DRC Task Force

Economic perspectives No 10, 2004

Currently, economic growth in China is in a pivotal stage. Since 2003, the CPC Central Committee and the State Council have adopted a series of macroeconomic regulation and control measures to resolve some acute problems, and it seems they are taking effect. China’s national economy is operating at a comparatively high level in an upward spiral; basic forces that drive medium- and long-term economic growth, such as upgrading of consumption structure and industrial structure remain strong; and the aggregate problem is yet to grow acute. However, the investment tends to be too large-scaled, prices of some capital goods have risen too fast and structural problem is arising. On current economic situation, different sides have different opinions, which need to be examined calmly and analyzed properly, in a bid to ensure a scientific regulation and control and keep China’s national economy within the track of high growth and low inflation.

I. Preliminary Analysis of Current Economic Situation and Problems

In the first quarter of this year, investment grew sharply; the price level has increased; and the supply of coal, electricity, oil and transportation has grown tight. Except these, other major economic indices did not show any signs of abnormal changes.

1. Investment has grown sharply and needs to be observed closely

In the first quarter of this year, total fixed assets investment grew 43% year-on-year, and the growth is 15.2 percentage points higher than in the same period of 2003. Such high-speed growth is incomparable for some factors: (1) 2004 is an intercalary year, and February has a day more than in normal years. Thus the investment workload increased. (2) Thanks to a warm winter in 2003, some large projects did not stop work at all. Meanwhile, as China has an earlier Spring Festival this year, migrant workers have returned back to cities for work earlier than in usual years, which is conducive to the arrangement of construction. Besides, fixed assets investment in the first quarter usually accounts for over one-tenth of a year’s total, a small change in investment would result in great changes in investment growth. Despite all these factors, investment growth at present is still a little bit fast. In view of macroeconomic regulation and control experience in the past, all policies have a certain time-lag in terms of effect, and the effect of the series of macroeconomic regulation and control measures China adopted since the latter half of 2003 is yet to be released gradually. Therefore, close attention should be paid to statistics on investment growth in the first half of this year, especially to positive and negative factors that have a bearing on investment growth.

2. Monetary credit supply has grown steadily

Financial industry operated smoothly in China in the first quarter of this year, and the growth of monetary credit dropped slightly. Money supply M2 grew 19.2% year-on-year, 0.7 percentage points higher than the growth in the same period of 2003; and balance of loans in RMB yuan issued by financial institutions grew 20.7%, 0.8 percentage points higher than in the same period of 2003 but lower than the growth in the latter half of 2003. M2 grew 18.1% in January this year, and the growth has slipped for 3 running months; loans in RMB yuan grew 20.1%, and the growth has slipped for 5 running months. The two figures picked up slightly in February and regained stability in March. Generally speaking, the trend of rapid growth of monetary loans has been basically curbed, but the pick-up still deserves attention.

3. Tight supply of coal, electricity, oil and transportation may prolong for a period of time, but it is unlikely for the gap to enlarge further

After years’ effort, China’s basic facilities of energy and transportation industries have improved greatly, and their capacity of adjusting to market demand has increased. The pace of power construction has accelerated since 2003. China’s installed capacity of electric power is 385 million kw at present, and there are still 130 million kw under construction. With newly constructed power plant projects go into operation one after another, by 2006, the situation of tight supply of power may be eased substantially. Meanwhile, with ample foreign exchange reserve, the demand of importing some resource products can basically be met. Communication and transportation industry is also developing rapidly. In fact, coal, oil, electricity and transportation need large investment, long investment period and a comparatively long time to realize supply growth. In view of the fact that China has sufficient capital, labor and technology supply at present, the situation of tight supply of coal, electricity, oil and transportation may not last long.

4. It is unlikely for prices to rise continuously

Of composition of consumer price index, prices of food make up about 30%; prices of various services make up about 20%; and prices of various industrial consumer goods make up the rest. Price hike since 2003 was mainly boosted by foods and services. Based on judgement for the trend of grain supply and demand, we predict that growth of prices of food will slow down in the latter half of this year and the growth of consumer price will go stable. As price of service is mainly controlled by the government, if reform is carried out properly and step by step, it won’t have much impact on increase of consumer prices. Industrial consumer goods are oversupplied at present, and the competition is fierce, and the influence of price hike of upstream products is hard to be passed on down to the final consumption links. It has been reduced and absorbed gradually in various intermediary links. In fact, prices of some products, such as automobile, have kept decreasing. Based on all these, we may expect a stable consumer price this year, with the price a little bit higher in the first half than in the latter half and a growth of 3% in the year. Price hike of capital goods won’t last long. Such capital goods as steel products, nonferrous metals and cement that are in short supply at present has grown rapidly. But when the supply increases, and the market demand growth slows down, the supply gap will be gradually filled and the price hike will gradually go stable.

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