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China’s Entry into a New Phase of Heavy Industry and its Impact on Macroeconomy

Mar 12,2004

Liu Shijin

Research Report No 199, 2003

If the economic growth since the second half of 2002 is merely seen as a rebound of macroeconomic indicators, it would be an underestimation of the changes the Chinese economy has been undergoing. To an economy that is still in a period of rapid growth, structural changes are often more important than changes in aggregates. What is striking in structural changes is the emergence of a batch of new fast-growing leading industries. Understanding the unique features of these industries and their growth mechanisms is of special significance to understanding some of the new macroeconomic phenomena. One of the basic views in this article is that the Chinese economy is entering a new phase of heavy industry and this phase is demonstrating growth features unlike that of the past. These features should not be explained by simply resorting to historical experience. Accordingly, the government should also make corresponding policy adjustment related to industrial development and macroeconomy.

I. The Basis for and Features of China’s Entry into a New Phase of Heavy Industry

The new round of growth beginning from the second half of 2002 has been driven by a batch of new fast-growing industries. The leading ones are the industries such as housing, automobile, electronic communication and infrastructure construction. These industries in turn have pushed forward other industries of intermediate investment products, mainly the iron and steel, nonferrous metal, machinery, building materials and chemical industries. The above two categories in turn have pushed forward the growth of the energy industry including electricity, coal and oil. In this logically related growth pattern, most of the fast-growing sector is heavy industry. As a result, the growth rate of the heavy industry in the first three quarters of 2003 was clearly higher than that of the light industry. The added value of the heavy industry accounted for as much as 64.37 percent of all industrial added value, which was 3.42 percentage points higher than the annual level of 2002 (60.95 percent). Such a range of change had been unseen for many years.

The rapid growth of the new leading industry in terms of heavy industry, played a vital role in the remarkable macroeconomic achievements scored since the beginning of 2003. In our study of the inter-relationship between industries and macroeconomic growth, we have seen a very meaningful result. In the first eight months of 2003, the contribution rate to industrial growth by the four industries of machinery, automobile, iron and steel, and electronics, whose industrial growth boom indexes were among the highest, reached 48 percent. Their proportion in the total industrial sales revenue reached 38 percent. These two proportions were respectively 33 percent and 32 percent in 2000. Supposing these two proportions had remained at the 2000 levels or supposing these industries had scored no faster growth, the industrial growth rate for the first eight months of 2003 would have been at least 2.5 percentage points lower and accordingly the GDP growth rate would have been 1-1.3 percentage points lower. In other words, the growth rate for the first three quarters of 2003 might well have been below 7.5 percent, instead of the 8.5 percent already realized.

The above phenomenon indicates that the Chinese economy is entering a period during which the heavy industry is playing an especially important role. This feature is by no means temporary or short-termed. It has medium and long-term implications. In light of China’s economic development period, it is logic to say that China is entering a new period of heavy industry. As indicated by international experience, the rapid growth of the Chinese economy has been closely related to the drastic changes in the economic structure. A typical manifestation is that different periods have had different leading industries to provide a driving force for economic growth. In the 1980s, the light and textile industries played the leading role. In the mid-1990s, the fast-growing industries were the basic industries, infrastructure, new-generation household appliances (television, refrigerators and washing machines) and the real estate (though with significant bubbles). The economic growth slowed down after 1997, which in fact meant that the fast-growing industries emerging in the early 1990s began sagging and new leading industries were yet to emerge. That constituted a period with no leading industries. This situation continued till the second half of 2002 when substantial changes began taking place.

The new period of heavy industry does not merely find expression in the rising proportion of the heavy industry. The changes in growth mechanisms also have more profound implications.

First, the housing and automobile industries, which are the leaders of the fast-growing industrial clusters, have seen 80-90 percent of their products being purchased by individual residents. In another word, individual residents have become the end consumers of these new fast-growing industries. That has brought about several significant results: the starting and ending points of the growth are solidly market- oriented; mass personal consumption enables the related industries to achieve the tangible effect of the economy of scale and become real leading industries. For example, the automobile industry truly began playing a leading role only in 2002 though the talk of such a role had been going on for years. Backed by mass personal consumption, limited and short-term bubbles cannot be ruled out but large-scale and long-term bubbles are less likely.

Second, these fast-growing industries are largely in three major sectors: the state-owned and state-holding enterprises, the joint-venture or wholly foreign-owned enterprises, and the private enterprises. Difference exists in different industries. For example, the joint-venture enterprises dominate the automobile industry, and the state-holding enterprises dominate the iron and steel industry. Nevertheless, data analysis indicates that in the new round of growth beginning in 2002, foreign-invested enterprises were the fastest growing ones, followed by private enterprises. State-owned and state-holding enterprises were average performers, while collective enterprises saw their performance below the average level. The general trend is that non-state-owned enterprises and those of mixed ownerships have become the leading force in growth. Take the machinery industry for example. Private and foreign-invested enterprises now account for 80 percent of the sales revenues of their industries and 90 percent of the profits of these industries. Private industries are enjoying supremacy in increasingly more industries such as micro and small bearings, low-voltage electric instruments, motorcycles, low and medium-pressure pump valves, automobile parts and civil meters for water, electricity and natural gas. Major changes also have occurred in the investment and production behaviors of these enterprises when compared with the past.

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