The changes and challenges for economy in 2013

A1

Back in December 2011, Fitch said it expected China's economy to grow about 8 percent in 2012, and it looks like this has been borne out. We took seriously the authorities' stated intention to get asset and consumer price inflation under control, and this has more or less been achieved, without a sharp increase in unemployment.

The key limitations are as follows: limited progress so far on rebalancing towards a more consumption-led growth model, and still a lack of clarity about how the buildup of debt in 2009-10 will be dealt with. That debt overhang, as we see it, is a key factor behind the Negative Outlook on China's local currency rating of "AA-". The foreign currency "A+" rating, meanwhile, remains well supported at Stable Outlook by China's exceptionally strong foreign currency sovereign balance sheet and $3.3 trillion in official reserves.

A2

Rebalancing the economy is imperative, not optional, if a further buildup of structural vulnerabilities is to be avoided.

Investment cannot go on growing faster than GDP, or it will start to outstrip even China's huge domestic savings, and China would become a current account deficit country, which we think the authorities would wish to avoid. One key question is how quickly the authorities make progress on structural reforms to facilitate rebalancing. These could include, but are not limited to, financial liberalization and strengthening of household incomes.

A3

We think China's economy will grow about 8 percent in 2013. The Central Economic Work Conference conclusions included language on accommodative fiscal policy and prudent monetary policy, which we see as a signal authorities want to prevent a re-emergence of inflation and strong house price growth. We expect consumption to grow faster than investment.

A4

China's urbanization rate of about 50 percent on official data - and probably a little higher in reality - is still well below 80 percent for South Korea or the US.

The point is how efficiently capital is invested, along with the fundamental macroeconomic constraint of the investment-savings balance. There is another constraint in terms of the ability of the financial system to grow the credit to fund further sharp rises in investment, which we think is pretty limited, given the banking system's weak capitalization and emerging strains in liquidity.

A5

The main risk facing the Chinese and world economy is the resolution, or not, of the US fiscal cliff. On our base case forecasts, the US does not fall off the cliff, but there will be a meaningful fiscal tightening of about 1.5 percent of GDP in 2013, and the US economy grows about 2.3 percent. For Japan, we expect growth of 1.5 percent. For the eurozone, we expect stagnation in 2013. Fitch forecasts emerging markets will grow 4.8 percent in 2013, up from 4.3 percent in 2012.