——An analysis of economic situation in the first half of 2012 and prospects for the whole year

DRC Task Force on Analysis of Economic Performance

In the first half of 2012, the economic performance in China continued its downward trend, characterized by marked fluctuations, declined benefits, increased risks and unstable expectations, posing a complex situation for macroeconomic regulation. Such a situation is closely related with the lingering European debt crisis and volatile global economy and more importantly, it reflects the overlay effects of the short-term destocking and deleveraging, and the transitional period of medium- and long-term development of domestic enterprises. The CPC Central Committee and the State Council have thus adopted timely pre-tuning and fine-tuning measures and effectively stabilized the economic growth. Despite the initial signs of stability in current economic operations, the economy may be volatile due to the impotent support for recovery. Accordingly, forthcoming macro-control should stick to the general principle of "making progress while maintaining stability" to prevent higher risks of economic bubble arising from over-stimulation and avoid unpredictable systemic risks triggered by short-term sharp slump. In the meantime, great attention should be given to the linkage between short-term and medium- and long-term policies while efforts in system reform and institutional innovation should be multiplied to unleash growth potential, promote smooth transition in the course of economic growth, and enhance the sustainability of social and economic development.

I. New Situations and Features in China's Economic Performance in the First Half of 2012

Since the beginning of the year, domestic and external demand growth has slowed down, with decreased production vitality and incomplete capacity utilization, and economic operation continued its downward trend, manifesting some new situations and features.

1．Short-term drastic fluctuations in export

From January to May 2012, China's export witnessed drastic fluctuations. Posting a negative growth in January, the growth rate surged to 18.4% in February and dropped to 4.9% in April before it rose to 15.3% in May. Apart from seasonal factors such as the Spring Festival, the Labor Day and the Dragon Boat Festival, such wide fluctuations, which have been very rare in recent years, can be attributed to the following reasons: the volatility of the European economy, set-backs in international economic recovery, instability of market expectations and the tendency of short-term orders in China's export that had partly brought about the ups and downs in export growth. At the same time, the export of photovoltaic, chemical fertilizer and new electronic products fluctuated widely due to special factors including the U.S. antidumping and countervailing measures. In addition, as China's economic performance has become an important indicator for the outside world to take stock of the global economy and bulk commodity prices, the contraction of domestic demand and the slowdown in import growth have also indirectly pulled down the demand of the international market for Chinese products.

2. Co-existence of destocking and deleveraging in enterprises

Since this January, the deceleration in the growth rate of China's industrial value-added output, major industrial production and power output has on the whole exceeded the decline in investment, consumption and export growth. The deviation between supply-side and demand-side is mainly because the enterprises, which held pessimistic expectations of future economic growth, had accordingly decreased the inventories of raw materials and finished goods and lowered capacity utilization. After the reserve ratio and the deposit and lending interest rates were lowered, monetary conditions improved and market interest rates continued to decline, but the effective demand for credit was still insufficient. In newly granted loans, medium- and long-term loans accounted for a significantly lower proportion than the historical average and the asset-liability ratio of enterprises also decreased, indicating that the enterprises lack motivation to make investment, leading to deleveraging and destocking in coexistence.

3. Prominent excess capacity and decline in economic benefits

In traditional industries, the problem of overcapacity has extended from steel, electrolytic aluminium, cement and automobile sectors to the coke, calcium carbide, iron alloy, copper smelting, textile and chemical fibre industries. In emerging industries, due to a variety of stimulus policies to boost investment in many areas, production capacity expanded rapidly and the industries of carbon fibre, wind power, polycrystalline silicon, lithium batteries and photovoltaic started to face overcapacity. Low-level homogenized competition and price war led to a substantial decline in corporate profits while the business model was characterized by overstress on growth rate and underemphasise on efficiency. From January to May 2012, the profit growth of industrial enterprises decelerated by 2.4% over the same period of the previous year and that of state-owned enterprises fell by 10.4%; the total loss of up-scale enterprises surged 78.2%, and the proportion of enterprises suffering from losses increased 23.1% year on year.

4. Remarkable differentiation in regional economic performance

In the first five months of 2012, up-scale industrial value-added output in the east, northeast, central and western regions increased by 9.6%, 10.5%, 15.2% and 15.5% respectively. The eastern region saw the slowest growth, with its role in boosting the overall economy significantly weakened; the growth rate of the central region continued to decline, lagging behind that of the west. According to the views made at the recent forum on economic situations among directors of provincial and municipal research centers, the economic situations and development trends vary significantly in different regions. Specifically, owing to the decelerating export growth, industrial production fell drastically in areas clustered with export-oriented industries; economic growth and efficiency both dropped significantly in provinces where resource-based industries and heavy & chemical industries take up a high proportion; economic vitality picked up in areas concentrated with relocated enterprises; and regions where industrial transformation and upgrading made rapid progress enjoy optimistic prospect despite their difficulties.

5. Changes in real estate market and potential rebound in housing prices in some cities

Nationally, the growth rate of new housing construction has been higher than that of property sales for 25 consecutive months, and investment growth in real estate has been faster than the funding growth of real estate developers for 20 consecutive months. Thus, the national real estate market is expected to continue the downward trend. But recently, new situations have arisen. Many cities, against the general downward trend, saw their housing prices and land prices rise in June. This is mainly because the drop in the loan interest rate coupled with the reduction in the real estate purchase cost has to some extent changed people's expectation of housing prices. The property sales in Beijing and some other most sought-after cities rebounded significantly, which gave rise to the increasingly prominent problem of insufficient housing for sale and follow-up supply decrease in real estate. As thus, the potential problem of housing price rebound cannot be ignored.

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