ADB Raises China’s GDP Growth Forecast to 9.6%, Highlights Challenges

The Asian Development Bank has released its annual study of Asian economies for the past year. In it, the ADB reassessed its economic forecast for China and predicts China’s GDP will grow by 9.6% in 2010 . From China Briefing:

The Asian Development Bank released its Asia Development Outlook 2010 on Tuesday, raising China’s GDP growth forecast to 9.6 percent, up from the 8.9 percent estimate made last September.

Strong growth could lead to risk of inflation and asset bubbles the bank said. The consumer price index may average 3.6 percent in 2010 and 3.2 percent in 2011.

“The stress on investment has also led to overcapacity in some industries and unsustainable use of natural resources,” the report said. “Expanding investment is relatively easy in a system where state-owned enterprises are fed with substantial amounts of public investment that they promptly channel into expansion. Increasing private consumption, in contrast, requires raising purchasing power and changing saving habits across the population.”

The report also stated that China’s high GDP growth rates over the past three decades have not been accompanied by any increases in employment generation. This has led to “large labor surpluses, mainly in rural areas, compounded by rigidities in the labor market.” The ADB advocated that China address this issue through a profound reform of the labor market, including a relaxation of the hukou system.

Here are some specific excerpts from the Asia Development Outlook 2010’s section on China. Restructuring the economy for long-term stability and developing a better service sector seem to be its main recommendations. From Asian Development Bank:

Increased labor mobility and a better educated and trained workforce would also help mitigate the impact on the economy of the aging of the population. Aging is particularly challenging in the PRC, because it is happening at a relatively low level of per capita income.

The sustainability of the current high energy-consuming and environment-unfriendly growth model is doubtful. A more sustainable model would be more reliant on technology, innovation, and skills. That could be achieved by increasing spending on research and development, which at present is below the government’s target. Large investments in education and vocational training are also needed.

Wide-ranging policy changes are needed to facilitate the transition to a more services-oriented growth model. These include improving the regulatory framework, changing production incentives, further liberalizing the finance sector, reforming the labor market, and investing more in education and training.

A larger services sector could absorb much of the surplus labor from agriculture and manufacturing, as well as a significant share of new workers entering the labor force. Reforming the hukou system would maximize employment gains, as would other policies that speed up the move of the population to cities. To minimize the impact of job losses caused by reducing policy incentives for low-skilled manufacturing, it would be necessary to implement supportive measures, including large investments in education, vocational training, and social safety nets.

The ADB expects China’s economy to grow by slightly less, at 9.1%, for 2011.