China's economy is likely to maintain a high rate of growth in the second half of the year and the momentum will carry on into 2004 as long as proper policy choices are made.

That's the conclusion of a report drafted by a research team from the State Information Center.

China's gross domestic product (GDP) achieved an 8.2 percent year-on-year growth in the first half of this year.

Accompanied by a low inflation rate and international trade surplus, that growth is more impressive against the grim backdrop of the Iraq War and the SARS outbreak.

China's economic increase will be slowed down in the third quarter due to the effect of the SARS epidemic and return to its former fast track in the fourth quarter, the report predicts.

The report also says China's annual GDP growth will stand at 8.3 percent this year, a bit higher than in 2002.

This conclusion is drawn from analysis of the three engines of economic growth: consumption, investment and trade.

In the coming months consumption in consumer goods, entertainment and tourism once suspended by the SARS epidemic will resume, but the weak income rise is unlikely to carry consumption growth too far.

Consumption is expected to have less growth than what was achieved during the same period last year, though it will certainly be stronger than the first six months.

Investment, as a whole, is predicted to have a 20 percent growth in the second half of the year -- a 12-percentage point drop from the first half, the report said.

The upgrade of consumption structure, which will promote the auto, real estate and telecom industries, along with ongoing urbanization and the proactive fiscal policy will help promote investment, but the effect of those growth generators is predicted to cool down over the rest of the year.

Foreign investment will almost certainly decrease for the scarce business activities before the SARS epidemic was curbed in June.

Moves by the country's banking and economic regulatory bodies have tightened controls on investment growth in over-heated industries like real estate.

The third engine, trade, will also soon consolidate its growth.

When SARS broke out last spring many trade negotiations were cancelled or postponed, and that impact will not show up until three months later, on average. Some countries even blocked Chinese goods, citing SARS as the excuse.

As a result, consumer goods such as agricultural produce, textiles and toys will see a difficult time in export in the months to come.

Driven by the economic growth at home, demand for advanced equipment, energy and raw materials will have a deep rise during the period, propelling an increase in imports.

The team forecasted a 20 percent growth in exports this year, a drop of 2 percentage points over last year. This year's imports will rise by 27 percent, 6 percentage points higher than that of last year. And the annul trade surplus will shrink to US$15 billion, 50 percent of that in 2002.

On the basis of the current economic trend, the team mapped out the economic prospects in 2004.

The growth trend will continue into next year and the GDP growth will be maintained at 8 percent in 2004 if proper policies are implemented.

After the Iraq War, both consumers and investors are picking up their confidence in the world market. The global economy is showing signs of resurgence after major economic powers adopted various policy tools to stimulate it.

According to estimates of the World Bank, the International Monetary Organization and the United Nations, the world GDP will go up 4 percent next year, 1 percentage point higher than 2003.

This will certainly bring a positive impetus to China's trade, hence its economy.

However, the change in international economy may not have much positive impact on attracting foreign investment.

The report noted that since China has not fully opened up its capital market and there have not been many cross-border mergers and acquisitions, the major part of foreign capital the country has utilized will remain direct investment.

Nevertheless, a growth-driving mechanism is taking shape within the economy as the country is going steadily in its establishment of a market-orientated economy and promotion of urbanization.

The internal forces will play an increasingly large role in propelling the country's economic growth as a virtuous economic cycle composed of consumption upgrade, industrial restructuring and accelerated urbanization is being formed.

Amid the favorable conditions both at home and abroad, unemployment poses the most severe challenge to the economy, the report pointed out.

The problem in cities and towns will worsen. New laborers will stand at 50 million in the next five years, but only 7 to 8 million new jobs are predicted to be created every year even if the GDP growth is as high as 8.5 percent.

Based on all these analyses, the report raised suggestions on key economic policies.

First, every effort must be made to boost employment.

The government should motivate all resources available to help create jobs in cities and towns for unemployed and laid-off workers.

Rural laborers should be allowed to take jobs in urban areas under an ordered manner and measures should be worked out to protect their interests and rights.

Relative authorities should also encourage private enterprises to provide positions by practical means.

Second, the proactive fiscal policy should remain in position, at least, through next year. An early fade-out of proactive fiscal policy may slash economic growth.

The treasury bond should continue to be earmarked for causes in key fields like rural education and public healthcare.

Rural healthcare systems, especially those in counties and villages, should get more financial support from the State.

The rules governing individual income tax should be adjusted. People earning a monthly income between 3,000 and 5,000 yuan (US$361.5-602.4) is the group that will be the target consumer of housing, automobile and tourism in next few years, and a tax cut for this group is necessary.

Third, redundant construction and duplicated investment in already heated industries should be checked.

Government departments should firmly stop projects that are poorly efficient, energy-consuming or pollution-generating. They should also release information guiding rational investment.

Restrictions on private investment in fields that are monopolized by the State should be removed. Private investors should be encouraged in infrastructure construction and environment protection.

Projects for improving rural life, boosting employment and developing the vast but relatively underdeveloped western areas should also be promoted in investment.

(China Daily September 1, 2003)