Liu Shijin and Zhang Liqun

I. Basic Assessment of Economic Development Trend of This Year

China’s economic growth at the current stage is mainly restrained by demand. An analysis of various factors indicates that this year the domestic demand will maintain a steady growth while the international economic development trend will continue to face uncertainties. But overall, the unfavorable impact of these uncertainties on the Chinese economy is expected to be smaller than last year and the national economy has every reason to maintain the momentum of a steady growth.

First, consumption will maintain a relatively high steady growth. In the first quarter of this year, the growth of the total volume of consumer goods retail declined slightly, mainly due to the effect of declining prices and the fact that the purchasing with token money in the same period of last year had augmented the base figure of consumption. At comparable prices, the total volume of retail consumer goods rose by 10.2 percent, close to the average consumption growth rate in recent years. Spurred by income, price, supply and other factors, it is unlikely that consumption growth will decline drastically in the rest of this year. The growth rate will be more or less at the same level of last year.

Second, investment will continue to grow at a rate slightly higher than last year. The fast growth of investment in the first quarter of this year was mainly attributed to the intensified government investment. More importantly, the growth of foreign investment was fast and the investment activities induced by the domestic market were brisk. Investments of this nature are sustainable. If policy adjustments are proper, these investments will continue to grow. As the intensified government investment is of phasic nature, investment growth is expected to be somewhat slower in the rest of this year but will remain higher than last year.

Third, export growth is expected to be slightly higher than last year and imports will rise at a relatively fast pace. As a result, trade surplus will decline to a certain extent. With the gradual recovery of the world economy, export environment will improve. As export growth last year was relatively low, export growth this year is expected to be slightly higher. At the same time, we should see that as the improvement in China’s export conditions is not tangible and its import will grow faster after WTO accession, the country’s trade surplus is likely to decrease.

Our overall assessment is that domestic demand will continue to grow fairly fast, foreign demand in terms of net export will decline, and this year’s economic growth will be equal to or slightly higher than that of last year, reaching 7.5 percent with hard efforts.

II. New Features of Economic Operation and Policy Adjustment Requirements

In the past two years, some positive changes of mid- and long-term significance emerged in the operation of the Chinese economy. First, housing, automobile, telecommunications, infrastructure and other sectors that could directly upgrade consumption structure and industrial structure and effectively push forward the national economy began to develop fast or maintained a rapid growth. Second, foreign transnational companies accelerated the transferring of production and manufacturing capacities to China after its accession to WTO. This has boosted the growth of foreign investment. Third, progress has been made in reforming the state-owned enterprises, in bringing them out of difficulties, and in restructuring, reorganizing, transforming and strengthening the management of enterprises. As a result, some enterprises that have made greater progress have entered a virtuous circle of development. The development of private economy and the restructuring of rural enterprises in southeast coastal provinces have made important breakthroughs and increased the vitality of the economy. Fourth, the reform and reorganization of monopoly industries have made significant advance. The plans for reforming and reorganizing the electricity, telecommunications, civil aviation and other industries are already in place. The reform and opening of the financial sector are advancing fast. Fifth, initial progress has been made in the adjustment and reform of government system, especially in overhauling the administrative examination and approval system, as part of fulfilling the commitments made on WTO accession. As a result, government relations with enterprises, markets and the society have demonstrated positive changes.

On the other hand, some issues and phenomena that have emerged this year deserve attention and study. The first is the contrast between economic growth and fiscal revenue and expenditure; the second is the contrast between economic growth and economic efficiency index; and the third is that while the economy has maintained a fairly fast growth, some social contradictions have become acute.

The recent positive changes in the economic life can be attributed to the positive fiscal policies implemented by the government in recent years and the policies of reform and adjustment that were designed to spur social consumption and investment and expand domestic demand. We should say that the positive macro-fiscal policies and the micro-policies to stimulate social consumption growth are mutually complementary. Without the economic growth rate supported by positive fiscal policies, there could be no liberal environment for the growth of social consumption and investment and some contradictions could become acute. Likewise, without inherent driving force for economic growth, the fairly fast economic growth rate could not sustain because positive fiscal policies could not last long. The positive changes in the economic life indicate that the market-based inherent driving force for economic growth is increasingly stronger.One direct evidence is that in recent years, the total volume of the Chinese economy has been constantly expanding while the scale of national bonds issued by the government to support the proactive fiscal policies has been more or less fixed. The economic growth rate of more than 7 percent over the years is a proof that the inherent growth driving force has played an increasingly greater role. The new problems emerging in the economic life testified to the necessity from another angle that some policy adjustments are needed. The tightening of fiscal conditions is, to some extent, due to the excessive dependence of the on-going economic growth, especially the growth of investment and export, on fiscal expenditure. The declining efficiency of the state-owned enterprises has been directly related to the changes in the external environment (for example, the declining international oil prices) and weakening or abolition of the supportive policies. And some social instabilities can be attributed to the incompleteness of the social security system and the changes in the income distribution pattern.

The policy orientation for the next step should cherish, protect and strengthen the market-based inherent driving force for economic growth so that it could play a leading role in future economic growth. At present, efforts should be made in the following two aspects. One is to further adjust policies in the new areas of consumption that can spur the upgrading of consumption structure, such as lower taxes and fees, less administrative procedures and more conveniences. In addition, housing monetization, which has not been truly implemented, and the marketization of used houses should be expedited, while the policy on automobile consumption should be introduced as soon as possible. The other is to further liberalize industrial access by taking advantage of WTO accession. The government should focus on improving the management of fiscal funds and providing public services. Except in a few special sectors, those who invest should be in charge. Administrative restrictions should be minimized so as to enhance the investment enthusiasm of all investors, especially the subjects of the private economy.

On the other hand, the proactive fiscal policies aimed at maintaining economic growth rate should be replaced by the fiscal policies that give equal emphasis to supporting reform and adjustment and to expanding the effect of domestic demand. Specifically, after the on-going projects supported by national bonds are basically completed, the emphasis of the fiscal policies should shift to increasing the support for poor people and backward regions and easing the contradictions associated with the changes in the pattern of social interests. At the same time, it is imperative to increase the support for the construction of the social security system, to ease the historical burdens of the state-owned enterprises that are in transition, and to promote the comprehensive and substantial advance in the adjustment of the distribution of the state-owned economy and the reform of the state-owned enterprises. In addition, it is necessary to increase the input of the guiding funds in infrastructure construction and related areas and to expedite the exploration for new mechanisms to attract, with limited fiscal funds, as much social funds as possible to invest in the public sectors welfare.

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