Growth is likely to remain robust in 2010, but the composition will change. With a larger than expected monetary stimulus, China is on track to meet the target of 8 percent GDP growth this year. We project 8.4 percent growth. Looking ahead, the global recovery is likely to be slow and subject to risk. Nonetheless, China’s export growth is likely to resume, helped by strong fundamental competitiveness and the recent depreciation of the nominal effective exchange rate, and net exports are likely to stop being a drag on growth. Real estate investment is also bound to be stronger. However, the growth impact of the government stimulus is set to decline sharply next year and investment in parts of manufacturing is likely to remain under pressure from spare capacity in China and abroad. The global spare capacity is also expected to keep inflation pressures low. With exports and imports projected to grow at broadly the same pace next year and the terms of trade likely to deteriorate, the current account surplus may edge down further.
 
On policies, the costs and risks of sustaining the current expansionary policy stance will increase over time. In our view, macroeconomic conditions in the real economy do not yet call for a major tightening. However, risks of asset price bubbles and misallocation of resources amidst abundant liquidity need to be mitigated and the overall monetary stance will have to be tightened eventually. Given our economic projections, in 2010 an unchanged or only slightly higher fiscal deficit would fit best but flexibility is important and this includes allowing the automatic stabilizers to work, this year and in 2010.
 
In the medium term, the recovery can only be sustained by successful rebalancing of the economy. Rebalancing and getting more growth out of the domestic economy call for more emphasis on consumption and services and less on investment and industry. Following on earlier initiatives, some further steps have been taken in recent months to rebalance and boost domestic demand, including increasing the presence of the government in health, education, and social safety; improving access to finance and SME development; and mitigating resource use and environmental damage. These are useful steps, but more policy measures will be needed to rebalance growth in China, given the strong underlying momentum of the traditional pattern. Structural reforms to unleash more growth and competition in the service sector and stimulate more successful, permanent migration would be particularly welcome.

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