Xie Fuzhan, Liu Shijin, Lu Zhongyuan,Li Jianwei, Wang Zhao & Xuan Xiaowei

After a period of accelerated growth from 2002 to 2004, the Chinese economy entered a period of stable growth in 2005. The GDP growth rate "was stabilized at a high level and showed a decline from the high level," employment increased, the investment growth rate declined from a high level and then stabilized, consumer demand continued to grow steadily, the price level dropped steadily, fiscal and financial operations were stable, and the overall economy developed towards the anticipated macro-control goals. At the same time, new problems arose in domestic economic operations, such as a big increase in the number of loss-making enterprises, the emergence of surplus production capacity in some industries, difficulty in increasing farmers’ incomes and trade surplus. The instable and uncertain factors in the external economic environment also increased, mainly aggravated trade friction, oil prices that stagnated at the high level and the potential for economic slowdowns in the United States, the European Union and Japan.

A general analysis indicates: The Chinese economy will maintain a stable and fast growth trend this year and next year, and this growth rate is estimated to be about 9%. Next year will see a continued moderate fiscal and monetary policy, deepened reform in key sectors, and efforts to promote the transformation of the mode of economic growth, so as to build a solid foundation for the 11thFive-Year Plan and prolong this period of stable economic growth.

I. Basic Assessment of China’s Economic Trend: the Economy Will Maintain a High and Stable Growth Rate and Show Signs of Slight Decline, There Is Slim Probability of any Big Decline or Remarkable Rebound, But More Attention Should Be Paid to the Margin of Decline

Judging from the developments of major economic indicators as GDP, investment, consumption demand and price, China’s economic operation has begun to slow down from its growth peak in the fourth quarter of 2003, and has entered a stage of stable growth. This is mainly reflected in the following: first, the GDP growth rate has stabilized between 9.2% and 9.6% for five consecutive quarters; growth rates in the secondary and tertiary industries dropped and stabilized at about 11% and 8% respectively in the first half of this year. The growth in industry profit rates dropped from 45.7% last year to 20.5% in the first seven months of this year, a decline reflecting a reasonable adjustment, and a slight rise has been noted since the beginning of this year. Second, the growth rate of fixed asset investment, after dropping significantly from the growth peak of 47.8% in the first quarter of 2004, basically stabilized at about 27% in the first eight months this year. Adjustment in the investment structure continued, with investments in the real estate, iron and steel, building materials, petrochemical and electric power industries declining remarkably, and with investments in sectors as machine building, farm and sideline produce processing and mining industries and urban public utilities increasing fast. Third, consumer demand continued to grow steadily, and its growth rate, after deducting price factors, was basically stable at about 11% in the first eight months of this year, slightly higher than the 10% growth rate on average since 1996. Fourth, prices dropped steadily. The consumer price index dropped from its periodic peak of 5.3% in July 2004 to 1.3% in August this year, the price index for factors of production in the January-August period was basically stable between 7% to 8%.

The steady growth trend in the Chinese economy indicates that macro-control measures are timely and effective, and macro-control goals can basically be achieved. Next year or in the coming several years, there is still a relatively big potential for China to maintain fast and stable economic growth. In addition to important forces as a strong momentum for upgrading the consumption structure, the accelerating development of heavy industry and the quickening urbanization process that help speed up the economic growth, there are also some new factors:

First, private investment has become more active. In the period from January to August of this year, the growth rate of investment by state-owned enterprises and enterprises with state holdings was a mere 11.7%, and the rate for the same period last year was 57.8%. Based on this, it is estimated that the growth rate of investment by non-state enterprises was as high as 48.9% in the January-August period, and the rate for the same period last year was 36.9%. Under the circumstances of a sharp decline in investment by state-owned enterprises and a slight drop of foreign direct investment (a drop of 3.4% in the January-July period compared with the same period of last year), the large increase in non-state investment helped maintain stability in the overall investment growth rate.

Second, regional economic development is becoming rigorous and some new trends are taking shape. This year, the economic growth of the central and western regions was generally faster than that of the coastal region; and in the coastal region, the economic growth of the northern coastal area was generally faster than that of the central and southern coastal areas. From January to August this year, the industrial growth rate of Inner Mongolia, Jiangxi, Shanxi, Anhui, Henan, Hunan, Guangxi, Sichuan and Qinghai in the central region was all above 20%. The growth rates of industries and investment in the northern coastal areas as Shandong, Hebei and Tianjin were all much higher than those of Guangdong and Zhejiang in the southern coastal areas. This year, the amount of industrial added value of Shandong Province exceeded, for the first time, that of Guangdong to rank the first in the country.

Third, the comparative advantages of China’s export products became more obvious. Although there are new restrictions on textile quotas and an increasing number of trade disputes, the trend of a fast growth in exports could hardly reverse in a short period of time.

In the coming few years, Chinese economic development will also have to face numerous shrinking and unfavorable factors, mainly including:

--Periodic shrinking factors in the Chinese economy appear continually. According to statistical analysis, Chinese economic fluctuations include short cycles of fluctuations caused by changes in enterprise inventory, medium-term cycles of fluctuations caused by changes in fixed investment, and long-term cycles of fluctuations caused by changes in industrial structure. Judging from the medium-term cycle of economic fluctuation (usually 6-8 years, with a growth period lasting 2-3 years, and a decline period lasting 5-6 years), the year 2004 should be the peak of the latest round of economic growth cycle, and the year 2005 should enter the periodic shrinking stage. Considering the role of the 2008 Olympic Games in driving economic growth, the decline period of this round of cycle could be delayed, and the GDP growth rate from 2005 to 2007 is estimated to be higher than 8.5%. Judging from the medium and long-term cycle of economic fluctuation (about 11-12 years), the year 2006 will be the peak for the new round of cycle, and then growth will gradually slow down and will reach its lowest level in the year 2012. The potential growth rate for the medium- and long-term cycle is estimated to be 8.3%, and the GDP growth rate from 2005 to 2009 could maintain an annual average of over 8%.

--The prospects for industrial growth will be stable and show a slight decline, and the scope of industries with declining prospects will expand. Since the first half of this year, the growth rate of industries such as iron and steel, building materials, petrochemical and machine building has witnessed a relatively obvious decline. At the same time, profits of industries as building materials, electric power, auto and electronics dropped significantly, and profits were mainly concentrated in a few upstream industries. The difference in growth rate and economic efficiency in different industries in the sector will likely lead to a slowdown in industrial growth next year.

--The growth rate of world economy might decline and import demands will decrease. Under the influence of such factors as sharp rises in oil prices, major international institutions all lowered their estimated growth rate for the world economy this year. There is a high probability that economic growth in the United States, European Union and Japan, all major trade partners of China, will slow down. In the first half of 2005, their import growth rate dropped from 18.4% in 2004 to 14.5%, and their annual growth rate is estimated to be a mere 10.9%, and the rate could further drop to 4.4% in 2006. This will mean a negative impact on Chinese exports and economic growth next year.

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