Goldman Sachs turns bullish on Chinese economy

Goldman Sachs turns bullish on Chinese economy

Goldman Sachs has dramatically raised its forecasts for the Chinese economy and is now predicting 8.3pc growth for this year, above the Communist Party's own target.

By Malcolm Moore in Shanghai
Last Updated: 9:36AM BST 22 Apr 2009


The reversal came after a raft of strong economic data in March convinced pundits that green shoots are starting to reappear in the Chinese economy, which could shortly overtake Japan as the world's second-largest.

Previously Goldman Sachs forecast that China would only grow by 6pc in 2009. Other economists have predicted growth to be as low as 5pc; strong compared to the rest of the world, but lower than the magic 8pc threshold that China believes is essential to maintain calm.

The Communist Party says that growth under 8pc will not produce enough jobs to keep unemployment at a manageable level and to avoid unrest.

After exports fell by nearly 20pc in the first quarter, the government has poured money into the economy to keep it running. As well as a 4 trillion yuan (£400bn) fiscal stimulus package, Chinese banks have made 4.8 trillion yuan in new loans so far this year.

In order to finance the sudden increase in credit, the Chinese central bank has started printing huge quantities of money. In March, the increase in M2 money supply was 25.5pc, the highest it has been since the Asian financial crisis.

Goldman Sachs is predicting that consumer price inflation will be negative, at -0.3pc, this year, allowing for further cuts in interest rates and the issuing of more new money.

"We are fully confident that we will overcome difficulties and challenges and we have the ability to do so," said Wen Jiabao, the Chinese prime minister, at the National People's Congress in March, as he underlined the government's determination to keep GDP growth at 8pc.

"Since the announcement of the fiscal stimulus package last November [...] the pace of implementation of new infrastructure investment and the scale of domestic credit expansion have been unprecedented," said Helen Qiao, an economist at Goldman Sachs. She added that growth next year would be 10.9pc.

Economic growth was just 6.1pc in the first quarter of this year, the lowest on record. However, commentators suggested that the figure was the bottom of the cycle, and that increases in industrial production, retail sales and fixed asset investment would soon buoy the Chinese economy.

However, Stephen Green, an economist at Standard Chartered in Shanghai, expressed some skepticism that there was a full-blown recovery underway. He said growth had accelerated from the end of last year, but cautioned that "there is a huge amount of volatility in the numbers and a chunk of salt is needed."

He added that while the fiscal stimulus package is likely to boost investment by companies in the short-term, in the long run China needs to increase the incomes of its workers and complete a social welfare system. He kept his forecast at 6.8pc for the year.

http://www.telegraph.co.uk/finance/financetopics/recession/5198966/Goldman-Sachs-turns-bullish-on-Chinese-economy.html