Task Force on Analysis of Economic Performance

I. Judgment on the Trend of Economic Performance in the First Half of the Year

From the beginning of the year, some new characteristics have turned up in China's economic growth, which mainly include: export in foreign trade has increased by a wide margin，consumption has turned out brisk, investment growth has become stable, economic growth rate has gone up to a high level, increase in money supply has speeded up, and commodity prices have witnessed a big rise. According to the comprehensive analysis of the main affecting factors, the economic growth in the first half of the year is estimated to show a momentum of operating at a higher level, with the following major reasons.

First，the driving force of consumption and export to economic growth has been gradually intensified. During the first quarter，the total retail volume of the social consumer goods increased by 14.9% year on year，and actually increased by 11.9% after allowing for the price rises，up 0.4 percentage points. The upgrading of consumption structure appeared to be more active. Of the total retail volume of the above-quota wholesale and retail industry，retail volume of the building and decoration materials jumped 25.3%，that of the communication apparatus rose 10.6%，and that of the automobiles surged 38.5%. Export in foreign trade grew a year-on-year 27.8%，up 1.2 percentage points.

Second，the economic short-cycle decline will not occur in the first half of the year. According to the analysis of the short-cycle fluctuations made by the Department of Macroeconomic Research of the Development Research Center of the State Council，small-scale decline of the economic growth could happen this year，but would probably take place in the latter half of the year. The background for such a decline lies in the fact that the surplus production capacity of part of the industries and the continuous appreciation of RMB could result in the slowing down of the industrial and export growth. At the same time, attention should also be paid to the fact that the Chinese economy still stays in the medium and long-cycle growth periods, with the space for development still expanding. In view of the whole year，the short-term decline of the economy is yet not enough to change the situation of a fast economic growth, but it is favorable for stabilizing the economy.

Third，structural contradictions have been more or less alleviated. The main facts are：the pressure on tight supplies of coal, electricity and petroleum and on the overloaded transportation system has been basically alleviated; supply of raw materials for such heavy and chemical industries as iron and steel, nonferrous metals, chemical industry and cement has been fairly abundant; grain output has been continually growing; and the rise in prices of the means of production has been going down. During the first quarter， purchase price indexes for raw materials, fuels and the motive power rose 4.1%, year on year，down 2.4 percentage points. Supply of the basic means of production and the means of subsistence has been fortified, giving important support to the continuous and rapid economic growth and to the stabilization of commodity prices.

Fourth，investment has assumed a recovering rise, but tends to be stable as a whole. During the first quarter，the fixed asset investment of the whole society increased by a year-on-year 23.7%，down 4 percentage points, of which investment in the secondary industry dropped 5.7 percentage points. As competition arose，investment in technical renovation mounted up. During January and February, among the fixed asset investment in cities and towns，investment in purchase of equipment and instruments jumped a year-on-year 27.5%，up 3.6 percentage points；while investment in architectural installation projects rose 26%, year on year，down 7.3 percentage points. On the whole，the current investment growth is a recovering rise from the lower level in the fourth quarter of last year by a narrow margin，and the investment structure needs to be optimized；under comparatively rigorous macro-control policies，it is estimated that there would be little possibility for the government-guided investment to bounce back dramatically.

According to the above-mentioned analysis，in the context of the consumption turning out brisk, export and investment becoming stable，it is predicted that the economy will maintain a rapid and steady growth in the first half of the year, with the GDP growth rate to register around 10.5%（GDP growth rate for the first quarter was 11.1%）.

II. Main Problems in Current Economic Operation

1.Potentialities for consumption growth need to be tapped，but resource and environmental restraints on upgrading of consumption structure have been aggravated.

In the new round of economic growth，with the constant improvement of the household income level，upgrading of the consumption structure has become vigorous，and the consumption demands have been growing fast. During 2001－2005，the per capita housing area of the residents in cities and towns increased by 28.6%，the household computers increased by 3.3 times，household air-conditioners increased by 1.6 times，and household automobiles increased by 5.7 times. The comparable price growth rate for the total retail volume of the social consumer goods has been rising in a continuous and steady way. Looking forward to the future，the latent power for consumption expansion is still great. Firstly，proportion of the Chinese laborers enjoying primary distribution of the national income is currently on the low side，and the distribution of incomes inclined to favor the government and the enterprises has not been changed. In 1997, payment of the laborers accounted for 52.79% of GDP，and declined to 49.62% in 2001，and further dropped to 41.4% in 2005. Nevertheless, when industrialization was accelerated in such countries as the United States, Japan and the Republic of Korea, proportion of the incomes of the laborers in GDP rose instead. If the national income distribution ratios are rationalized in China to properly increase the payment of the laborers，then it would favor the expansion of the consumption demands. Secondly，there is a big difference in present income distribution in China. As the vast numbers of the moderate and low-income groups have a higher marginal propensity to consume，therefore，adjustment of the difference in income distribution to increase the incomes of the moderate and low-income groups will also form a new impetus to the expansion of consumption demands. Thirdly，in current expenditure structure of the government, too much financial support has been given to investment. Adjustment of the government expenditure structure and increase of expenditure on public service and public consumption will help step up the consumption growth of the whole society.

What merits attention is that upgrading of the consumption structure and expansion of the consumption demands will give a strong impetus to investment，and will form a huge pressure on resources and environment. The vigorous consumption of the households in buying houses and cars has stimulated such industries as the real estate, automobile and telecommunication to a rapid growth，thus has further brought along the development of such heavy and chemical industries as iron and steel, nonferrous metals, petrochemical and cement as well as the development of such basic industries as energy and transportation，and has in turn promoted the large-scale urban construction. As a result，the rapid growth of investment over recent years，after allowing for the unreasonable factors，has originally been driven by consumption activities through market conduction as a whole. With the deepening of the market regulation，reaction of the investment to the change of market demand will become more sensitive. Due to the vigorous house purchasing by the residents，from January to February of this year housing investment increased by a year-on-year 29.8%，up 5.5 percentage points. Upgrading of the consumption structure featuring a robust demand for automobile and house purchasing will play a long-term role in stimulating the development of the heavy and chemical industries and the growth of investment，which is likely to intensify the contradictions between consumption upgrading and the resources and environment. For this reason，when stabilizing the investment growth，properly guiding the demand for automobile and house purchasing and stabilizing the pace in upgrading of consumption structure are also important aspects that need to be considered in formulating macro-economic policies.

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