Xie Fuzhan, Liu Shijin, Lu Zhongyuan, Zhang Liqun

DRC Task Force

Economic perspectives No 10, 2004

In our analysis of the economic situation in the first half of 2002, we concluded that the self-growth ability of the Chinese economy1 had become visibly stronger. The ensuing trend of economic performance indicated that the economy’s inherent self-growth ability had been stabilized at a relatively high level, from where the economy had entered into a new round of rapid growth. This year’s economic growth is expected to reach or exceed 8 percent, and all the projected targets will be achieved. Under the prerequisite of maintaining the continuity and stability of macroeconomic policies, the emphasis of policies and the intensity of expansion should be properly adjusted so that more efforts can be devoted to solving the system and structural problems of a medium- and long-term nature.

I. The Chinese economy has entered a new round of rapid growth, with the acceleration of non-governmental investment, the upgrading of personal consumption and the acceleration of industrial upgrading being the main supporting factors.

Since the beginning of 2003, leading macroeconomic indicators have demonstrated further improvement on top of last year’s drastic increases. In the first two months, industrial added value, investment in fixed assets, foreign trade, actual foreign capital utilization and currency supply (M1 & M2) all posted a record high growth rate. In particular, the industrial growth rate and the investment growth rate reached the highest levels since 1996. As the base figures in the same period of last year (the GDP growth rate was 7.6 percent for the first quarter of last year) were relatively low and some of the growth elements by the end of last year may be transferred to the beginning of this year, the ongoing sustained growth of the leading economic indicators is basically normal.

The acceleration of non-governmental investment is the first supporting factor for the self-growth of the economy. From 1998 to 2001, the non-governmental investment nationwide (including the investment by the joint-stock economic sector, the collective economic sector, the private economic sector and the cooperative economic sector but excluding the investment by foreigners and those from Hong Kong, Macao and Taiwan) posted an average growth rate of 20 percent high. In particular, the growth of the investment by the joint-stock economic sector is far higher. In the meantime, the growth rate of the investment by the state-owned economic sector dropped from 17.4 percent to 6.7 percent. Of the total investment in fixed assets, the proportion of the non-governmental investment is close to that by the state-owned economic sector. From 1997 to 2001, the former rose from 35.9 percent to 44.6 percent, while the latter fell from 52.5 percent to 47.3 percent. This trend continued in 2002. It is estimated that the proportion of the investment by the state-owned economic sector further declined to 44.8 percent, while that by the non-state-owned economic sector (including foreign investors) reached 55.2 percent. At present, the investment desire of the non-state-owned sector is tangibly stronger than that of the state-owned economic sector. We can expect that in the new round of rapid economic growth, the investors from the non-state-owned economic sector, including domestic non-governmental investors and foreign investors, will become the leading force in pushing up the total social investment.

The contribution of market factors to investment growth has been constantly rising. The dependence of the growth of the total social investment on the government’s direct investment and other stimulation policies has weakened gradually. The data published by the National Bureau of Statistics indicated that from 1999 to 2002, the growth rate of the total social investment rose from 5.1 percent to 16.1 percent and the growth rate of the budgetary investment fell from 54.7 percent to 26.8 percent. Since 2000, interest rate cuts have been more marginal and less frequent than in 1998 and 1999. Based on the forecast of the Research Department of Macro-Economy of our center, during the 2000-2002 period, the pro-investment macroeconomic policies pulled investment growth by 3-4 percentage points. Even if the contribution of these policies was deducted, the investment growth rate during this period was still in a state of quite high growth. The funding sources of the investment in fixed assets in the first two months of this year indicated that the government budgetary fund rose by 30.3 percent over a year earlier, down by 22.2 percentage points; domestic loans rose by 65.1 percent, up by 32.3 percentage points; foreign capital utilization rose by 49.2 percent, up by 36.5 percentage points; self-raised funds rose by 60 percent, up by 25.6 percentage points; other funds rose by 57.4 percent, up by 38.1 percentage points. This is an indication that with the gradual advance of the strategic adjustment of the state-owned economic sector, the accelerated development of the private economic sector and the gradual improvement of the market order and the environment for financing and investment, the contribution of market factors such as enterprise earnings, prices, expectations, self-financed investment and foreign capital utilization to the investment growth has been constantly increased and that the self-growth ability of the investment sector has further strengthened.

The industrial upgrading spurred by the upgrading of consumption structure is the second supporting factor for the self-growth of the economy. 1998-2002 was the period in which we witnessed the quickest decline in the Engel coefficient of the Chinese residents since the initiation of reform and opening up. Thanks to the higher incomes of urban and rural residents, the Engel coefficient of the rural residents dropped from 55.1 percent to 46.2 percent while that of the residents in cities and towns fell from 46.4 percent to 37.7 percent. The structure of resident consumption has been upgrading rapidly, and so has the growth of housing, transportation, communication and new-generation consumer goods. In these five years, the housing space of urban residents increased by 22 percent, their household computers increased by six fold, their household air-conditioners increased by 3.6 fold, and their family cars increased by 3.4 fold. In the rural areas, household color TV sets increased by 1.22 fold, refrigerators increased by 74 percent and washing machines increased by 45 percent.

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1The self-growth ability mentioned here refers to the economic growth promoted by production, investment and consumption spontaneously of market entities, which is different from that promoted by direct government investment.