China's year of challenges

Second, the prevailing macro-economic policies in major developed countries will increase the number of jobs by creating inflation in 2013. The United States has already implemented its fourth round of quantitative easing, or QE4. The US Federal Reserve will keep the basic interest rate at or close to zero and link the country's inflation and unemployment rates to ensure that the policy remains as long as inflation does not rise above 2.5 percent and the unemployment rate does not fall below 6.5 percent. This will hold the global economy hostage by creating inflation and asset bubbles across the world until the US unemployment rate falls to the desired level and the American economy starts real recovery.

The European Union is following in the US' footsteps, while Japan is likely to join the trend soon. Faced with an influx of excessive liquidity from the West, the Chinese government must step up its financial assistance to expand domestic demand and develop the real economy while deepening reform to soften the impact of foreign capital invasion.

Third, developed economies will take more protectionist measures in trade and investment this year to break free from the limbo of industrial vacuum. This means China will have to tackle more trade disputes, from the tactical to the strategic front, and from economic, political, social and cultural matters to military affairs.

Nevertheless, the Chinese economy will enter an important transitory phase this year. The country's GDP growth potential for 2013 is likely to be lowered to between 7 and 8 percent, and its foreign trade is expected to slow down. Economic growth in China's more developed region along the coast will remain relatively low, while the central region will grow slightly faster with the western region growing even faster.

China's heavy, chemical, construction and real estate industries, including their related equipment manufacturing output, will enter a long period of adjustment this year, while the growth rates of power generation, steel, other industrial materials and automobiles sectors will slow down.

At the same time the cost of labor, land, water, power and gas - all essential for economic growth - will continue to increase, and so will the yuan's exchange rate, interest rate and consumer price index. These signs make it even more important for the government to improve the quality of economic growth and make it more result-oriented in 2013.

The author is general secretary of the Academic Committee of the National Development and Reform Commission. www.chinausfocus.com

(China Daily 02/02/2013 page5)