China’s Economic and Financial Prospects in 2007

Abstract
The Chinese economy faces favorable development environment in 2007. The world economy will continue to uphold its growth trend, in spite of uncertainties associated with global economic imbalance, international trade frictions, and a likely rebound in the oil prices. Domestically, even though deep-seated issues remain and excess liquidity has emerged, several favorable conditions will sustain rapid growth: first, recent rapid growth has laid a strong foundation; second, macroeconomic policy environment continues to be accommodative; and, finally, stabilization and adjustment program have borne fruits.
In 2007, the Chinese economy will continue to grow at a rapid pace, about 10%. The growth in fixed assets investment is expected to slow to about 22%, two percentage points less than a year ago. Consumption will enjoy a stable growth. Social retail sales will increase by 14.5% in 2007, 0.8 percentage points higher than the previous year. Even if inflation pressure has intensified lately, inflation is likely to remain modest, in the range between 2-3%. The liberalization and opening in the financial market will continue. The transactions in the stock, bond, and inter-bank markets will be active. Financial innovations will accelerate. However, at the same time, the risks posed by a likely rebound in investment and inflation, even larger trade surpluses, more excess liquidity and excess productive capacity, as well as rising imbalance between domestic and between external demand and between consumption and investment, are also present. These risks could threaten macroeconomic instability, worsen business conditions, and reduce operational efficiency.