By Liu Shijin,, Yu Bin & Zhang Liqun

In the first half of the year, economic growth accelerated, economic efficiency improved, and the economic performance developed with an obvious upward trend. In the second half of the year, the growth of exports tends to decline, the foundation for a continuous expansion of the domestic demand is not stable yet, the growth rate is likely to drop slightly. It is estimated that the annual economic growth can reach 7.5%. The priority of the current macro economic policy should be changed from promoting short-term economic growth to solving the major problems facing the medium and long-term development so as to maintain sustained and stable growth of the national economy.

I. Major features of the economic performance in the first half of the year

From the beginning of this year, economic growth developed with the trend of quarterly acceleration and the economic performance had the following features:

1. Demands increased in an all-round way, and the pattern of economic growth underwent changes. Exports, consumption and demand for investment all maintained a high growth rate, and the overall increase in demand constituted the important foundation for the economic recovery and growth. The fast growth of exports and consumption demands, in particular, played an increasingly role in driving the economic growth. In the first six months, foreign trade maintained an extraordinarily high growth, increased by 38.3% as compared with that of the same period of last year. The total retail volume of consumption goods increased by 10.1% as compared with that of the same period of last year, the growth rate was 3.7 percentage points higher than that of the same period of last year; while the overall fixed assets investment increased by 11%. The adjustment and effective application of the macro economic policies in recent years, such as the increase of export rebate rate, the levy of interest tax, the implementation of real names for savings deposits, the prolonged holidays, the increase of incomes for middle and low-income groups, the interest discount by the state finance to support technological transformation of enterprises and the reform of housing distribution system, all played an important role in promoting the growth of exports, consumption and investment demands.

2. The overall price level continued to stay at a low level.Against the background of overall increase of demands and acceleration of the economic growth, the deflation situation began to ease.

However, obviously different from the pattern of the economic performance in the past, the market demand-supply pattern did not undergo a fundamental change, and the overall price level still stays at a low level. In the first half of the year, the retail price index of consumption goods dropped by 1.9% as compared with that of the same period of last year; the resident consumption price index, due to influence by the increase of various service charge standards, reversed its negative trend and increased by 0.1% as compared with that of the same period of last year. The price of some production resources began to rise, such as steel, cotton, crude oil and finished oil, which was associated with the price fluctuation at the international market, the domestic restrictions on "five kinds of small enterprises" and the reduction of the production capacity. The continuous low level of the overall price indicates that surplus production capacity is still rather common and strikingly high, and the task for structural adjustment is still arduous.

3. The structure was improved slightly and the economic efficiency was improved. High-tech products maintained a fast development, the electronic, information and telecommunications industry contributed about 1.7 percentage points to the industrial growth, becoming a new force in the growth of industrial production. The growth of infrastructure industry accelerated, electricity generation increased by nearly 10% as compared with that of the same period of last year, the overall freight and passenger transportation increased by 4.2% and 7.3% respectively as compared with that of the same period of last year. The reduction of production capacity in coal, metallurgical and sugar-making industries produced some results – the production of crude coal dropped by 2.7%, the production of sugar dropped by 23.8%, and the growth rate of steel production dropped by about 5 percentage points as compared with the average growth rate of last year. The quality and efficiency of economic performance were also improved. The stockpile of finished products of enterprises dropped, the sale rate of industrial products reached as high as 96.8%, marking an increase of 1.15 percentage points as compared with that of the same period of last year, the sale rate in June reached a record high of 97.8%. The economic efficiency of enterprises was improved. From January to May, the composite index of economic efficiency of industrial enterprises was 107.3, an increase of 16.4 percentage points as compared with that of the same period of last year, the amount of profit realized by enterprises increased by 1.3 times. The pace in reducing losses and increasing profits by the coal and metallurgical industries accelerated. In the first five months, the net losses suffered by the coal industry was reduced by 440 million yuan as compared with that of the same period of last year, the profits realized by the metallurgical industry increased by 5.8 times as compared with that of the same period of last year.

4. The fiscal and tax revenues and economic growth started to increase with the same pace. In recent years, the growth of fiscal and tax revenues continued to be faster than economic growth, producing a relatively complicated effect on expanding domestic demands. This year, the fiscal and tax revenues maintained a fairly fast growth, however, after the non-comparable factors were deducted, the fiscal and tax revenues and economic growth started to increase with the same pace. In the first half of the year, the national fiscal revenues totaled 624 billion yuan, an increase of 17.9% as compared with that of the same period of last year. The total amount of tax revenues was 597.3 billion yuan, an increase of 99.8 billion yuan or 20% growth, making this year’s increment biggest and the incremental rate fastest in recent years. The main sources for the growth of fiscal and tax revenues were the acceleration of economic growth, the improvement of enterprise economic efficiency, the bullish securities market as well as the increase of tariff due to the crackdown on smuggling and the fast growth of imports. In the first half of the year, import tariff collected by the customs and stamp tax collected from securities transactions increased by 32 billion yuan, accounting for 32% of the total incremental amount of fiscal and tax revenues; the enterprise income tax, income tax of enterprises with overseas investment and individual income tax increased by 22.7%, 35% and 50% respectively, amounted to 25.8 billion yuan, accounting for 26% of the total.

II. The national economy will maintain its trend of stable growth in the second half of the year.

In the second half of the year, conditions supporting economic growth will undergo some changes, and the national economy will continue to maintain its trend of stable growth.

1. The growth rate of exports tends to drop, and its function for driving forward the economy will weaken. In 1999, the growth of exports developed a pattern of lower growth in the first half and higher rate in the second half, dropped 4.6% in the first half and increased more then 15% in the second half. The monthly export volume after August stayed at more than US$18 billion, and surpassed US$20 billion in December, the average amount was roughly the same as compared with the monthly export in the first half of the year (US$19.1 billion), and this will, to a considerable degree, affect the growth rate of exports in the second half of the year. Furthermore, there is now little room for adjustment of policies that would further promote growth of exports. It is predicted that the growth rate of exports in the second half of this year will see a declining trend. Different from exports, the growth rate of imports witnessed little fluctuation last year. In the second half of the year, the increase of demands for various production investment, particularly for technology and equipment, will naturally lead to an increase of imports, therefore, imports in the second half of the year will continue to maintain a high growth rate. With a declining growth rate of exports and continuous growth of imports, the contribution by the growth of net exports to the economic growth will weaken in the second half of the year.

2. The growth of investment demands will remain stable. In the investment growth in the first half of the year, the investment in infrastructure construction and that in renovation formed a sharp contrast. Investment for infrastructure construction increased by 6.6% while that for renovation increased 22.9%, the difference in growth rates was 16.3 percentage points. This indicates that the current investment growth, to a high degree, still relies on the size and utilization structure of the state treasury bonds. In terms of the sources of capital, budgetary investment and loan investment increased rapidly while the growth of capital raised by enterprises and overseas loans was still slow. Among this, overseas capital actually used in the first half of the year dropped by 7.5% as compared with that of the same period of last year. This will directly have an impact on the expansion of sources of investment capital and also reflects the will of the investors and the deficiency of the financing capability. Furthermore, the factors persistently restraining the investment expansion, such as unsmoothed financing channels for medium and small enterprises and high and new technology enterprises, the drop of anticipated yields of investment and the increase of investment risks, did not show any sign of turning for the better. Therefore, given the conditions that the volume of state treasury bonds does not increase drastically, the investment demands will continue to maintain a stable growth in the second half of the year.

3. Factors restraining the expansion of consumption demand increase. In the first half of the year, the expansion pace of consumption demand was quickened, and it played an important role in promoting economic growth and easing the pressure of deflation. In the second half of the year, first of all, the decrease of grain output and the drop of farm produce’s price will directly affect the growth of farmers’ income and the development of the rural market. The output of summer crops decreased by 12 billion kilograms or a 10% drop, the output of early rice was the lowest since the reform and opening up. For autumn crops, a decrease in output is now a definite fact due to the reduction of sown acreage and serious drought in North China. In June, the market price of major farm produce dropped by a large margin, the prices of rice, corn and wheat dropped by 1.9%, 6.3% and 3.6% respectively over the preceding month, the average prices of seven kinds of fruits and 12 kinds of vegetables also dropped by 6.7% and 12%. Second, the number of laid-off workers and the unemployed will continue to rise, the middle and the low income groups in cities and towns will find it difficult to increase their income. The number of laid-off workers from state-owned enterprises will continue to rise, and the unemployment rate in cities and towns has now surpassed 5%. Third, the consumption environment and related policies can see little improvement in a short period of time. Some new consumption sectors are still restrained. For example, the disorder in the tourist industry, the inadequate accommodation capacity of tourist spots and traffic jams during the golden tourist seasons make it difficult for holiday tourism and holiday consumption to play more important role in the economy. Therefore, the base for a continuous expansion of consumption demands in the second half of this year is not stable and solid yet, the consumption demand might see a decline.

By comprehensively analyzing the aforementioned factors, we hold that the national economy will maintain a trend of stable growth in the second half of the year, the growth rate will drop slightly as compared with that of the first half of this year, and the annual economic growth rate will reach 7.5%.

III. Several problems deserving our attention and calling for solution

The Chinese economy has now undergone some positive changes, and declining trend has been basically reversed. At the same time, we should be sober-minded that the base for a stable recovery and fast growth of the economy has not formed yet. Against the backdrop of the emerging positive signs of the economy, we should timely adjust the policy priorities from checking the short-term decline to exploring and tapping the potential for medium and long-term growth of the economy. Now, we can consider to do several things that we wanted but were impossible to accomplish a few years ago.

First, to organically link the issue of state treasury bonds and the supplement of social security funds with the expansion of consumption and investment. This year, with the issuing of new state treasury bonds, we may consider to use part of it to supplement the social security funds. This capital, apart from distributing to the low income group and the retirees to help them expand consumption, could be transferred, in an experimental way and through an appropriate channel, into investment by diverting it into the capital market. In this way, revenues from state treasury bonds will ultimately be used to expand the domestic demands, but it is then organically linked up with the reform of the social security system and investment system, thus realizing the goal of "one stone killing two, or even several birds". Our country still has great potential in issuing medium and long-term state treasury, the formation of the aforementioned mechanism will help find the way of using more state treasury to fill up the shortage of social security funds.

Second, to reduce and reform administrative examination and approval, further relax controls on investment. At present, there are too many administrative examinations and approvals, many repetitious and blind investment projects actually passed such "examination and approval". The examination and approval without transparency is usually the hotbed for corruption. We should now make a thorough scrutiny of the existing administrative examinations and approvals, and those that could be cut should be eliminated as soon as possible. The priority of the government is to better manage the investment of the government. We should distribute state capital according to the strategic restructuring of the national economy set by the Fourth Plenary of the 15th Central Committee of the CPC, particularly the state capital directly managed by the government. In terms of non-government investment, we should loosen controls in the aspects of investment scale and access restrictions. Against the backdrop of the accelerating pace of our country''s entry into the World Trade Organization (WTO), one principle should be made clear, that is, industries that are to be to opened to overseas investors should be first of all opened to domestic enterprises. This move will help stimulate growth of non-government investment. After the examinations and approvals are reduced greatly, the work priorities of the government should be shifted to formulating industrial policies, promoting technological progress, strengthening environmental protection and security management, providing information services, and most importantly, creating and defending a fair competition environment. To put it simply, the government mechanism compatible to the socialist market economy should be strengthened. The solution to this problem should become the core of the transformation of government functions and organizational reform.

Third, to cultivate new growth sectors for the economy. Housing, car and construction of urban infrastructure facilities, particularly light-track transportation systems in large cities, are the fields with greatest potentials to promote medium and long-term growth of the national economy. In the first half of the year, the housing industry in Beijing and Shanghai recorded a fast growth. The sales of commodity residential house in Beijing grew 190% as compared with those of the same period of last year, the housing purchases by individuals increased sharply, accounting for 84.1% of the total sales, and non-occupied houses were reduced. The opening of the secondary and third housing market in Shanghai greatly stimulated housing consumption by residents, making it an important new growth sector in Shanghai's economy.

From the national perspective, the growth rate of real estate investment in the first half of the year (excluding town and township collectives and individuals) reached 22.4%. The emerging growth potential of the housing industry is the direct result of the reform of the housing distribution system, also an example of growth potential released by reforming and eliminating the system and policy obstacles, it deserves adequate attention. Of course, there are still much to be done in the reform of the housing system, for example, solving the remaining problems of the welfare housing distribution system, further opening the market and forming the currency distribution system, they should all be further deepened. Car consumption and the development of the automobile industry are now the focus of the whole society. Here, problems must be solved in order to face international competition when the country joins the WTO, to expand domestic demands and promote the economic growth. The most urgent thing is to further adjust the consumption policy so as to release the potential of car consumption that has been depressed for a long time, to enlarge the market capacity, to stimulate the manufacturers to enlarge their scales and reduce cost, to strengthen their competitiveness in the domestic market, and consequently improve their competitiveness in the international market when the customs tariff is lowered in the coming few years. When the automobile industry moves onto the track of sound development, it is expected to become an industry with the greatest potential in the national economy in the coming 20 to 30 years.

Fourth, to vigorously cultivate new investment mechanism for the construction of infrastructure facilities. With the urbanization process being accelerated, investment for the construction of infrastructure facilities will continue to take a large proportion in the overall investment. More non-governmental funds should be introduced, and a new investment mechanism for infrastructure facilities should be cultivated. One of the features of infrastructure projects is that their social efficiency is better than economic benefits, and there is a gap between the proceeds level and the average return rate of social investment. If government funds could make up this gap, a large amount of non-governmental investment could be introduced into the infrastructure construction. The government could make up the aforementioned gap by financial subsidies or proceeds generated by the construction projects. For example, the proceeds gap between subway developers and operators could be made up by allocating some revenues from price hike of land along subway lines, or by ochtying up the profitable projects along subway lines with the subway projects. In the construction of infrastructure facilities in medium and small towns, reasonable arrangement of non-profitable and profitable projects could be used to attract non-government investment.

Fifth, to speed up the reform of monopoly industries, and promote the growth of related consumption and investment. With reforms in the past years, the monopoly industries in our country have undergone changes to different degrees, however, some industries are still monopolized, seriously hindering the growth of consumption and investment. Take the example of the electric power, telecommunications, civil aviation, petrochemistry and banking industries. On the one hand, they still impose strict restrictions on access, make competition in the industries inadequate or unreasonable, and it is difficult to effectively lower the cost, and on the other hand, they maintain the price higher than the normal through administrative means, thus limiting consumption by the public. With the acceleration of China’s entry into the WTO, it becomes more urgent to deepen reforms in these industries, and the conditions for such reforms are now mature. The opportunity to promote these industries to relax access restrictions, encourage competition, develop reasonable price mechanism and build up market structure should not be missed, and such reforms will naturally stimulate the growth in related consumption and investment sectors.

Sixth, to continue the implementation of the decisions made at the Fourth Plenary of the 15th Central Committee of the CPC, promote the strategic adjustment of the national economy and the system renovation of the state-owned enterprises. The opportunity for structure adjustment of some industries and the improvement of operation conditions of some enterprises should be grasped. The solving of difficulties and problems of enterprises, the promotion of enterprise restructure and renovation, and the long-term development should be properly linked up. In some places, in particular, after the state-owned enterprises operating at a loss come out of plight, these enterprises should be actively guided to implement the decisions of the Fourth Plenary of the 15th Central Committee of the CPC to further strengthen their structure adjustment, promote the overall and in-depth reform of enterprises and to lay a solid micro foundation for the sustained and stable development of the macro economy.

Project Group for "Analysis of Macro Economic Situation"

Project leader: Xie Fuzhan

Project members: Chen Xiwen, Zhang Junkuo, Long Guoqiang

July 2000