China may have a difficult year 2008 because of the effect of falling exports combined with sparkling inflation. In fact, the World Bank has cut its forecast for Chinese economic growth in 2008 to 9.6 per cent, which is much lower than last year 11.4 percent growth.
The decrease in export demand caused by the global slowdown and growing protectionism may be very harmful for Chinese economy. As a matter of the fact during the last 5 years China has grown more dependants on external demand. For example in 2003 and 2004 net exports accounted for around 3% of real GDP while in 2007 it may account for as much as 12%.
Also, one of the biggest negatives is the rise of consumer price index. In 2007 annual inflation rate was 4.8 per cent, compared with just 1.6 per cent in 2006. The problem is not only high food prices but also the increase in money supply. China is the biggest holder of foreign currency reserves and since the country has a relatively pegged exchange rate system, is very easy for the government to flood the economy with Yuan. Furthermore, inflation has been affecting real interest rates. Real deposit rates are negative and lending growth is being hampered by falling real lending rates.
Finally, the higher exposure of China to global markets has been making the stock market more vulnerable to recessionary fears. The share prices are growing rapidly due to high demand from Chinese investors. However, if the world economy slows down further, the Chinese market can be again in a prolonged slump.