The Chinese economy continued its rapid growth in 2005, while
the country's macro-economy operated better than any other year
since 1998, according to official Chinese research.
Research conducted by the Academy of Macroeconomic Research
under the National Development and
Reform Commission shows that as a result of prudent fiscal and
monetary policies, the national economy continued to make strides
in the planned direction.
While the economy maintained fast growth, an ideal state
characterized by no inflation and no deflation prevailed. GDP
growth rates in the first three quarters of the year were 9.4
percent, 9.5 percent and 9.4 percent respectively. The rate for the
whole year is projected at 9.2 percent.
A year of growth
China's industrial structure has been further optimized as a
result of the macro-control policy implemented during the past two
years.
Backward production capacity is gradually being shed. A number
of calcium carbide, coking and alloy iron plants as well as
mini-cement plants not in compliance with the government's
industrial policy were shut down.
Greater effort was committed to the merger and restructuring of
enterprises, thus bringing about heightened industrial
concentration. Weak links in China's economic development were
strengthened. Small-scale rural infrastructure development was
beefed up. A number of projects were kicked off to develop key
techniques in such areas as energy exploration, safe production,
energy conservation and comprehensive utilization of resources.
Meanwhile, as investment received by central and west regions
continues to slightly exceed that gained by east China, there is a
discernible trend toward a more balanced regional economic
structure.
The Economic Situation Research Group under the State
Information Center found that China's economy made sound headway in
2005, with investment structure improving following a steady
decline in fixed asset investment.
Nationwide fixed asset investment is estimated at 8.78 trillion
yuan (about $1.09 trillion), representing a year-on-year increase
of 25.3 percent, a decline of 0.5 percentage point from last year.
More investment was pumped into agriculture, while the growth rate
of investment in the manufacturing sector slowed and that in
tertiary industry kept relatively stable.
In the first eight months of 2005, investment in primary
industry reached 39.6 billion yuan ($4.9 billion), an increase of
20 percent over the same period last year, up 3.7 percentage points
from the growth rate a year ago. Investment in secondary industry
was 1.73 trillion yuan ($214.4 billion), growing 35.2 percent from
the same period last year, down 6.5 percentage points from the
growth rate a year ago.
Investment in weak sectors such as coal, electricity, oil and
transportation has risen dramatically, whereas the growth rate of
investment in overheated industries such as iron and steel and
alloy iron has plunged.
The situation in which the growth of heavy industry outpaced
that of light industry is being reversed. From January to August,
the growth rate of heavy industry was 16.9 percent, 1.7 percentage
points lower than last year's 18.6 percent. The gap between the
growth of heavy industry and that of light industry narrowed from
3.2 percentage points last year to 0.7 percentage point.
The narrowing gap indicates that the economy has begun to
develop in a more balanced and stable way. Thanks to the lowered
growth rate of heavy industry, pressure on transportation and
electricity sectors, long-time bottlenecks for China's economic
development, was lessened to some extent.
The persistent low consumption demand began to pick up.
Consumption played an increasingly important role in promoting
economic growth. In the first three quarters of 2005, total retail
sales of consumer commodities reached 4.508 trillion yuan ($557.6
billion), up 13 percent year on year, hitting a record high since
1997. The figure accounted for 42.4 percent of China's GDP, up 1.3
percent from the same period last year.
As the income of farmers kept rising, the consumption growth
disparity between rural and urban areas narrowed slightly. In the
first half of 2005, farmers' per-capita cash income reached 1,586
yuan ($192), an increase of 12.5 percent in real terms. The growth
rate was 1.6 percentage points higher than that of last year. The
growth rate of farmers' per-capita net income for the whole year is
projected at over 5 percent in real terms.
In 2005, both rural and urban markets turned out brisk, a rarity
for quite a few years. In the first eight months, retail sales in
urban and rural markets grew by 14 percent and 11 percent
respectively. The gap between growth rates declined to 3 percentage
points from 5.1 percentage points last year.
The financial market was further opened up. Foreign financial
institutions were given the green light to conduct RMB business in
China. The yuan was revaluated by a small margin, giving shape to a
more flexible exchange rate system. The reform of state-owned banks
was accelerated, with China Construction Bank's listing in the Hong
Kong Stock Exchange.
However, the Chinese economy in 2005 was not trouble-free.
First, there was a notable increase in international trade
frictions. Trading partners imposed a series of barriers on a
variety of Chinese exports, worsening China's external trading
climate. Despite these hindrances, China's foreign trade volume is
expected to hit $1.4 trillion for the whole year. The growth rate
of exports tends to be much faster than that of imports, with the
former expected to reach 29 percent, while the latter 19 percent.
The trade surplus is projected at $100 billion this year. Initial
calculations indicate that net export will contribute more than 35
percent to China's economic growth. Foreign demand played an
abnormally big role in stimulating economic growth. State
Information Center researchers pointed out that the chronic foreign
trade surplus and excessive role of foreign demand in fueling the
economy underscore potential economic fluctuations.
Second, the energy problem was still a pressing concern. China
suffered a transient oil scarcity when oil prices skyrocketed in
2005, impacting sustainable and balanced economic development.
In addition, the inertia effect of the investment-driven economy
was evident. There was an increase in the number of overproducing
industries. Apart from cement, electrolytical aluminum and some
other already overheated industries, iron and steel, auto, flat
glass and chemical fiber industries are also facing the risk.
Future plans
In 2006, China will proceed with prudent fiscal and monetary
policies so as to direct its economy along the path of stable and
rapid development, according to the Central Working Conference on
Economy that concluded on December 1 in Beijing. The annual
conference set guidelines and major tasks for the Chinese economy
in 2006.
On December 11, the Chinese Academy of Social Sciences (CASS)
released a blue paper on China's economy, saying that GDP growth
rate in 2006 will be around 8.8 percent, a goal the Chinese
Government has pursued for the past two years. Wang Tongsan,
Director of the Institute of Quantitative and Technical Economics
under the CASS who was responsible for drafting the document, said
that as China's macroeconomic operation is in a period of stable
growth, next year's macroeconomic control should focus on
maintaining the stability and continuity of economic policies.
Analyzing from the perspectives of investment, consumption and
import and export--three locomotives driving the national
economy--State Information Center researchers reached a number of
conclusions on China's economic landscape in 2006.
Less fixed asset investment
According to the researchers, many new projects were initiated
in 2005, pointing to a potential growth in fixed asset investment.
In addition, 2006 is the first year of China's 11th Five-Year
Guideline, when a number of major infrastructure projects will be
kicked off. Given these factors, fixed asset investment is likely
to maintain a rapid growth.
Nevertheless, the government is expected to take tough
macro-control measures to rein in the trend. After land
requisitioned in the past few years is used up, a limited land
supply resulting from the government's stringent land control
policies will hold back fixed asset investment in the upcoming
year.
Moreover, the growth rate of the banks' long- and medium-term
loans began to decline this year, something that is likely to
affect the growth of fixed asset investment next year, especially
in the real estate sector.
Overproduction in the manufacturing sector will become more
prominent in 2006. Rising production costs and declining prices
will further erode the profit margin for some businesses, thus
dampening their enthusiasm about investment and expansion.
Meanwhile, confronting escalating international trade frictions
and mounting pressure from their overproducing Chinese
counterparts, foreign companies in certain sectors tend to slacken
their efforts to shift production to China. In the first eight
months of this year, paid-in foreign investment dropped by 3.02
percent from the same period last year.
The rare decline is expected to constrain foreign capital
inflows in certain industries next year. In light of this, fixed
asset investment growth is expected to drop steadily in 2006. The
growth rate is estimated to drop by 5 percentage points compared
with 2005 to stand at about 20 percent.
Blooming consumption market
Several advantageous factors will contribute to rapid
consumption growth in 2006.
First, as farmers' incomes have been on the rise for two
successive years, the rural consumption structure is being steadily
upgraded. Rural residents in China's vast hinterlands are becoming
consumers of big home appliances on the heels of their better-off
peers in the east coastal region.
Second, the average income of urban residents continues to rise.
Middle-income earners have become a main driving force of the urban
consumption market. Some local governments raised minimum salaries
and unemployment benefits in 2005. The monthly personal income tax
threshold was raised from 800 yuan (nearly $100) to 1,600 yuan
($200). Many local governments are expected to adopt policies that
favor low- and middle-income earners. Civil servants could earn
more money, a trend that would likely lead to salary increases for
all urban employees. These moves will help nurture more
middle-income earners, while tapping their consumption
potential.
Third, the constant improvement of the social security system is
conducive to the expansion of immediate consumption. As the social
security system improves with more funds allocated by the
government, residents will become more confident about the future.
They may abandon the habit of saving money in the bank, letting
loose the urge to consume.
More balanced international trade
Researchers predict that while the world economy will stay in
good shape in 2006 with accelerating international trade growth,
China's export structure will be upgraded, with exports becoming
more competitive in the international market.
As the country's production capacity keeps growing, escalating
domestic competition will force more companies to venture into the
international market.
At the same time, imports are projected to increase
considerably, given the energy shortage and the lack of raw
materials, advanced technology and key equipment. The growth rate
of exports and imports is estimated at around 15 percent and 17
percent respectively.
Flip side
State Information Center researchers note that there will be
quite a few unfavorable factors affecting China's economic growth
in 2006.
Under the impact of high oil prices, the Chinese economy will
face increased pressure to develop. In addition, possible
fluctuations of the RMB under the newly adjusted exchange rate
mechanism will affect China's international trade next year.
Other negative factors include the insufficient supply of coal,
electricity, oil and transportation facilities, ever-rising capital
goods prices in domestic and international markets, environmental
protection pressure, increasing trade frictions and the
international community's opposition to the highly energy-consuming
products made in China.
Lu Jianhua, an official with the Ministry of Commerce, said
China's foreign trade may face a more critical situation in 2006
than in 2005, adding there is no reason whatsoever to be blindly
optimistic about export growth.
Owing to its limited shares in the international market and
trade protectionism worldwide, China will find it difficult to
maintain its fast export growth, which has lasted for the past four
years. China's foreign trade volume will hopefully exceed $1.6
trillion, up 15 percent, Lu said. However, the growth rate will be
notably lower than that in 2005.
According to the Academy of Macroeconomic Research of the
National Development and Reform Commission, China will have to
confront growing deflation pressure next year. With export and
investment slowing down and production capacity soaring, the
Chinese economy will undergo even greater adjustments in 2006.
Imports will grow more rapidly than exports, a trend that could
halt the growth of trade surplus, if not necessarily erase it.
Since September, there has been a considerable decline in the
price growth rates in the Chinese market. In particular, the
general price index for capital goods dropped 0.2 percent compared
with the same period last year. This could be interpreted as the
earliest sign of deflation.
In terms of money supply, M1 and loans are only growing at a
slow pace, not enough to fuel a price rebound. With deposits
increasingly outnumbering loans, there is an evident tendency
toward financial contraction. All these could point to a slight
deflation in 2006.
(Beijing Review January 5, 2006)