By Liu Shijin & Zhang Liqun

I. Basic Assessment of Economic Development Trend of This Year

China's economic growth at the current stage is mainly restrained by demand. An analysis of various factors indicates that this year the domestic demand will maintain a steady growth while the international economic development trend will continue to face uncertainties. But overall, the unfavorable impact of these uncertainties on the Chinese economy is expected to be smaller than last year and the national economy has every reason to maintain the momentum of a steady growth.
First, consumption will maintain a relatively high steady growth. In the first quarter of this year, the growth of the total volume of consumer goods retail declined slightly, mainly due to the effect of declining prices and the fact that the purchasing with token money ill the same period of last year had augmented the base figure of consumption. At comparable prices, the total volume of retail consumer goods rose by 10.2 percent, close to the average consumption growth rate in recent years. Spurred by income, price, supply and other factors, it is unlikely that consumption growth will decline drastically in the rest of this year. The growth rate will be more or less at tile same level of last year.

Second, investment will continue to grow at a rate slightly higher than last year. The fast growth of investment in the first quarter of this year was mainly attributed to the intensified government investment. More importantly, the growth of foreign investment was fast and the investment activities induced by the domestic market were brisk. Investments of this nature are sustainable. If policy adjustments are proper, these investments will continue to grow. As the intensified government investment is of phasic nature, investment growth is expected to be somewhat slower in the rest of this year but will remain higher than last year.

Third, export growth is expected to be slightly higher than last year and imports will rise at a relatively fast pace. As a result, trade surplus will decline to a certain extent. With the gradual recovery of the world economy, export environment will improve. As export growth last year was relatively low, export growth this year is expected to be slightly higher. At the same time, we should see that as the improvement in China's export conditions is not tangible and its import will grow faster after WTO accession, the country's trade surplus is likely to decrease.

Our overall assessment is that domestic demand will continue to grow fairly fast, foreign demand in terms of net export will decline, and this year's economic growth will be equal to or slightly higher than that of last year, reaching 7.5 percent with hard efforts.

II. New Features of Economic Operation and Policy Adjustment Requirements

In the past two years, some positive changes of mid- and long-term significance emerged in the operation of the Chinese economy. First, housing, automobile, telecommunications, infrastructure and other sectors that could directly upgrade consumption structure and industrial structure and effectively push forward the national economy began to develop fast or maintained a rapid growth. Second, foreign transnational companies accelerated the transferring of production and manufacturing capacities to China after its accession to WTO. This has boosted the growth of foreign investment. Third, progress has been made in reforming the state-owned enterprises, in bringing them out of difficulties, and in restructuring, reorganizing, transforming and strengthening the management of enterprises. As a result, some enterprises that have made greater progress have entered a virtuous circle of development. The development of private economy and the restructuring of rural enterprises in southeast coastal provinces have made important breakthroughs and increased the vitality of the economy. Fourth, the reform and reorganization of monopoly industries have made significant advance. The plans for reforming and reorganizing the electricity, telecommunications, civil aviation and other industries are already in place. The reform and opening of the financial sector are advancing fast. Fifth, initial progress has been made in the adjustment and reform of government system, especially in overhauling the administrative examination and approval system, as part of fulfilling the commitments made on WTO accession. As a result, government relations with enterprises, markets and the society have demonstrated positive changes.

On the other hand, some issues and phenomena that have emerged this year deserve attention and study. The first is the contrast between economic growth and fiscal revenue and expenditure; the second is the contrast between economic growth and economic efficiency index; and the third is that while the economy has maintained a fairly fast growth, some social contradictions have become acute.

The recent positive changes in the economic life can be attributed to the positive fiscal policies implemented by the government in recent years and the policies of reform and adjustment that were designed to spur social consumption and investment and expand domestic demand. We should say that the positive macro-fiscal policies and the micro-policies to stimulate social consumption growth are mutually complementary. Without the economic growth rate supported by positive fiscal policies, there could be no liberal environment for the growth of social consumption and investment and some contradictions could become acute. Likewise, without inherent driving force for economic growth, the fairly fast economic growth rate could not sustain because positive fiscal policies could not last long. The positive changes in the economic life indicate that the market-based inherent driving force for economic growth is increasingly stronger. One direct evidence is that in recent years, the total volume of the Chinese economy has been constantly expanding while the scale of national bonds issued by the government to support the proactive fiscal policies has been more or less fixed. The economic growth rate of more than 7 percent over the years is a proof that the inherent growth driving force has played an increasingly greater role. The new problems emerging in the economic life testified to the necessity from another angle that some policy adjustments are needed. The tightening of fiscal conditions is, to some extent, due to the excessive dependence of the on-going economic growth, especially the growth of investment and export, on fiscal expenditure. The declining efficiency of the state-owned enterprises has been directly related to the changes in the external environment (for example, the declining international oil prices) and weakening or abolition of the supportive policies. And some social instabilities can be attributed to the incompleteness of the social security system and the changes in the income distribution pattern.

The policy orientation for the next step should cherish, protect and strengthen the market-based inherent driving force for economic growth so that it could play a leading role in future economic growth. At present, efforts should be made ill the following two aspects. One is to further adjust policies in the new areas of consumption that can spur the upgrading of consumption structure, such as lower taxes and fees, less administrative procedures and more conveniences. In addition, housing monetization, which has not been truly implemented, and the marketization of used houses should be expedited, while the policy on automobile consumption should be introduced as soon as possible. The other is to further liberalize industrial access by taking advantage of WTO accession. The government should focus on improving the management of fiscal funds and providing public services. Except in a few special sectors, those who invest should be in charge. Administrative restrictions should be minimized so as to enhance the investment enthusiasm of all investors, especially the subjects of the private economy.
On the other hand, the proactive fiscal policies aimed at maintaining economic growth rate should be replaced by the fiscal policies that give equal emphasis to supporting reform and adjustment and to expanding the effect of domestic demand. Specifically, after the on-going projects supported by national bonds are basically completed, the emphasis of the fiscal policies should shift to increasing the support for poor people and backward regions and easing the contradictions associated with the changes in the pattern of social interests. At the same time, it is imperative to increase the support for the construction of the social security system, to ease the historical burdens of the state-owned enterprises that are in transition, and to promote the comprehensive and substantial advance in the adjustment of the distribution of the state-owned economy and the reform of the state-owned enterprises. In addition, it is necessary to increase the input of the guiding funds in infrastructure construction and related areas and to expedite the exploration for new mechanisms to attract, with limited fiscal funds, as much social Rinds as possible to invest in the public sectors welfare.

III. Causes of Current Fiscal Revenue Downturn and Policy Options

In the first quarter of this year, some unusual phenomena appeared in fiscal operations. Fiscal revenue nationwide rose by 3.4 percent, which was 24.5 percentage points lower than that of the same period a year before. The fiscal revenue of the central government declined by 7.8 percent over the corresponding period of last year. This phenomenon is unprecedented in recent years and deserves close attention.

According to an analysis of the data available, the main causes are as follows: First, the previous years saw lots of policy-oriented or unconventional tax increase factors while this year has witnessed the reduction or abolition of these factors and the introduction of some policy-oriented or unconventional tax reduction factors. Second, the amount of the policy-oriented revenue reduction was underestimated. For example, the total amount of tax "exemption, anticipation and rebate" introduced for the stock markets and exports that were full of variables had been underestimated. The actual tax rebates in the first quarter totaled 40.5 billion yuan, or 19.7 billion yuan more than that in the previous corresponding period. That was the most important factor causing the abnormity of fiscal revenue and expenditure. Third, the intensity of the expansionary policies in budget expenditure could have been too strong. An analysis of the economic situation in the latter months of last year indicates that the intensity of fiscal expansion increased in order to prevent a decline in economic growth rate in the first half of this year. As a result, infrastructure construction spending was 60.1 percent higher than the same period of last year and the increase was the highest in recent years. Due to the wage hikes ill the administrative and institutional units last year, the educational expenditure and administrative spending all rose by more than 30 percent.
Nevertheless, we can still make the following assessment of this year's fiscal trend: if the economic growth rate can be maintained at more than 7 percent in the last three quarters of this year, if the consumption market is fairly brisk, if the policy-oriented budget expenditures are properly adjusted, if other feasible measures are taken to increase revenue and reduce expenditure, the targets of this year''s budget revenue and expenditure can still be achieved.
For this reason, we make the following suggestions. First, the relationship between finance and economic growth should be properly handled. As there is a sound trend right now for inherent economic growth, equal attention should be paid to the downturn in fiscal revenue and to the protection of the investment and production enthusiasm of the enterprises. In view of the current conditions, the growth of fiscal revenue should be maintained at a level equal to or slightly higher than the level of economic growth. The key step is to truly collect all the taxes that should be collected. Second, tax collection and supervision should be strengthened in certain regions where the economy is developed and tax resources are abundant. According to our own investigation, some economically developed regions are emphasizing the idea of hiding wealth among the people. As a result, tax collection and supervision are not carried out earnestly, showing a sharp contrast with some economically underdeveloped regions where taxes are collected ill an excessive manner. Therefore, it is imperative to strengthen tax collection and supervision in the developed regions, a move that will also have a positive impact on narrowing regional disparities. Of course, acting according to law should be emphasized and over-doing should be avoided. Third, the rate of circulation tax may be appropriately raised for tobacco and other high-profit industries. In June last year, consumption tax was adjusted for the tobacco industry, with the rate For high- and mid-grade cigarettes dropping from 50 percent to 45 percent. If this rate is reversed to its original level, it can generate an additional fiscal revenue of about 4 billion yuan for the central government. In addition, the education surcharge in the tobacco industry should be reversed from the current 1.5 percent to the original 3 percent. This move will level the surcharge rate in this sector with other industries and can add about 1 billion yuan to fiscal revenue. Fourth, the growth rate of fiscal expenditure for capital construction should be appropriately reduced so as to scale back the national debt investment. The deficit space thus evacuated can be used to make up the budget shortfall arising from export tax rebate.

IV. Ease Control and Promote "Going Abroad" Strategy

In an era of economic globalization, encouraging Chinese enterprises to invest abroad will not only help the enterprises increase their international competitiveness, but also help overcome trade barriers, reduce trade frictions and expand exports, which will in turn push forward domestic economic growth. At present, conditions are ripe for some large Chinese enterprises in the competitive industries to expand operations beyond national boundaries. If they invest and develop abroad, these enterprises could become transnational corporations in a relatively short period of time. The existing regulations on overseas investment are inconsistent with the requirements of developing Chinese enterprises into transnational corporations. While focusing on the "going abroad" strategy for large Chinese enterprises, China should ease its control and reform or adjust the existing control systems.

First, the policies to encourage overseas investment should be further improved. Large enterprises that have competitiveness should be granted greater decision-making powers on overseas investment. All enterprises should be encouraged to give Full play to their superiority and carry out "combined investment" abroad. While the total amount should be controlled, the restrictions on foreign exchange for overseas investment should be properly eased.
Second, macro-guidance and service for overseas investment should be strengthened. The state should formulate a development strategy and a mid- and long-term plan for overseas investment and should provide timely guidance for overseas investment and information required by enterprises. In addition, the state should take full advantage of foreign assistance funds to create sound conditions for the enterprises to invest abroad, and our commercial representative offices in foreign countries should improve their service and guidance for the overseas investment by domestic enterprises.

Third, the contents of examination and approval should be simplified, the procedures be reduced and the efficiency be enhanced. With regard to the investment projects conducted by the enterprises with their own or self-raised funds, the examination should just cover the main contents of projects, such as investment destination, content, scale and duration. The examination and approval should no longer cover the feasibility study report on business risks of projects, the contracts or regulations. Business risks of investments should be appraised by intermediary institutions and borne by investors.

Fourth, the government's functions of public administration should be separated from those of the owners of state-owned assets, and the government's supervision should be clearly defined. The government institutions in charge of examining and approving overseas investments should no longer perform the functions of the owners of state-owned assets. The government's follow-up supervision over overseas investment projects should be mainly targeted at the subjects of domestic investments. At the same time, responsibilities should be clearly defined to avoid red tape and cause undue burdens to enterprises.

V. Effective Measures Should Be Taken to Ease New Social Contradictions
With China's economic development and economic restructuring entering a new stage, social structure and interest patterns have been undergoing profound changes and new contradictions have emerged and mingled with old ones. First, the problem of unemployment has become increasingly acute. There has been an oversupply of labor and the employment structure is unbalanced. For a certain period of time, unemployment will be serious in specific sectors and among specific population groups. Second, is that the income gap has been widening. In particular, the polarization between the rich and the poor arising from unreasonable and illegal factors can very easily trigger off social discontent and even social disturbances. Third, the labor management relations have become tense. Due to the oversupply of labor and the incompleteness of social security system, workers are often in a vulnerable position and their legitimate rights and interests are prone to damage. Fourth, is that the group-based unexpected incidents could increase during a certain period of time. When the relations of social interests are undergoing adjustments and the social integration mechanisms are incomplete, the masses whose interests suffer more damage tend to have their voice heard through disturbances

A striking feature of the current social contradictions is that they originate from relative poverty instead of absolute poverty and from how a cake should be cut instead of the fact that the cake has become smaller. This is similar to the feature indicated by international experience that when a developing country has developed to a certain stage, social conflicts will become aggravated. In easing social contradictions, emphasis should be placed on developing and improving social coordination and integration mechanisms, easing hostile sentiments and replacing confrontation with communication, understanding and cooperation. For this reason, while emphasis should be placed on strengthening the construction of social security system, helping the poor and regulating the income distribution gap, the following problems should receive adequate attention: The first is the correct guidance and proper balance of media operations. In recent years, media commercialization has become increasingly tangible. Some media institutions and people in media cycle have been overdoing publicity for those who have paid, just to seek commercial interests. This has resulted in a serious and objective imbalance ill the manifestation of the opinions of different interest groups and has to some extent increased the discontent of the poor. In this area, the government should assume the responsibility of regulating the balance of media opinion and strengthen its control over the media, especially television, networks and other mass media that are noted for fast transmission, great influence and wide coverage. The government should encourage media institutions to give more coverage of the ordinary people, cadres and intellectuals, to reasonably reflect their wishes and complaints and to recognize their contributions to social development, in addition, it is necessary to publicize the care and help of the Party, government and various sectors for the people in difficulty and contain the excessive commercial publicity for "big shots", celebrities and the rich social spectra. The second is to develop all effective social coordination mechanism. In combination with the rules adjustment after China's WTO accession, the governments at all levels should increase the transparency of the working procedures and the information about their operations and further explore more channels for the general public to participate in public administration. For example, more meetings should be held for the representatives of the general public to participate in testimonial hearings on government decision-making.

VI. Studies Should Be Strengthened on How to Expand Consumption and Expedite the Development of New Leading Industries.

International and our own experience over the years has indicated that to maintain a rapid economic growth, there should be several leading industries whose growth rates are higher than the average level. Leading industries vary in different stages of development. These leading industries generally meet new consumption demand, and only an upgrading of the structure of consumption demand can effectively spur an expansion of the total amount of consumption demand and social demand. The slow-down of economic growth rate since 1997 can be regarded as the result of the changes in the leading industries arising from the upgrading of consumption structure. The increase of the so-called inherent driving force for economic growth is due to the fact that a group of new industries that can play a leading role in a considerable length of time are emerging. Therefore, we should study the relationship between the structure of consumption demand and the expansion of total consumption demand, study how the adjustment and upgrading of consumption structure will influence the adjustment and upgrading of industrial structure and in turn how the latter will influence the total amount and structure of urban and rural employment, especially how to influence the opportunities for the rural population to enter the non-farming industries in urban areas. We should also study how to remove the system and policy barriers that impair the adjustment and upgrading of urban and rural consumption structure and industrial structure so that the entire economy can enter a virtuous circle. At the macro-level, we should study how the changes in consumption structure and total consumption amount will influence total demand and how to correctly handle the relationships between accumulation and consumption, between the national economy and the people's livelihood under new circumstances. We plan to do in-depth studies on these and other related important issues in the next project.


"Economic Situation Analysis" Research Group of the Development Research Center of the State Council

Project leaders: Xie Fuzhan and Liu Shijin

Project group members: Lu Zhongyuan, Han Jun, Yu Bin, Ge Yanfeng, Ni Hongri, Yang Jianlong and Lu Gang


May 2002