Xie Fuzhan, Liu Shijin, Lu Zhongyuan, Zhang Liqun & Li Jianwei

By Jin Sanlin

Research Report No 009, 2006

In 2006, the national economy has maintained a trend of stable growth. The factors that likely lead the economy to develop downwards and the factors that support an accelerating economic growth are intermingled. There exist many uncertainties in the future trends of economic performance, and they deserve our close attention.

I. The Economic Performance Still Maintains a Trend of Fast Growth, Tending to Slow Down

From January to February this year, the industrial added value grew 16.2% compared to the same period of the previous year, and the growth rate dropped 0.7 percentage points compared to the same period of last year, or 0.2 percentage points compared to the annual figure for last year. Inventory of enterprises is an important indicator of changes in short-term economic performance. Beginning from 2005, the growth rate of the unrecovered balance of capital by finished industrial products has been on the decline, and this trend continued in the period from January to February this year, indicating that the economic performance was in the fast growing but dropping process. According to the industrial performance monitoring analysis by the Research Department of Industrial Economy of DRC, the performance of upstream industries and the middle investment products continued to drop in the period from January to February, and the growth rate of heavy and chemical industries was in the fast growing but dropping process.

In terms of future trends, factors that lead to the slowing-down of economic performance mainly include:

First, the problem of surplus capacity in some industries still exists, and in particular, surplus capacity in such industries as iron and steel, cement, glass and nonferrous metals is an outstanding problem.

Second, the driving force of external demands may weaken. In the January-February period this year, export grew 25.5% compared to the same period of the previous year, and the growth rate dropped 10.7 percentage points; import grew 27.4% compared to the same period of the previous year, and the growth rate increased by 19.1 percentage points. Factors that affect China’s export growth this year include: the world economic growth may slow down, and the growth rate of import of China’s major trading partners tend to drop; trade frictions may worsen; the Renminbi exchange rate may rise by a small margin; and China’s measures to control the export of resource products. It is estimated that China’s growth rate of export will drop slightly, and the weakened driving force of external demands for economic development will become obvious.

Third, the supply-demand relationship tends to change to the situation where the supply outpaces the demand, and rising prices will continue to drop. In the January-February period, the PPI (producer price index) rose 3% compared to the same period of the previous year, the purchasing price of raw materials, fuel and power rose 6.6% compared to the same period of the previous year, and the rise rates were down 2.4 percentage points and 3.2 percentage points respectively compared to the same period last year; or 1.9 percentage points and 1.7 percentage points lower than the yearly figures of last year. The CPI (consumer price index) rose 1.4% compared to the same period of the previous year, the rise rate was 1.5 percentage points lower than that of the same period of last year, or 0.4 percentage points lower than the yearly figure of last year. The trends of the supply-demand relationship and price fluctuation will produce a certain shrinking effect to the enterprises’ anticipations and the future economic performance.

II. Some Factors that Lead to Fast Economic Growth Are Still on the Increase

First, consumption demands continue to rise, and the upgrading of consumption structure is accelerating. The rise of consumer consumption is the decisive factor in driving this round of fast economic growth. In recent years, along with the fast economic development, the income levels of urban and rural residents also rose fast, and their consumption activities were brisk and active. In the January-February period this year, the total amount of social retail products increased 12.5% compared to the same period of the previous year, and after deducting the price factor, the actual growth was 12.05%, continuing the trend of an actual growth of 12% registered in the previous year, and the consumption structure is actively upgraded. In the January-February period, in the sale amount of wholesale and retail industry above the designated quota, the growth rate of construction and decoration materials was 18.4%, autos grew 29.5% and telecom equipments grew 24.8%.

Driven by the demand of residents for houses, autos and electronic information products, the base for a sustainable growth of auto, real estate, electronic information industries is solid and favorable, of which, the development of the auto industry, after eliminating its inventory and adjusting the product mix, began to pick up from the second half of last year. In the January-February period this year, the auto output grew 40.6% compared to the same period of the previous year, 28.5 percentage points higher than the yearly growth rate of last year, and was the highest growth rate since 2002. For the real estate market, with macro control and adjustment measures last year, irrational demands caused by speculative activities are being brought under control, and the transaction volume dropped slightly. However, the price of commodity houses continued to rise, indicating that the housing demands are still brisk and growing. The electronic information industry has been maintaining a trend of fast growth. In the January-February period this year, the growth of computers was 24.2% compared to the same period of the previous year, and the integrated circuits grew 53.6% compared to the same period of the previous year. The leading industries all developed a trend of fast growth.

Second, the probability of investment rebound grows. In the January-February period this year, urban fixed asset investment grew 26.6% compared to the same period of the previous year, although the growth rate dropped slightly compared with that of the previous year, it still maintained a high growth rate. What is noteworthy is that, driven by consumption, the development of end industries accelerated, there was a strong demand for urban construction and the investment demand was huge. This year is the first year of the 11th Five-Year Plan, local governments are all highly enthusiastic about speeding up the development related to their respective plans, the demands in all sectors could be translated into a huge demand for investment, and therefore, investment activities led by government may become very active. At the same time, along with the change of enterprises’ internal mechanism and the fierce market competition, investment by enterprises in technological upgrading and renovation increased rapidly. From January to February this year, investment in the manufacturing industry grew 35.4% compared to the same period of the previous year, higher than the overall growth rate of investment, of which, investment in general equipment manufacturing grew 68.7% compared to the same period of the previous year, and investment in the manufacturing industry of transport equipment grew 53.1% compared to the same period of the previous year. In terms of both government and market, investment became increasingly active. From January to February, the total engineering and construction projects of urban fixed asset investment amounted to 48,589, an increase of 9,913 over the same period of last year; total planned investment for these projects was 9.7652 trillion yuan, an increase of 39.8% compared to the same period of the previous year; the number of newly started projects was 11,723, an increase of 4,140 over the same period of last year; and the total planned investment for these new projects amounted to 634.8 billion yuan, an increase of 33.4% compared to the same period of the previous year. At present, although the growth of loans was not high, money supply was relatively sufficient, and the level of interest rate is still fairly low. All these create favorable conditions for investment growth. Since 2005, of the growth rate of bank loans, short-term loans have registered the biggest drop, but middle and long-term loans have all registered a fast growth, indicating that financial institutions are very active in participating in the investment activities. Under the above backdrop, the growth rate of fixed asset investment tends to accelerate.

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