Research Group of the Development Research Center of the State Council

I. Basic judgement on the present economic situation and its trend for the next year

Faced with the extremely complex economic situation both at home and abroad, the Party Central Committee and the State Council had adopted a series of steps since the beginning of this year to vigorously expand domestic demand and maintain stable development of the national economy. A number of positive changes had come forth since July: accelerated industrial production, a turn for the better in the link between production and sales, and declining stock. The overall level of enterprise economic efficiency had raised as evidenced by bigger profits yielded by state-owned enterprises (SOE) and industrial enterprises where the state holds the majority of shares. Foreign trade export rebounded, the total retail amount of social consumer goods went up while the fall in consumer goods prices had been stabilized with prices of some capital goods picking up. The power production and industrial power consumption grew considerably. It is noticeable that investment in fixed asset registered a zero growth in August, and recorded a negative increase in September, while industrial production growth fell to 8.2 percent in September form 9.5 percent in August.

The economic growth target set at the beginning of the year is expected to be fulfilled. However, the internal driving force for economic growth is still not sufficient, an ability for sustained expansion has not taken shape in the economic operation and the foundation for economic recovery is still quite fragile.

First, economic growth has further relied on the government macroeconomic policies. Since this year, economic operation, affected by the change in the macro control intensity, has featured seasonal fluctuations. The central government timely put in force a number of measures to stimulate economic recovery, including issuing 60 billion yuan additional treasury bonds, increasing the income of urban residents, raising export tax-refunding and further lowering lending and saving rates. The positive changes that have taken place in the economic operation are rightly manifestations of the policy effect.

Second, some of the positive changes in the economic operation are closely associated with a turn for the better in the external economic environment. Apart from the positive part played by increase of export tax refunding, the big rebound in the exports since July is benefited by economic recovery in countries hard hit by the Asian financial crisis. The overall better economic performance of the petrochemical industry is partly profited from the rising oil prices on the world market and the severe crackdown on smuggling. But there exists great uncertainty in these positive factors.

Third, while the total retail amount of social consumer goods picked up a little, the growth in fixed asset investment slid down and the pace of lending expansion slowed down to affect to a certain extent the economic trend in the fourth quarter. In August, the increase in capital investment by the state and other types of economies (excluding investment by urban and rural collectively-owned economy and individuals) stood at zero, with investment in infrastructure down by 4.1 percent and investment in renovation and transformation down by 5.9 percent. Despite the rapid rise in money supplies, the amount of new loans was still lower than the level of the same month of the previous year. The increase in the lending by financial institutions in August was 37.9 billion yuan less than the level of the same month in the previous year, with increase in short-term loans down by 27.4 billion yuan and medium- and long-term loans by 25.8 billion.

Economic growth in the fourth quarter is expected to register a little slide in view of the current economic performance and the quite high growth in the final quarter of last year. But it is still hopeful to achieve a yearly growth rate of a little higher than seven percent this year.

There are many favorable conditions for the economic growth next year. After years of exploration, China has accumulated experience in mastering the intensity and opportunity of macroeconomic policy measures and dealing with changes of international economic environment. The clear direction of the SOE reform and development pinpointed by and the practical steps toward this direction worked out by the Fourth Plenary Session of the Fifteenth CPC Central Committee has instilled new vigor in the development of the state-owned economy. The construction of laws and systems adaptive to the requirement of the market economy has stridden forward and the implementation of the “Solely Owned Enterprise Law” and the “Securities Law” has ensured the sound and steady development of the private economy and the stock market. In the international economic environment, most of the countries and areas hit by the financial crisis have been recovering at a speed faster than expected and market confidence there is restoring. While oil prices are rebounding, the sliding in the prices of some primary products has stopped. The U.S. economy is maintaining its growth momentum, the Japanese economy is coming out of its bottom and the growth in Western Europe is gathering speed. The recent forecast about the 1999 world economic growth made by the International Monetary Fund put the rate at 3 percent, to climb to 3.5 percent in 2000.

But the contradiction and difficulties for the current economic operation are still quite prominent. First, it is hard to fundamentally improve the demand to support economic growth in a short period. The expansion of consumption demand is restrained by many unfavorable factors. The poor resident income/spending expectation has not been turned for the better and the system and policy obstacles to new consumption areas have not been removed. Without a rise in farmer’s income, it will be difficult to open up the rural market. Under the situation that bad assets still account for a high ratio in the financial institutions, their ability to fend off risks still remains low and the fund-raising channels for the non state-owned economy, small and medium-sized enterprises and venture business in particular, are still not unblocked, the expansion of investment and the lending will have to rely on the intensity of financial borrowing. Second, there still exists a quite big uncertainty in the rise of external demand. The possibility of a fallback in the U.S. economic growth is on the rise, so is the worry of the international community over the prospect of the U.S. economic growth. The U.S. dollar is becoming weaker in trading with other currencies and its interest rates are adjusted downside while the current account deficit is widening, all giving rise to the difficulty in predicting the U.S. economic growth prospect. In Japan, the base for an economic recovery still looks fragile. The Japanese Yen is rising steeply in trading with the American dollar, financial risk is still there and confidence in investing and consumption has not yet restored. The growth momentum in Western Europe looks good. But a slowdown in the U.S. economic growth will inevitably drag down the growth in Western European countries and even hinder the economic recovery in Japan and other Asian countries. All these would put a check on the growth momentum in China’s foreign economic sector.

Given that the current macroeconomic policies and their intensity are maintained, the expansionist financial policy continues to be implemented, there are no major ups and downs in the gradual recovery of the international economy, and no major natural disaster occurs in China next year, China’s economy for the coming year will maintain its continued stable development.

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