——Analysis of economic performance in the first quarter of 2010 and prospects for the whole year

DRC Task Force on Analysis of the Economic Performance

During the first quarter of 2010, China's economic growth maintained a continuous rise since the second quarter of 2009. However, new circumstances and issues, such as the decline of the investment growth, the shrinkage of trade surplus and the expansion of employment difficulties, merit attention. Under the influence of the investment growth downswing and the export fluctuations, the pressure of downturn facing the economic growth has intensified evidently since the second quarter of 2010. At the same time, the asset price bubble is aggregating and the imported inflation has aggravated. As a result, the macroeconomic policies need to keep a balance between maintaining the sound and rapid development of the economy and guarding against price bubble and restraining inflation and the policies should be adjusted at the right time in light of the downturn of the economic growth and the pressure of inflation. Flexibility should be enhanced to expedite the reform of important fields, the structural adjustment and the transformation of the mode of development so as to lay a good foundation for the medium- and long-term steady and rapid economic growth.

I. Pressure of Downturn Economic Growth Intensifies and the Employment Difficulties Have Far-reaching Influence

Due to the improved external environment, export growth has reached a high level, domestic consumption demand has grown steadily, plus the lower base for the same period of 2009, the economic growth during the first quarter of 2010 will hit a new high in the short run. However, investment growth has declined substantially, trade surplus has further shrunk and the pressure of downturn facing the economic growth has intensified evidently. At the same time, the employment difficulties have shown the change of tendencies in China's labor supply-and-demand situation and have far-reaching influence on the economic and social development.

1. Substantial decline of investment growth

During January and February of 2010, urban fixed asset investment grew by 26.6%, down 3.9 percentage points as compared with the annual growth rate in 2009 (30.5%). During January and February, urban fixed asset investment, after allowing for the rise of the producer's prices of means of production, grew virtually by 19.33%, down 21.12 percentage points over the actual annual growth rate in 2009 (40.45%).

The substantial decline of the investment growth is mainly manifested by the decreasing growth of government investment and investment from state-owned units. During January and February, investment in projects of the Central Government and of the local governments grew by 14% and 28.1% respectively, down 4 percentage points and 3.9 percentage points respectively as compared to the growth rate of 2009. Investment from state-owned and state holding units grew by 27.41%, down 7.53 percentage points as compared to the whole year of 2009. Investment from non-state units, especially from the private sector of the economy (investment from non-state units excludes that from Hong Kong, Macao, Taiwan and Foreign investors) dropped by a slim margin. During the first two months of 2010, investment from non-state units and from the private sector of the economy grew by 26.06% and 31.84% respectively, down only 1.12 percentage points and 0.75 percentage points as compared to the whole year of 2009.

Evident shrinking of the expansion of financial and monetary policies has been the main reason for the decline of the investment growth from the government and state-owned units. In 2009, stimulated by the expansive financial and monetary policies, investment growth increased by a wide margin. The policy effort gradually weakened since July. In the first half of 2009, the newly increased credit scale reached a monthly average of 1.234191 trillion yuan and amounted only to 370.645 billion yuan in the latter half of the year. The accumulative increase of the public finance expenditure kept going down from 24.1% in September of 2009 to the annual 21.2%. Affected by this, the nominal investment growth declined from 31.15% in September of 2009 to the annual 30.1%. In February of 2010, increase of loans in financial institutions went down by 4.5 percentage points as compared to that of 2009, and the accumulative public finance expenditure only grew by 7.7%, down 29.3 percentage points and 13.5 percentage points respectively over the expenditure increases in February of 2009 and during the whole year. Expansion of the financial and monetary policies shrank evidently and the stimulus of the policies to investment gradually faded away, with the investment growth declining to the average of 2007 and 2008 (26.03%).

2. Further shrinkage of trade surplus

Due to the rebound of the external demand, over the first two months of 2010 China's exports grew by 31.4%. The economy of the United States, the European Union and Japan began to become stable and go up since the third quarter of 2009 and the import demand rebounded strongly. In January of 2010, imports of the United States, 16 countries of the Euro zone and Japan increased by 11.8%, 1.4% and 9.1% respectively and Japan's imports increased to 30% in February.

Affected by the Chinese economy being the first to make a turnaround and the considerable increase of import prices, imports increased by 63.6% in the first two months of 2010. Compared with such major economies as the United States, the European Union and Japan, the Chinese economy recovered earlier and by a wide margin and China's imports increased substantially since September of 2009. From January to February of 2010, the aggregate import volume, imports of primary commodities and imports of industrial products increased by 42.9%, 43.6% and 41.4% respectively. Meanwhile, with the recovery of Chinese and foreign economies and driven by the rapid growth of demand, prices of primary commodities on the international market rose by a wide margin once again, and prices of China's imports also went up at a fast pace. During January and February of 2010, prices of all imports and the import prices of primary commodities and of industrial products rose by 14.4%, 37.5% and 4.7% respectively.

As there was a sharp difference between the import and export prices in China, China's trade surplus dropped by 50.4% in January and February of 2010 from a year earlier, with the drop being further enlarged over the previous year. From January to February of 2010, China's exports grew by 38.8%, being only 4.1 percentage points lower than import increase. However, export prices dropped by 5.4 percentage points, being 19.8 percentage points lower than import prices, leading to a considerable shrinkage of trade surplus. Due to the rise of import prices, especially the rise of import prices of primary commodities, export prices kept on declining and trade deficit showed up in China in March.

At present, uncertainty exists in the rapid growth of China's import and export trade. The continuous and rapid increase of imports during the first few months drove up China's stock levels, thus containing the imports in the rest months of the year. In February, growth of the imports of primary commodities and industrial products all went down significantly. The strong rebound of external demand was also fuelled to a large extent by “re-stocking”. Consumption and investment demand in the United States, the European Union and Japan was not yet truly started. When the stock reaches a reasonable level, the demand for “re-stocking” will reduce rapidly and the growth of China's exports will also decline drastically. Recently, orders received by Chinese export enterprises are mainly short-term and emergent orders, suggesting that uncertainty exists in the strong rebound of the export growth and the increase of external demand.

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