth and social stability will mean continued domestic focus.

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