Faced with a sharp slowdown in external demand, prudent fiscal policy will drive the growth of internal demand growth.

On the 3 day, JP Morgan released the outlook for China's macroeconomic data, and predicted that China's gross domestic product (GDP) would slow slightly to an annual growth rate of 10.3% in 2008 (10.5% before forecast) and 11.4% in 2007.

The government set the GDP growth target at 8% this year, which hinted at the government's concern about the risk of overheating and the tendency to maintain economic balance and sustainable growth.

At the same time, there will be three interest rates hike in the second half of this year, and interest rates will not be raised in the first half of the year.

With the slowdown in external demand, China's export growth began to slow down in the fourth quarter of 2007.

Morgan predicted that export growth in 2008 will be lower than the 27% year growth rate in 2007, but it will still maintain a high level of 16% throughout the year.

The prediction is based on the following factors: the relaxation of the US fiscal and monetary policy is expected to stimulate the US economy to rebound in the second half of the year; the productivity of China's manufacturing industry has increased further; and China's export products and markets have been further diversified.

Meanwhile, with the gradual increase in consumer spending and the strong growth of fixed investment (the government seems to be spending more on infrastructure and investment), JP Morgan believes that domestic demand growth will remain stable this year.

In the face of a sharp slowdown in external demand, a sound fiscal policy will help the government to boost internal demand growth.

JP Morgan pointed out that the government set this year's GDP growth target as 8%, which should not be understood as more macro tightening measures in the future to substantially reduce the overall growth rate. On the contrary, it implies the government's concern about the risk of overheating and the tendency to maintain economic balance and sustainable growth.

In fact, Premier Wen Jiabao stressed the need to combat inflation pressure and control inflation expectations as one of the priorities of this year's government, and reiterated tight monetary policy.

He also stressed the need to support economic growth in the context of global financial market uncertainty and worsening global growth prospects.

In fact, as the consumer price index (CPI) is expected to gradually ease over the next few months, the focus of macroeconomic policy is likely to shift from simply fighting inflation to maintaining sustained economic growth.

JP Morgan believes that the central bank's recent decision to raise the deposit reserve ratio is, in fact, reducing the possibility of another rate increase in the short term.

However, as expected CPI growth in 2008 averaged 5% over the same period, and the current one-year deposit rate was 4.1%, the real interest rate remained negative.

This is in line with the PBC's view that interest rates still have room to increase.

JP Morgan forecasts that there will be three interest rates hike in the second half of this year and no increase in interest rates in the first half.

The reasons for the increase in interest rates in the short term include the widening of the spread of the RMB against the US dollar (expected the Fed will further reduce interest rates), the deterioration of the global macroeconomic outlook (which will affect China's exports) and the recent sharp adjustment of the domestic A share market.

JP Morgan believes that the government may continue to allow the rapid appreciation of the RMB, especially the trade weighted exchange rate, and thus become an important means to control the upward pressure on import prices and commodity prices.

But as before, this will not be done in the near future.