Growth is projected to continue to edge down, to 6.7% by 2016. Slowing real estate and business investment will be countered to some extent by stepped-up infrastructure investment. Consumption is set to remain robust. Urbanisation and the rapid expansion of service industries will generate employment and keep unemployment low. Enduring overcapacity in some heavy industries should keep producer price inflation negative and consumer price inflation low.
Monetary policy should be eased further to stabilise growth and contain deflationary pressures. Financing costs need to be brought down as real interest rates are high and slowing growth heightens credit risks. Fiscal policy should also ease, as planned, to support activity. Accelerating debt-for-bond swaps at the sub-national government level would mitigate fiscal risks, but unconditional rollover of debt works in the opposite direction. Pension reform should accelerate to ensure fiscal sustainability in the long term.
Investment has been slowing for some years, and is now a smaller fraction of GDP than consumption. Investment efficiency has fallen in recent years on the back of growing excess capacity in real estate and several manufacturing industries. Market forces should be allowed to play a greater role in allocating resources, in particular capital. To that end, a level playing field for all firms needs to be established by gradually removing implicit guarantees to state-owned enterprises. Rural land reform should extend land tenure and encourage land consolidation. Urbanisation will continue to drive investment and growth, as will the expansion of the service sector, which will be spurred by liberalisation measures.