During the implementation of anti-cyclical macro-economic control policies between 1998-2001, the growth of China's GDP remained stable at 7-8 percent, exceeding 8 percent in 2002. In the first quarter of 2003, the growth was as high as 9.6 percent. In spite of the impact of SARS, the GDP growth in the first three quarters still kept at 8.5 percent.

Since 2002, China's GDP growth has been stabilizing at over 8 percent and the economic operation is in a fresh upward cycle. Meanwhile, investment has been brisk, price has started going up, and the index showing entrepreneurs' confidence has also increased. From January to September 2003, society's total fixed asset investment was 3 trillion yuan (US$362.8 billion), an increase of 30.5 percent over the previous year. The balance of the supply of broad money (M2) rose by 20.7 percent. Banking institutions' RMB loans increased by 2.47 trillion yuan (US$298.3 billion) compared with the beginning of the year, a rise of 1.12 trillion yuan (US$135.26 billion). Enterprises' profit obviously went up. The consumer price indexes (CPI) grew for 10 straight months, and a new round of consumption sprees has appeared, with cars, housing, tourism and telecommunication tools becoming hot consumption spots.

The far-reaching significance is that investment that relies on state treasury was reduced, and the amount raised by enterprises through foreign capital and domestic loans increased faster than budgeted funds. The growth shows that China has received tangible results from its six straight years of anti-cyclical operations, demonstrating that the government investment has propelled non-government investment, thus bringing China's entire economy into an independent developing channel. Therefore, we can say that China's macro-economic operation has passed through a low valley to a peak.

In addition, the rising domestic economy has been supported by the recovery of the world economy. A yellow book issued by the US Federal Reserve Board in late November last year says that the US economy has come out of its two-year long recession and is entering a prolonged and widespread recovering period. Japan and euro-zone countries have also got rid of their economic stagnation. The International Monetary Fund (IMF), Morgan Stanley and other world-known organs all gave an optimistic prediction for the world's economic situation in 2004.

Such a strong development situation does not come easily. It is the result of China's efforts to overcome difficulties brought about by years of relatively low economic growth and deflation and to carry out a series of economic control policies.

These major changes in the economic situation were followed by heated discussions on macro-economic issues in various circles. There are also suggestions on guarding against a new round of overheating since there is rapid increase in money supply and loans, repeated investment in real estate and other industries, and a fast growth in energy and grain prices. The consumer price index, however, is still negative. This indicates that overheated investment growth might lack corresponding consumer desire.

Such thinking is normal. Logically, when an economic cycle hits a peak, attention should be paid to preventing and controlling economic overheating. In such fields as steel and real estate, overheated investment does exist. But we cannot conclude from this that the national economy is overheated and that measures should be taken to deal with inflation. This is because we cannot judge China's national economy as "cold" or "hot" simply by data, or by comparison with other countries. We must take into account both China's economic features and current prominent contradictions and problems while making policy decisions for the next step. As the process of commercialization, industrialization and urbanization is being accelerated, and reform in various fields is deepened, various complicated problems have emerged and become interwoven. Some problems, such as those related to agriculture, rural areas and farmers, unemployment, stagnant consumption, social security, eco-environment, technological progress and industrial upgrading, can be solved only through development.

To improve and perfect macro-economic control policies, we should fully consider the following:

1. It takes a period of time for the national economy to reach its peak after passing a turning point, and during this time there is much development potential at stake. Countermeasures should be taken to deal with overheating and repeated construction prompted by government investment in some industries.

2. Development is an essential principle. In order to realize the modernization strategy, we must turn the potential for growth into real growth during the course of transforming the economic pattern from a planned to a market-oriented one and change the mode of growth from an extensive to an intensive one.

3. Priority should be given to the unemployment problem and social security, followed by alleviating inflation.

4. The process of market competition is one involving "repeated construction" and is one in which the fittest survives.

At present, repeated construction mainly involves private enterprises, which, in a sense, is dominated by the market economy. Emphasis should be placed on opposing repeated construction under government operations. Furthermore, China's current investment mainly goes to the heavy chemical industry and, as it needs huge amounts of capital and a long period between input and output, we cannot expect an immediate consumer price index response.

The current favorable economic situation provides conditions for relatively rapid development in the year 2004. So, we must continuously implement sound fiscal policy under the principle of expanding domestic demand and prudent monetary policy, so as to accelerate economic development.

Attention must also be paid to taking preventive measures against the next round of inflation pressure, intensifying economic analysis and forecasting, and coping with overheating issues and outstanding structural problems. Readjustment and improvement should be made in following policies:

--Rationally adjusting the strength and emphasis of proactive fiscal policies, with emphasis laid on appropriately reducing long-term treasury bonds, mainly using government loans in extended projects and in final-phase projects, increasing input in agricultural and public health infrastructure facilities, as well as in public projects relating to ecological protection, and supporting key projects for western development and the transformation of old industrial bases. Meanwhile, effective measures must be taken to optimize project decision-making, to strengthen supervision and management, and efficiently utilize funds raised from issuing treasury bonds.

--Improving the coordination of fiscal and monetary policies, and enhancing control over all financial matters.

--Bringing the role of the policy-oriented banking system into full play, straightening the relationship between policy banks and credit insurance organs on the one hand and financial departments and commercial banking systems on the other, bringing the regulatory role of discount, low-interest loans and credit guarantee into full play, and actively exploring and propelling BOT (build, operate and transfer) and other new ways to guide and use non-governmental capital in public investment fields.

--Promoting a new round of taxation reform merging the income tax of domestic and foreign-funded enterprises in due course, realizing changes in VAT and putting into practice structural tax reduction measures and other policy measures.

--Further expanding domestic demand through efforts to improve consumption stimulating policies, public services, administrative efficiency and the investment environment.

--Deepening reform, advancing system innovation and developing the fundamental role of market mechanisms, so as to form a solid system base for long-term economic growth.

(Beijing Review February 11, 2004)