China: economic challenges

China's economic growth will again exceed 10% in 2008, but political pressures from trading partners will lessen as the pace of trade surplus expansion slows.

The government's main challenge will be containing inflationary pressure in food and housing. Food inflation can probably be contained by supply-side stimulus in agriculture, combined with moderately tight monetary policy. However, monetary tightening will not be effective in controlling property price inflation. Instead, the government will keep trying to increase the supply of mid-range and low-priced housing.

One major area in which a significant policy shift is unlikely is exchange-rate management. The renminbi appreciated by about 6.5% against the dollar in 2007, from a rate of 7.9 to 7.4. A slightly faster rate of appreciation is likely in 2008, of about 8.0%, which would bring the renminbi/US dollar rate to 6.8 by the end of the year. At last month's Sino-US Strategic Economic Dialogue, Chinese officials made it very clear that they were unwilling to contemplate a more dramatic currency move.