By Liu Shijin, Yu Bin & Wu Zhenyu

In the first half of 2014, under the joint impact of short-cycle adjustment and the medium and long-term growth transition at present stage, the economy was under increased downward pressure. Meanwhile, the restructuring and reforms had made preliminary achievements, with economic performance indicators such as corporate profits and fiscal revenues taking a turn for the better. It is expected that the second half of this year will see an improvement of the international economic environment, an intensive manifestation of the effects of domestic policies for smooth economic growth, and possible relief of the downward pressure on the economy. As a result, the annual economic growth is expected to be within a reasonable range as set by the goal. While ensuring the continuity and stability of macroeconomic policies, China will focus on stabilizing investment, press ahead with reforms in related fields, unleash the inherent growth potential of the economy, accelerate the mitigation of risks in industries with overcapacity, local government financing platforms and real estate market, and place greater emphasis on the quality of growth, so as to facilitate the economic transition moving smoothly toward to a new normal growth.

I. Quality of Economic Operation Has Improved, but Regional Disparities and Local Risks Have Become Tangible

Since the beginning of 2014, the expansion of domestic and international demands has slowed down, increasing the downward pressure on economy. In the first half of this year, the year-on-year growth rates of investment, consumption, and exports had decreased by 2.8, 0.6, and 9.5 percentage points, respectively, compared with the same period of the previous year. The manufacturing and real estate industries, which accounted respectively for 34% and 20% of the fixed-asset investment, had experienced a decrease of 2.3 and 6.2 percentage points in investment growth rate compared with the same period of the previous year, exceeding the average drop in investment. The added value of enterprises above designated size (industrial enterprises with an annual revenue of RMB20 million yuan or more from their main business operations) had increased by 8.8%, 0.5 percentage point lower than the same period of the previous year. Meanwhile, the quality and benefits of economic operation had improved, the industrial and regional disparities had enlarged, and some areas were exposed to more financial risks.

1. Both quality and benefits of economic operation had improved.

During the slowdown of economic growth, the quality and benefits of economic operation had improved, indicating that the market players were starting to make adjustment and were gradually adapting to the macro environment with transitional economic growth, and that the restructuring and reforms had made preliminary achievements.

First, the corporate profitability was better than expected. From January to May, the profits of industrial enterprises had increased by 9.8% year on year, 1.1 percentage points higher than the growth rate of the industrial added value; the growth rate of main business profits had increased prominently compared with the second half of the previous year, and it was basically synchronous with the growth rate of total profits, indicating that the enhancement of corporate profitability was mainly a result of the improvement in production status.

Second, fiscal revenue growth had recovered. In the first half of this year, the central fiscal revenue had increased by 6.2% year on year, 4.7 percentage points higher than the same period of the previous year. Since March of this year, the local fiscal revenue growth was rebounding each month to 10.9% in June, higher than the nominal GDP growth rate.

Third, the employment and income of urban and rural residents had maintained a stable growth. Under the influence of expanding economic scale and increasing ratio of service industry in economy, the number of jobs created in urban areas had maintained a stable growth. In the first four months, a total of 4.73 million new jobs were created, slightly higher than the same period of the previous year. In the first half of this year, the real growth of both urban per capita disposable income and rural per capita cash income was higher than the second half of the previous year. From January to May, the number of urban residents drawing the minimum living allowances had declined by 5% year on year.

Fourth, the service industry showed a trend of accelerated development. In June, the PMI of the service industry was 53.5, 2.5 percentage points higher than that of the manufacturing industry. In the first half of this year, the service industry had driven up GDP growth by 3.6 percentage points, exceeding the secondary industry by 0.1 percentage point; it was playing an increasingly important role in economic growth.

2. Industrial disparities became evident, affecting regional growth.

The industrial disparities had further widened. In the first half of this year, the added value of the manufacturing industry, mining industry, and electric power, gas and water production and supply industry had increased by 9.9%, 4.6%, and 4.4%, respectively. Compared to the whole of last year, the growth rate differences between the latter two industries and the manufacturing industry had respectively enlarged by 1.2 and 1.8 percentage points. The differences within the manufacturing industry were also expanding. The non-ferrous metals, pharmaceutical, and automobiles manufacturing sectors were showing a trend of high-speed growth, with a growth rate of around 13%. The textile, oil, and ferrous metal flattening sectors all maintained a year-on-year growth rate of 6% to 7%, lower than the average level.

The industrial disparities had affected the regional economic performance. According to the data of the enterprises surveyed, the enterprises in the central region were comparatively pessimistic about the current economic conditions, followed by those in the western region, while enterprises in the eastern region were relatively more optimistic. In terms of provinces, those relying on energy and raw materials had encountered aggravated difficulties in corporate operations, with increased economic downward pressure, and even "regional collapses", i.e. the central economic development was slower than both the eastern and the western regions; those provinces and cities with a high proportion of high-end manufacturing sectors such as automobile and pharmaceutical enjoyed relatively stable economic growth; those regions that actively pushed forward industrial transformation and upgrading as well as adjustment and optimization of economic structure had maintained a stable growth of regional added value, corporate profits, fiscal revenue, and resident income despite a relatively low investment growth rate.

3. A growing number of local financial risks became obvious.

With the declining economic growth rate, the pressure on real economy had further transferred to the financial system, and the financial risks related to overcapacity industries, real estate industry, and local government financing platforms had increased. The loss of unprofitable enterprises was increasing at an annual rate of above 10%, and the non-performing loan ratio of commercial banks had risen. The overdue loans were increasing fast, and the non-performing loan ratio was predicted to continue growing. The number of trust product honoring crises had increased. In some regions, real estate developers became insolvent, guarantee companies were quitting the market, and the number of private lending risk events was increasing.

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