Xie Fuzhan and Yu Bin

Since the beginning of this year, the national economy has maintained a momentum of steady growth. Some positive changes have occurred to the economic operation, laying a foundation for the growth of the whole year. At present, the national economy has the ability to keep a sustained and steady growth.

1. The residents’ expectations tend to be stable and the consumer demand is growing steadily. In the middle and latter part of the 1990s, the state took measures to divert laid-off workers in the state-owned enterprises, reform the government institutions, push forward the housing commercialization and reform medical care, pension and education systems. Necessary as they are, these reforms have had negative impact on the residents’ expectations and short-term consumer demand. After active adjustment in recent years, the comprehensive effect of reform has gradually become obvious – residents’ expectations have gradually become stabilized and consumer demand has grown fairly high. From January to May, the total volume of retail sales saw a year-on-year increase of 10.1%. During the "golden week" in May, the number of tourists surpassed 70 million person/times. The related industries also witnessed a fairly fast growth.

2. The prices grow slightly, and the pressure of market surplus has been alleviated. The total residents’ consumption level is up by 1.7% compared with that of May last year. From January to May, it is up by 1.1%. Although most of the products are in over supply, and the slight growth of prices is caused by the price rise in education, housing, public services, petroleum, petrochemicals and steel, the main price index is kept positive. This indicates that deflation is being eased and surplus pressure alleviated.

3. Fixed asset investment increases fairly fast, and housing, car and other pillar industries keep a strong growth momentum in investment and sales. From January to May, total fixed asset investment increased by 17.6% with an eight-percentage-point higher over the same period of last year. The investment in housing renovation and real estate grew by 26.7% and 26.5% respectively. The growth scope of investment and marketing in the housing, car and other pillar industries reached a rather high level. In the first quarter, the investment in housing completion grew by 28.6%, accounting for 68.1% of the real estate investment and representing a one-percentage-point higher over the last year. The commodity housing space sold and sales respectively grew by 3.14% and 48.9%, of which, the sales from individual purchases increased by 56.9%, accounting for 83.2%. In April, car production grew by 18.2% and sales by 38.3%. In large cities, such as Beijing, individuals bought more than 80% of the cars sales.

4. The quality and result of economic operation have been raised. From January to May, aggregative index of economic returns of industrial enterprises is 116.5, eight percentage points higher than that of the same period of last year and 2.3 points higher than that in the first four months. The amount of loss of enterprises in red declined by 10.4% against the same period last year. In the first four months, the state-owned and state-controlled enterprises realized an increase of 39.1% in profit after the deficit was deducted. The 12,700 state-owned and state-controlled large and medium-sized enterprises earned 66.09 billion yuan. Such enterprises in 31 provinces, autonomous regions and municipalities have generally reported profit.

As the positive changes occur to the economic operation, the economy will face quite a few difficulties in the latter half of the year due to the change of international economic environment and the negative impact of some in-depth conflicts in the domestic economic life. The economy will see a faster growth in the early months, and a slow-down in the latter half of the year.

Firstly, China’s export will be very much affected by a slow-down in world economic growth.

According to the forecast of the World Economic Prospect Report (Spring) issued by the International Monetary Fund in late April, the world economic growth will drop from 4.8% in 2000 to 3.2% this year. The world trade growth rate will drop from 12.4% of last year to 6.7%. Generally speaking, the global economy is continuing to slow down. The recovery of electronic products is not active. The price of petroleum is still above the long-term price. Most of the companies report a declining in profit. Trade protectionism has gained some ground, and the trade environment is getting worse than last year. Take a country-by-country look, we can see that there exist many disputes on the forecast of American economy, but the main divergence lies in the judgement over the length of the recession period and basic situation of economy. It is basically agreed that the US economic growth will fall by half and even more than previous year. Japanese economy has long suffered recession, and cannot go back to the track of normal growth in the near future. The export situation in Europe is further deteriorating. As a result of political turmoil in Indonesia, the economy in the ASEAN countries represents variable factors, whose negative impact over China’s exports and economic growth cannot be underestimated. In January-May, foreign trade growth was declining, of which, it grew by 3.5% in May. In terms of the orders gained by the export enterprises, the leading indicators of processing trade export and the situation in key export areas, the growth of exports in the latter half of the year may further drop.

The relative appreciation of renminbi exchange rate has also yielded negative impact on exports. China has kept a sustained favorable balance of current accounts, and the inflow of capital keeps at a certain scale. So renminbi is not under the pressure of depreciation. At the same time, imports grow faster than exports. The trend of a declining favorable balance shows that renminbi is not poised for appreciation. But as a result of the appreciation of US dollars against euro and Japanese yen, the US dollar-linked exchange mechanism of renminbi leads to its relative appreciation against other foreign currencies. This will, to a certain extent, weaken the international competitiveness of Chinese products, lower the prices of imported products, decrease the net exports and increase pressure on the domestic market.

If all the above-mentioned facts are considered, we can see that if the annual exports only increase by 5% and imports increase by 15%, the net demand from overseas will decrease by 150 billion yuan over the previous year. That may lower GDP growth by 1.7 percentage points. If the structural characteristics of China’s import and export products are considered, the pressure caused by the decrease of net exports will be very prominent. So China should try to avoid this situation.

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