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Economic Performance in 2009 and Policy Options


Project Team of DRC

The year 2008 has been a year in which Chinese and foreign economic situations have turned out extremely complicated and quite changeable. The CPC Central Committee and the State Council have stepped up the predictability, the purposefulness and the flexibility in macroeconomic control and have taken timely and effective measures to have successfully protected China's economy from the negative effects originating from such severe and disadvantageous factors as the snowstorms, the Wenchuan Earthquake in China's Sichuan Province and the US sub-prime mortgage crisis. As a result, the rise of the commodity prices has been falling down month by month and the national economy has maintained a stable and fast growth. However, the cyclical decline of the economic growth has evidently dragged down the investment and export growth and evoked the readjustment of such leading industries as the real estate and auto. In addition, as US sub-prime mortgage crisis has evolved into an overall financial crisis, China is facing the pressure of a declining economic growth in 2008 and 2009. For this reason, the basic principle for macroeconomic regulation in 2009 should rest on carrying out a positive financial policy and a stable monetary policy, accelerating the reform and structural readjustment and expanding effective demand in China, controlling economic downturn and its duration and guarding against the serious deviation of the economic growth from the potential growth rate through “retaining and stabilizing a number of economic sectors while reforming the others”.

I. Weakening Price Rise Is Evident and the Medium- and Long-term Inflation Pressure Still Calls for Alertness

The reverse variation tendency of the household consumer prices and the ex-factory prices of the industrial products since April 2008 is undergoing changes. Throughout the year,the rise of household consumer prices is expected to drop to 6% or so and the rise of ex-factory prices of the industrial products will also show a downturn at the higher level. The pressure of price rise will decrease evidently in a short period of time. The slowdown of the world economic growth, the weakening US dollar and the drastic decline of the prices of the primary commodities on international markets will also alleviate China's inflation pressure to certain extent. Affected by the new round of global industrialization wave and the rise in the cost of China's production factors, the pressure of a medium- or long-term price rise still calls for attention.

1. The rise of household consumer price will continue to decline

The drastic rise of food and housing prices has been a main reason for the continuous rise of consumer prices since June 2007, with the average contribution rate of food and housing prices to the rise of consumer prices reaching 94.5%. Of this percentage, the average contribution rate from the rise of food prices reached as high as 82.2%. With the continuous decline of the food price rise from 23.3% in February to 10.3% in August, the average contribution rate of the food prices to the rise of consumer prices has dropped from 85.6% in February to 67.2% in August. In August, the rise of consumer prices dropped from 8.7% in February to 4.9% as compared to the same period of the previous year,which hit an all-time low over a year's time.

In terms of the whole year's tendency, as the effects of the incentive supply policies have gradually loomed up, the supply of meat, poultry, eggs and vegetable has been ameliorated, a grain harvest for the fifth consecutive year is for sure, the international foodstuff prices have been falling down at a higher level and the food prices will continue to show a downward trend. At the same time, as the real estate market has entered a period of readjustment, the home-leasing prices have reduced and the prices of fuel and raw materials on international markets have dropped at a higher level, therefore, there is little room for the rise of the housing prices. It is estimated that the household consumer prices will continue to maintain a monthly downward trend,with the whole year's rise up to about 6%.

2. The rise of ex-factory price of industrial products is nearing its peak

While the rise of the household consumer prices has been falling down month by month, the rise of the ex-factory prices of the industrial products has been going up continually, up 10.1% in August, year on year, and hitting an all-time high since 1994. In terms of the structural aspect of the rise of the ex-factory prices of the industrial products, the prices of metal products, oil processing, chemical raw material and products, coal and coking, oil and gas extracting have seen a considerable increase. Of them, the increase in the prices of iron and steel products, oil and petrochemical products and coal has contributed a rise of 2.4, 3.4 and 1.2 percentage points respectively to the rise of ex-factory prices of the industrial products,with the rise of the prices of those products contributing a 70% increase in the ex-factory prices of the industrial products. The rise of the prices of those products has been caused by the short-term disequilibrium in China's coal supply and demand resulted from such factors as snowstorms, restricted transportation capacity, control over the capacity and the adjustment of oil and electricity prices in China as well as by the sharp increase of prices of the primary commodities on international market.

At present, the factors driving up ex-factory prices of China's industrial products are changing. Firstly, the recent demand for iron and steel in China and abroad has obviously reduced, resulting in a change of the market supply-demand pattern, an increase of the stock of iron ore and the majority of iron and steel products and a gradual decline of the prices. Secondly, the growth of China's demand for power and coal will see a continuous decline in a certain period of time. In August, the growth of power consumption fell back to a lower level, the apparent coal consumption reduced, the coal stock in most power-generating enterprises hit an all-time high and the spot coal prices dropped notably. Thirdly, the international crude oil prices have been declining continuously from a historical high level, thus obviously dragging down related energy prices and raw material prices. On the whole, currently the rise of the ex-factory prices of the industrial products has by and large reached its peak in this round of economic cycle.

3. Vigilance should be kept over medium- and long-term inflation pressure

Although the world economy has declined as a whole in a short period of time, the shrinkage of the aggregate demand will bring down the prices of the international staple products, therefore, it is possible that the commodity prices would go down continually. However, from the international perspective, the new round of global industrialization wave represented by the BRICs (Brazil, Russia, India, and China) will last for a longer period of time, becoming a mainstay in demand for staple products,thus determining that the prices would not decline sharply. On the other hand, the overall outbreak of the American financial crisis, coupled with the United States taking massive measures to save the market with the government credit, the US dollar will weaken once again, at the same time part of the international hot money will once again speculate into commodity markets, thus making it possible for the prices of the international staple products to rebound.

With regard to China's economy, firstly, the Chinese domestic grain market is relatively isolated from the international grain market, there is a big difference between grain prices on Chinese domestic market and those on international market. Besides, the labor cost has risen, therefore, it is predicted that the grain prices on Chinese domestic market will rise in the medium and long run. Secondly, it is imperative to reform the market prices of the production factors, the prices of the production factors will tend to rise over a long period of time, and there is still room for the prices of oil products, power prices and prices of related resources to go up. Thirdly, China is confronted with more constraints in its development and will face much pressure in the new round of international climate negotiations. The cost rise brought about by energy saving and emission reduction is also a factor driving up the prices. It is clear that China will still face a medium- or long-term inflation pressure and needs to watch out for it.

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