-- Q1 economic analysis and yearly outlook for 2012

DRC Task Force on Analysis of Economic Performance

A slight slowdown in economic growth continued into the first quarter of 2012, the longest deceleration period in China since 1992. A result of interaction between multiple cyclical factors and of the decrease in both the international and domestic demands, the deceleration indicates to some extent the transition of the Chinese economy from fast to moderate growth. On the other hand, certain positive changes have taken place in the world economy, and the growth in the domestic demand tends to stabilize after a decline. The economic growth in 2012 will tend to stabilize in spite of a reduced growth rate in the first few months. To strike a balance between a steady growth, structural adjustment and price control, it is necessary to maintain a basically stable aggregate demand policy, and at the same time, launch among others a reform-oriented supply policy to promote adjustments in the economic structure; remove institutional barriers to redress the distorted resource allocation and improve efficiency in operation; push forward reform in basic industries, tap the unfulfilled potential in growth and build the capacity for more sustainable economic growth.

Ⅰ.Economic Growth Is Expected to Stabilize Following a Slowdown

During the first two months, a lower growth rate in investment, consumption and particularly evidently in export and destocking efforts of enterprises lead to a slight slowdown in economic growth, and along with it, the reduced pressure of price rise. In view of the trend of development, the world economy shows signs of recovery, and China shows considerable potential for growth in domestic demands. These and many other favorable factors are expected to work together to stabilize the economic growth after a decline in the first few months.

1. External environment to be improved and export growth to rebound

China's import and export growth slowed remarkably in January and February, down 14.4% and 28.9% respectively compared with the same period last year. The export to the United States, Europe and Japan grew by 12%, -1.1% and 14.9% respectively and the growth rate was 7.4%, 12.7%, 2% and 11.9% for export to Latin America, ASEAN, Africa and Oceania, all showing a remarkable slowdown. Against the backdrop of a tortuous road toward globalization and ever-deepened international division of labor, the national or regional economies interact with each other in a profound way and it is hardly possible for the major economies to be "disconnected" from each other. At the same time, with an increase in its size and contribution to the global economic growth, the Chinese economy is playing an important role in driving forward changes in the world economy and China's domestic demands are increasingly connected with the international demands. When China's import growth slows down, the exports, consumption and employment of other countries will be affected, and so will the export growth of China.

In recent two years, China's trade structure has kept improving. Its exports to developing countries account for more than 50% of its total, the scale of general trade is bigger than that of processing trade, private enterprises have increased their exports, the external and the internal imbalances are alleviated to some extent, and the trade surplus in GDP has decreased to less than 3%. Changes have been reported in the geographic distribution of exporters in the country. While the places with a high concentration of export-oriented industries saw a decline in exports, part of the western and central regions experienced a much faster growth. In the first two months of 2012, Chongqing, Henan, Anhui, Hunan and some other provinces all achieved a double-digit export growth. The record high trade deficit in February is not indicative of a reverse in the tendency. Rather, it is associated with the usual practice of foreign trade enterprises to import more than export after the Spring Festival and also with the international price trend.

Compared with the previous few months, the world economy is experiencing certain positive changes. The US economy shows signs of a modest recovery, with unemployment decreased, household debt ratio further reduced, consumer spending continuing to grow, real estate market beginning to stabilize and home sales and housing starts rebounding. The University of Michigan's Consumer Sentiment Index measured 76.2 in March, and the three-month average was the highest since 2008, indicating a boosted consumer confidence. Reponses to the European Debt Crisis made phased progress and the financial market began to stabilize. With the adoption of the new Assistance Program for Greece, the financial consolidation measures were well on track. The European Central Bank is improving the liquidity of the banking system by injecting liquidity through long-term refinancing operations (LTRO) and building firewalls and other long-term protection mechanisms. In Japan, though its economic recovery was impacted by power shortage and Yen appreciation, the catalytic role of post-disaster reconstruction became prominent, and now the Japanese economy has been recovered to the pre-earthquake level. With the pressure of inflation relieved on the emerging economies, various countries began to ease their macroeconomic control and the policy-related slowdown in the economic growth is expected to improve. At the same time, China should be aware that the path toward global economic recovery is still tortuous, uncertain and thus not too optimistic. Developed economies introduced contractionary fiscal policies due to their enormous debts and increased pressures on reducing financial deficits. While there lacks target areas of investment with clear growth potential, the effect of an easy money policy is limited. It is difficult to make concrete progress in structural adjustment, development of emerging industries, growth of the real economy and many other basic issues in the near term, and no evidence shows a turn for the better will come in the predictable future.

With all the changes in the domestic and international situation, the exports of China are expected to edge up to an annual growth rate of 15%, higher than the estimate of 10% made at the end of last year.

2. Domestic demand decreases for the short term and is expected to stabilize by midyear

A decrease in domestic demand is an important reason behind the slowdown in the economic growth. First, the largely steady investment growth slows down slightly. In January and February, investment in expansion and reconstruction projects grew at a faster pace, but the investment growth rate for new projects fell by 12.4 percentage points compared with the same period of last year. In terms of structure, due to a time lag in previously started construction projects, real estate investment maintained a significant growth, but the floor areas of homes for sale were a record high for this period of the year and the total area of housing starts decreased. Investment growth in commercial property may well slow down for the latter half of the year. Investment in manufacturing grew by 24.7%, somewhat lower than last year. Investment in capital construction project fell by 1.5%，a decline greater than estimated. The investment in these three sectors accounted for about 85% of the total investment in fixed assets and thus decided the general trend of investment.

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