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Analysis of Economic Situation in 2005 and Forecast for 2006


Zhang Liqun

I. Basic Features of Economic Performance in 2005

1. The economy has maintained a steady and rapid growth

The annual GDP growth rate increased 9.9%, year on year, showing 0.2 percentage points lower than the previous year, with the same growth level. Starting from 2003, the country’s economic growth rate has maintained a 10% growth rate (estimated on the basis of the adjusted data), displaying a momentum of steady growth at a notably high level.

2. Price hikes have notably decreased

The consumer price index (CPI) rose by 1.8% year on year. The decline is very noticeable compared with the 3.9% rise of the previous year.

3. Consumer demand has maintained a strong momentum

The total retail sales of consumer goods grew by 12.9% year on year. After deducting the price factor, the actual growth was 12%. The actual increase was 1.8 percentage points over the same period of the previous year. The retail volume of telecom equipment enterprises in wholesale and retail industry above designated quota increased by 19.9%; the electrical domestic appliances and audiovisual equipment increased by 14.8%; the retail volume of automobile grew by 16.6%, indicating the consumption structure is still being actively updated.

4. The investment continues to grow at a fairly fast pace, but the growth rate tends to be stable

The fixed asset investment of the whole society rose by 25.7% year on year, 0.9 percentage points lower than the same period of the previous year. In general, it is still at a high level. This is the first time for the investment growth to remain steady at such a high level in history.

5. Imports and exports continue their rapid increase, and the trade surplus continues to expand

In 2005, total import and export volume increased by 23.2% year on year. Exports grew by 28.4%, and the growth rate was about the same with that of the previous year; imports increased by 17.6%, and the growth rate was notably lower than the same period of the previous year. With the import and export value being mutually offset, the surplus amounted to 101.9 billion US dollars.

II. On Steady Growth Period

At present, a new round of economic growth has turned from the rising period to the steady growth period. It is characterized by the coexisting of high growth and low inflation — when the economy grows at a high speed, the total supply and demand moves around the point of balance. The important reasons behind it are: Demand, especially the source demand caused by the upgrading of the consumption structure, is still robust, which determines that economy will continue to maintain a high growth rate; on the other hand, the increase of supply capacity is also robust. The market’s ability of adjustment of total supply and its structure is so strong that it could make supply promptly adapt to the change of the demand — this has helped maintain a general balance of supply and demand. Under this pattern, on the one hand, the market is large, actively pushing the advance of industries and enterprises; on the other hand, there is a rapidly growing and large number of industries and enterprises that wish to enter this market. Thus, rapid growth will inevitably go along with fierce competition. This is a new characteristic that has not been seen before. It is believed that this has created a very important environment for deepening the reform, optimizing the economic structure and changing the mode of economic growth.

1. Increasing consumption, encouraging personal purchase of cars and houses and continuing to upgrade the consumption structure are key factors for sustained rapid economic growth

China’s output of cars grew by 55.1% in 2002, 89.7% in 2003, 11.7% in 2004 and only 4% from January to May in 2005 (the above growth rates are based on year-on-year comparison). This indicates that the growth of car purchase has turned from the explosive increase in previous years to a steady adjustment. Since 2004, real estate has become a hotspot of residents’ investment as house prices have been rocketing. After the government took adjustment measures in 2005, the situation has been gradually cooling down. After these adjustments, the personal car and house purchase would tend to be mature and stable and become a lasting force to push economic growth. But the purchases are still not quite steady in the course of policy adjustments. If policy-making is not properly handled, the market might continue to stay cool. As cars and houses are the important source factors for a new round of economic growth, the continuous slowdown of purchase might lead to incessant decline of economic growth and quickly send the economy into a sluggish plight. This will pose a serious threat to the steady and fairly rapid economic growth. We should pay enough attention to this problem. Therefore, it is suggested that an important policy goal during the period of steady growth is to encourage residents to by cars and houses so as to stabilize the source factors that bring along the economic growth.

2. The adjustment and upgrading of heavy industrial structure has been sped up

In this new round of rapid economic growth, the heavy industry has been developing at a higher speed. The overheated investment in recent years has mostly appeared in heavy industry. Under the market regulation, the production capacity has been vigorously raised in iron and steel, cement and non-ferrous industries; on the other hand, the overheated tread has been effectively controlled as a result of a series of macro control adjustments; but the domestic car and house purchases as well as the enlarging of international market share have also tended to stabilize. In general, the growth of demand for the heavy industry has tended to be steady, which will fundamentally change the supply-demand relationship of heavy products. As a result, partial production capacity surplus has emerged. As prices fall and competition tends to be fierce, the economic benefits of enterprises have also decreased. This situation will naturally bring about the adjustment and upgrading of the heavy industry, resulting in a change from quantitative expansion to structural optimization and quality and efficiency improvement.

3. Foreign trade enters transitional period

In recent years, China’s export has maintained a 30%-plus growth rate. The main reasons are: First, international industrial transfer has created a drastic increase of the country’s processing trade; second, domestic competition pressure has squeezed more and more labor-intensive industries into the international market, such as light and textile industries, garment and home appliances. The advantages of labor resources and private firms’ marketing ability have accelerated the growth of exports of general trade by a big margin. It is expected that these factors will continue to support the rapid export growth. On the other hand, fiercer domestic competition and falling prices will inevitably restrict the increase of imports, which will also lead to more trade surplus and more trade frictions with China’s main trade partners. Against this background, China will be under a series of pressures from the mode of trade growth characterized by quantitative expansion. The country will naturally develop its economy in the direction of structural optimization and quality and efficiency improvement. Such changes would help raise its export competitiveness and ease trade frictions.

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