Zhang Liqun, Department of Macroeconomic Research of DRC

Research Report No.017, 2005

The Chinese economy began a new round of rapid growth in 2002, thanks to the profound changes in both the mode of development and the mode of system. In the area of development, the structural upgrading of personal consumption to housing and transportation has brought a new round of structural adjustment of social production and sped up the process of both industrialization and urbanization. In the area of system, the changes in ownership structure and in property relations have enabled the market to rapidly expand in both the depth and width of resource allocation. The drastic changes in economic structure and the changes in the mode of resource allocation have formed a tremendous momentum for development. At the same time, they have also caused diverse contradictions and conflicts and produced lots of factors detrimental to stability. How to continue this new round of economic growth against this backdrop has become a key issue for China’s economic development.

I. The Basic Features of the Economic Performance in 2004

1. The national economy continued to have a steady and fast growth

China’s gross domestic product was estimated to grow by about 9.3 percent in 2004, more or less at the same level of the previous year. From 2002 to 2004, the GDP growth rate was respectively 8.3 percent, 9.3 percent and 9.3 percent. It was a curve that climbed first and then remained steady. In 2004, there was once a trend of economicheating, which was brought under control after appropriate measures were adopted. The GDP growth rate was respectively 9.8 percent, 9.6 percent, 9.2 percent and 8.6 percent (estimated) for the four quarters, demonstrating a declining trend.

2. Investment dipped to a steady growth

Investment increased sharply in early 2004. The growth rate of the total social investment in fixed assets rose as high as 43 percent in the first quarter, close to the level of the economic overheating in 1993. Macro-regulation visibly muffled the growth rate of investment. The growth rate was respectively 28.3 percent and 27.7 percent for the first half of the year and for the first three quarters of the year. The growth rate was estimated to be about 25 percent for the whole year, which would be slightly lower than the level of the previous year. In particular, some overheated industries saw their investment growth rate fall markedly. In the first three quarters, investment in the sectors of iron and steel, cement and real estate development was respectively 65.5, 43.4 and 12.8 percentage points lower than in the first quarter. Investment in the primary industry headed by agriculture gained momentum, with the investment in agriculture, forestry, animal husbandry and fishery in the first three quarters being 21.4 percent higher year-on-year and 21.0 percentage points higher than in the first quarter. While investment growth slowed down in the secondary industry, that in the tertiary industry remained stable. In particular, investment in the sectors of power, coal, and railway and highway construction went up by a big margin.

3. While consumption growth went up, housing and automobile consumption bounced down

By early December 2004, total retail turnover of consumer goods exceeded 5 trillion yuan. In the first 11 months, it went up 13.2 percent year-on-year. If price factor was deducted, the growth rate was 9.9 percent, or 0.7 percentage points higher. The growth rate of commercial housing sales was 44.4 percent for the first quarter, 40.9 percent for the second quarter, and 34.8 percent for the third quarter. The growth rate of automobile sales by the above-quota wholesale and retail enterprises was 56.5 percent for the first quarter, 43.7 percent for the second quarter, and 9 percent and 9.8 percent respectively for July and August. The growth rate dived by several dozen percentage points.

4. Foreign trade reached a record high

China’s foreign trade in 2004 totaled 1,154.74 billion US dollars, which was 35.7 percent or 303.7 billion dollars higher than in the previous year. The trade volume was 2.3 times that in 2001 before the country joined the World Trade Organization. Right now, China is the world’s third largest trade power. Specifically, China’s export in 2004 was 593.36 billion US dollars, up 35.4 percent year-on-year, while its import stood at 561.38 billion US dollars, up 36 percent. Trade surplus for the year was 31.98 billion US dollars, the largest since 1999.

5. Price increases gradually stabilized

The month-on-month growth rate of the personal consumer price index rose from 3.2 percent in January to 5.3 percent in August, and then fell to 1.9 percent in November. In the first 11 months, CPI rose 4 percent over a year before and 3.9 percent for the whole year. The growth rate of the ex-factory price index of industrial products rose from 3.7 percent in the first quarter to 8.4 percent in October and then dropped to 8.1 percent in November. The price rise of steel products slowed down in the year. In November, the ex-factory prices of the products of the ferrous metal smelting and rolling processing industries were 15.8 percent higher than in the same month of the previous year, or 1.7 percentage points lower than in October.

6. Money supply increased at a slower pace

In the first quarter of 2004, M2 balance was 19.1 percent higher than a year before. The financial institutions increased their real lending by 835.1 billion yuan, or 24.7 billion yuan more over a year before. This is an indication that the growth of money supply gained momentum. But after macro-regulatory measures were taken, the growth of money supply slowed down visibly. At the end of the third quarter, M2 balance was 13.9 percent higher than a year before, while the lending in Renminbi by all financial institutions increased by 1.8 trillion yuan, which was 669.7 billion yuan lower than the lending increase in the same period of 2003.

II. Economic Performance and Macro-Regulation Face New Contradictions and New Tests

1. Economic performance faces new contradictions

(1) The drastic changes in the economic structure have affected the stability of the economic performance

The contradictions of the aggregates of this round of growth were not so conspicuous. In terms of end products, the supply capacities of both the traditional consumer goods such as textiles and household appliances and the emerging consumer goods such as electronics, communications equipment and automobiles (housing is classified as personal investment) were fairly abundant. There was no under-supply. In terms of intermediate products (raw materials and machinery equipment) and basic products (energy and transport), demand exceeded supply by a fairly big margin. But the growth of end products was not affected and there was no overall under-supply. Therefore, unlike in the past, supply shortages were not wide-ranging, and occurred only in some sectors. On the one hand, this triggered a fast growth in the sectors of iron and steel, nonferrous metals, cement, petrochemicals, coal and power. On the other, this has also allowed the extensive mode of growth and the system shortcomings typical of a scarcity economy to come up again. The rapid rise in the prices of intermediate and basic products has also increased the production cost of end products and made it more difficult for these sectors to develop.

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