The president, Hu Jintao, is promoting allies in the run-up to the 17th congress of the ruling Chinese Communist Party, due in October 2007, paving the way for an eventual successor. The government will focus on development needs in rural areas and in central and western provinces, in an attempt to prevent widening inequalities from producing a political challenge to the regime. Strengthening central control over the regions will also be a priority for Mr Hu's administration as more cash is disbursed from the centre to the regions to fund welfare programmes.
The integration of China into the world political system will cause tensions with the US, not least because the two countries' political perspectives differ sharply. Disagreements over Iran, Taiwan and Central Asia are likely. Relations with Japan will remain difficult, despite a recent easing of tensions. China will become more diplomatically proactive, especially in Africa.
Real GDP growth is forecast to slow slightly but will remain impressive, easing gradually from 11.4% in 2007 to 7.4% in 2012. The government is attempting to boost the contribution of private consumption to overall growth. The tax burden on rural residents will fall, increasing their disposable income, and the growing trend for urban Chinese to buy homes and cars will also give a fillip to consumption spending during the forecast period.
Investment spending growth will slow gradually from 2008, but low interest rates will support speculative borrowing in the early part of the forecast period, especially against a background of higher inflation. So far this has led to asset price bubbles, especially in some real estate markets and also in the stockmarket. However, the risks to the wider economy of a bursting of either the property or the stockmarket bubble are manageable.
The renminbi will continue to be held in a floating exchange-rate system managed primarily against the US dollar. Increasing volatility and sustained appreciation will be permitted throughout the forecast period, with the exchange rate averaging Rmb6.30:US$1 in 2012. The government will make gradual progress on the liberalisation of the capital account.
The current-account surplus will fall as a proportion of GDP during the forecast period, in line with a deceleration in China's export growth and continued strong growth in GDP. Services exports will be boosted by the 2008 Olympic Games in the capital, Beijing, and by the 2010 Shanghai World Expo.
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