Slower Growth - Increased Consumption  

The Year of the Rabbit began with an interest rate hike, and the fight to tame inflation will be a central theme in 2011. The key trends in economic planning in China in 2011 target slower, more manageable growth that will facilitate effective remedying of rising prices. At the same time, the plan is for China to increase the share of consumption in its growth composition, and for Chinese consumers to earn and spend more.

On February 8, the Year of the Rabbit was barely a week old when, at the end of China's Spring Festival holidays and one day before markets were set to open, the People's Bank of China announced another hike in interest rates. The third such increase since mid-October 2010, when China initiated a cycle of tightening measures, was effective from February 9. The benchmark one-year lending rate was increased to 6.06 percent from 5.81 percent, and the one-year deposit rate rose by 25 basis points to 3 percent. Soaring food prices and a steady uptick in inflation in 2010 were obvious grounds for the latest increase in interest rates, and more rate hikes are expected in the course of 2011, and possibly more quantitative tools – like requiring banks to hold more deposits as reserves – as well. So the battle lines have been drawn for 2011: inflation reached 4.9 percent in January – much too high for comfort for China's government – only a slight moderation from the 28-month high of 5.1 percent in November 2010 (see Chart 1). The fight to tame inflation will clearly be one of the most significant stories on China's economy in the Year of the Rabbit.

The latest interest rate hike came less than three weeks after China's National Bureau of Statistics announced that China's economy had powered to 9.8 percent GDP growth for the fourth quarter of 2010 (see Chart 2), so that the economy grew at 10.3 percent in 2010, up from 9.2 percent in 2009. In combination with ample liquidity and inflows of cash from overseas, double-digit growth has contributed to increases in asset and consumer prices. Hence 10.3 percent annual GDP growth is just a little too high for China's government to be comfortable with – an enviable problem, one might say. The 12th Five-Year Plan (covering the period 2011-15), which is now in initial stages of implementation, targets a growth rate of around 7 percent. During the 11th Five-Year Plan (2006-10), however, China exceeded its annual GDP growth target, so planning for slower growth is not necessarily a guarantee for actually attaining slower growth.