Xie Fuzhan, Lu Zhongyuan, Zhang Liqun, Wang Zhao, Han Jun & Li Jianwei

In the first half of this year, the Chinese economy maintained a steady high growth, though slightly slower. Investment growth had been relatively stable, consumer demand had been thriving, imports and exports had been growing rapidly, the rising consumer prices hadbeen lowered, and employment had increased. In short, the economy has been moving forward in the regulated direction set by the Party Central Committee and the State Council at the beginning of this year. Currently, the main scenario and problems emerged in the economy are that import growth is not high, the trade surplus is fairly big, trade friction is increasing, credit growth is declining, financing channels are not smooth, the real estate market is facing more uncertainty, the economic efficiency of enterprises is sliding down, grain prices are falling, and peasants find it more difficult to raise their income. It is expected that economic growth is unlikely to bound upwards in the second half of the year. If regulation is proper, economic growth is also unlikely to fall drastically. But it is necessary to closely follow developments, control the key areas and intensity of regulation and prevent the economy sliding downwards.

I. The Economy Maintained a Steady, Though Slightly Slower, High Growth Performance

Currently, there remains considerable potential for investment growth. The structural contradiction arising from shortages in the supply of raw materials is easing, market prices are moving downwards, overheated industries are facing an increasingly strong constraints from market demand, and investment in the heavy industry is slowing down. In addition, growth in foreign investment is likely to be slower. All these factors will have a certain impact on investment growth, and both total investment and its growth rate are unlikely to rebound. Besides, investment growth is unlikely to fall drastically. The reasons are: first, the scale of the investment in real estate and municipal construction is still large and there remains enormous space for the growth of potential demand; second, the private and foreign-invested economic sectors are developing rapidly, the reform of state-owned enterprises is constantly deepening, enterprises have a strong desire to voluntarily upgrade and transform their facilities in order to meet market demand, and there remains a considerable potential for investment growth in equipment upgrading; third, the supply capacities of the energy, transportation and public sectors are still insufficient, the government has intensified investment support, access restrictions to social capital are easing, and investment demand will continue to grow fairly fast.

Under the influence of the above factors, social investment in fixed assets will continue to grow at a fast pace. Our forecast based on a quarterly quantitative economic model indicates that investment growth this year will be 26 percent. Even if all uncertain factors uncovered by the comprehensive model are included, we predict investment growth will be about 20 percent.

Consumption growth will continue at a fairly high level. Since last year, consumption has been growing steadily. The total real growth rate of retail consumer goods rose from 9.4 percent last June to 12.1 percent this May. This is mainly because personal income has been steadily increasing and in particular peasant income has increased considerably since last year. In addition, market prices have begun declining and market supply has been sufficient, and consumer expectations will continue to improve with economic development and advances in the reform of social security, medical care and education. As a result, long-term consumption and investment will be more reasonable and short-term consumer spending will increase slightly. The growth of personal spending will remain at a relatively high level. Model forecasts indicate that nominal consumption growth for the whole year will be 13 percent. If price factors are deducted, the real consumption growth rate will be about 12 percent.

Export will stabilize at a high level, while the trade surplus will be expanded by a big margin. According to the forecasts of international organizations, the economies of the United States, Japan and Europe will continue to recover steadily in 2005. Despite uncertain factors such as high oil prices, USD exchange rate fluctuations and increased trade friction, international market demand is likely to continue to grow steadily. Therefore, the external environment is still conducive to Chinese trade growth. If there are no major adjustments in domestic macro-regulatory policies and in particular in the exchange rate policy and if the expectation for RMB appreciation continues to exist, the overall trade situation in the first half of the year will continue into the second half. First, export growth will be high and stabilized. Since the abolition of the quota system for textile trade, China has been facing increasingly fiercer trade friction, which has clearly become a constraint to the country’s export growth. On the other hand, we should also note that the quota system did not have an extensive impact on the export of textile products. Ongoing trade negotiations with Europe and the United States are aimed at forming new quantitative restrictions on exports, which will help promote a rational quantitative distribution of exports at home and raise the export efficiency of products. Therefore, exports will continue to grow fairly fast. Model forecasts and integrated analysis both indicate that export growth this year will be about 22 percent. With regard to imports, the growth rate in the second half of the year is likely to increase slowly because the basic figure for last year was moving down from a high level. Annual import growth is expected to range between 15-20 percent. The situation in which import growth has been growing faster than export growth for two consecutive years will change. The trade surplus for the whole year is expected to be 40-60 billion U.S. dollars, a net growth of 8-28 billion dollars over the previous year. External demand will have a strong driving force on our economic growth.

An integrated analysis of the demands of investment, consumption and export indicates that this round of economic growth still has a fairly strong momentum. At the same time, the factors that led to a slowdown in economic growth rate have already appeared. First, the declining growth rate of imports and the increase of net export and trade surpluses are, to some extent, a reflection of weakening domestic demand. Second, the decline in the growth of RMB credit and the growth in fixed asset investment will have an impact on economic development trends in the second half of the year. Third, the boom in industrial economic growth began declining, and this decline is affecting more industrial sectors and is fairly noticeable in the iron and steel, building materials, chemicals, machinery and processing sectors. Fourth, the problem of overcapacity has become conspicuous in some industries. Industrial enterprises have seen their inventories increasing and growth in efficiency sliding downwards, and their investment desires are flattening. Based on our analysis of all factors, we expect that economic growth in 2005 will continue to be high, but the growth rate will be somewhat lower. Model-based forecasts indicate that GDP growth for the whole year will be 9.2 percent. If policy adjustments and other uncertain factors are considered, GDP growth for the whole year can reach about 9 percent. The focus of regulation may not be on this year’s growth rate, but on how to keep growth momentum into next year.

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