China’s Coming Growth Tests

While no one should be surprised by the recent recovery in China's economic growth, the true challenges lie in the medium and long term. Indeed, the current economic rebound is not an achievement worthy of celebration if it comes at the expense of further reform and structural adjustment.

BEIJING – The most recent official data show convincingly that the Chinese economy has bottomed out, and it is now widely expected that annual GDP growth should reach roughly 7.8% in 2012. This result should come as no surprise.

To rein in rising house prices and pre-empt the inflationary impact of the strongly expansionary fiscal and monetary policies implemented during the global financial crisis, China’s monetary authorities began to tighten financial conditions in January 2010.

Monetary tightening, administrative measures introduced by various municipal governments to stem the run-up in the housing market, and the waning effect of the government’s ¥4 trillion ($642.3 billion) stimulus package resulted in a gradual economic slowdown. While inflation should have eased in early 2011, rising food prices and commodity prices thwarted expectations. Annual growth in the consumer price index peaked at 6.5% in July 2011.

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