Growth cushions to prevent hard landing

Affordable housing construction surge will offset slowdown in commercial property investment

China is unlikely to experience a hard landing in the second half of the year despite the slight cooling of the economy.

Against such a backdrop, we expect the gross domestic product (GDP) to grow at around 9.3 percent during the third quarter and at 9.5 percent in the fourth quarter of the year.

While it is expected that economic growth may slow slightly in 2011, there will be a strong rebound during the fourth quarter from falling prices and effects of the loose monetary policy.

Investment, domestic consumption and trade are the three key drivers of China's economic growth. A closer scrutiny of these three factors indicates that GDP growth may remain above the 9 percent mark during the second half of the year.

From an investment point of view, the slowdown in commercial property investment during the second half of the year will be offset by a surge in affordable housing construction. There will be a marked rise in such construction programs during the second half, especially in the third quarter of the year.

Local governments will also accelerate their investment plans, and this will also help increase investment in fixed assets. We expect the annual growth rate of urban fixed asset investment to be around 23 percent.

Real household income will increase as prices start falling. Consumer demand will also pick up substantially.

Inhibited by high inflation, the traditional slow summer period and a restructuring auto and real estate market, it is still difficult to see a significant increase in consumption of consumer goods. But China's 12th Five-Year Plan (2011-2015) has already made it clear that the government will increase disposable incomes and reduce the tax burden to stimulate domestic consumption. So it is only a matter of time before domestic consumption accelerates.

During the first half of the year, the real per capita cash income of rural residents went up by 13.7 percent, higher than the GDP growth rate and urban residents' income growth rate over three consecutive quarters. This is a good sign, as continued growth in rural income augurs well for rural consumption.

With price increases expected to slow in the second half of the year, residents will be able to see real income grow, and this will boost retail sales of social consumer goods toward the end of the third quarter and in the fourth quarter of the year. Full-year retail sales are expected to hover around the 17 percent mark in 2011.

Although the global economy is facing uncertain times, it is showing signs of recovery. As such, China's exports may not face a worsening situation in the second half.

During the first half of 2011, China's export performance has been remarkable. Despite the debt crisis in Europe, Japan's earthquake and political turmoil in the Middle East and other external uncertainties, export growth has exceeded market expectations with a growth rate of over 20 percent.

Though the debt crisis still lingers in Europe, there is little chance of it deteriorating further. Countries like the US and several other developed economies have already started showing clear trends of recovery.

From a trade point of view, global commodity prices will continue their process of price adjustments in the second half of the year. All of these will undoubtedly lead to a better trade environment during the second half of 2011.

Though we expect China's full-year export growth rate to slow to around 20 percent, the import growth rate will be at a high of 27 percent.

Overall, if we analyze all the sectors that contribute to the growth of the service industry in 2011, China is unlikely to experience a hard landing in a short period of time.

The author is a senior analyst with the Bank of Communications.