-- An analysis of economic situation in the first quarter of 2013 and prospects for the whole year

DRC Task Force on Analysis of Economic Performance

Despite the overall economic upturn worldwide since 2013, structural contradictions and risks have increased in the Chinese economy, when reduction of long- and medium-term potential growth rates are intertwined with the weak recovery of the short-term economic cycle. While adhering to the established guidelines, we should aim the macroeconomic policies at properly handling the relationships between stable economic growth, the check of inflation as well as the prevention of risks. We should, through adopting relevant reform measures, release the growth potential, consolidate investment and increase consumption; innovate on sectoral regulation patterns, actively and steadily mitigate overcapacity and facilitate the readjustment of economic structure; adopt the policy of stopping up loopholes while opening up new channels so as to gradually release financial risks, to constantly improve the quality of growth and economic benefit and to strive to enhance economic performance in a stable and sustainable way.

I. The Short-Term Weak Recovery Failed to Take a Turn for the Better and the Growth for the Whole Year Is Estimated to Get Slightly Higher Than 7.5%

In the first quarter, the global economic performance took a turn for the better, which helped to drive forward the upturn operation of domestic economy since the fourth quarter of last year. In general, the Chinese economy is witnessing a reduction of long- and medium-term potential growth rates intertwined with the weak recovery of the short-term economic cycle, increased structural contradictions and risks as well as short-term fluctuations and differentiation of macro indicators. With the support of such factors as enterprise re-stocking, stable investment, the upturn performance of world economy and public expectations for economic improvement, China's GDP growth went up by 7.7% in the first quarter, which is a little lower than in Q4 2012, but higher than in Q3 2012 which hit the bottom in recent years. The short-term weak recovery failed to take an upward turn. It is expected that the annual growth rate would be slightly higher than 7.5%.

1. New changes emerged related to indicators on demand side and positive factors coexisted with negative ones

Positive factors on the demand side included: first, export growth rose evidently, up an accumulative total of 18.4% in the first quarter from a year earlier. Even if the abnormal part was allowed for, the actual growth was higher than that of last year. Except Japan and Oceania, China's exports to other regions all grew evidently. Second, infrastructure and real estate investment maintained its upturn momentum, and the nominal growth exceeded 20%. The urban fixed asset investment maintained a steady growth and, among others, investment growth speeded up in China's eastern region as compared to the previous year. At the same time, negative factors cannot be ignored either. First, growth of consumption demand slowed down. Compared to the same period of last year, the total retail sales of consumer goods reduced nominally by 2.4 percentage points in the first quarter of 2013. The above-norm catering revenues saw a negative growth of 8.5%, down by 4.8 percentage points as compared to the same period of last year. Second, growth of the manufacturing investment slumped. Affected by such factors as overcapacity and high asset-liability ratio, during the first quarter, the manufacturing investment grew by 18.7%, down by 3.3 percentage points as compared to last year's overall growth rate, being lower than the medium- and long-term growth trend. The manufacturing investment is the nucleus for fixed asset investment, accounting for an average ratio of 34% over recent 5 years, and it will, in case of a continuous downturn, will pose a significant impact on investment growth.

2. The supply side was relatively stable and the capacity utilization was low in some industries

In contrast to the differentiation of the demand side, the supply side was relatively stable. Since September 2012, the year-on-year accumulative growth of the industrial added value had remained at 10% and the rate only dropped by 0.5 percentage point in the first three months of 2013. Except for energy output, important industrial products such as automobiles, steel, cement, integrated circuit, power and communication equipment, all saw a rise in output growth. It is predicted that growth of the industrial added value will improve slightly in the second quarter.

The internal mechanism of the economic operation reveals that time lag exists in the interactive relationship between supply and demand, which is mainly determined by the adjustment of business inventory. Business inventory bears the brunt of digestion when demand begins to rise. When inventory reduces and expectations improve, enterprises will make up for their inventories by increasing purchases or boosting yield. If demand continues to improve, enterprises will choose to increase investment and improve productivity. Usually, the continuity of the rise in inventory is determined by the level of the rise in demand and by expectations of future growth. Rise in yield and capacity utilization in the wake of the re-stocking is an important signal indicating the further improvement of economic performance.

After a long period of de-stocking, re-stocking had started since the fourth quarter of 2012. Volume of production of quite a number of industries went up, whereas the capacity utilization did not improve markedly. For instance, the capacity utilization in such industries as steel, automobile, cement, nonferrous metal, textile, thermal power and ethylene was all on the evidently low side. It suggests that currently the rise in demand and yield is insufficient for improving the severe overcapacity by a wide margin. What merits attention is that the continuous increase of investment in such sectors as infrastructure and real estate, which are an important driving force for demand growth, will be restrained by the accumulating financial risks. On the other hand, excessively rapid growth of demand, if any, is likely to stimulate the growth of investment in overcapacity industries, and will thus exacerbate the existing contradictions. It would be a reasonable option to maintain the proper growth of demand and improve the capacity utilization to a certain extent without incurring enormous investment stimulus but gaining time for the reduction of capacities and adjustment of structures for overcapacity industries

3. Economic growth promises to go up before it gets stabilized and the whole-year growth is estimated to stand slightly higher than 7.5%

The world economic situation is better than last year's on the whole in the first quarter. The US economy is undergoing a continuous resurgence. The shale gas revolution has incurred the systemic cost-reduction effect, both the tertiary and manufacturing industries are expanding, and the capacity utilization has hit an all-time high over 62 months' time; the real estate sector continues to revive, with the housing sales reaching a record high over 39 months; the employment figure has reached the pre-crisis level, with the unemployment rate reducing to 7.6%; and corporate R&D input has increased and the vitality of the real economy has improved. The European economy is getting stabilized through readjustment. Affected by Cyprus and Italy, the PMI of Eurozone's service and manufacturing industries, the economic boom index as well as the investment confidence index all dropped in March, discontinuing the rise started since the third quarter of the previous year. Nonetheless, the return rate of national debt treasury bonds of various Eurozone countries went down notably, and the German economy continued to maintain an upturn. It is predicted that the Eurozone economy will become stabilized in the first half of 2013 and will improve in the latter half of the year. An economic turnaround is looming up in Japan. Under the stimulus of the monetary and fiscal expansion policy carried out by the Shinzo Abe government, the consumer confidence index rose to 44.3 in February, which was once witnessed in June 2007. Moreover, the economic observer prospects index also hiked to a record high since the statistics were first estimated in 2000. Emerging markets improve continually. An accelerated economic growth was realized in Brazil and India in the third and fourth quarters last year; and in February, PMIs of the BRIC countries all topped 50, suggesting the whole of the emerging economies was continually taking a turn for the better. Driven by the improved world economic situation, it is predicted that China's export growth will reach about 10%.

...

If you need the full context, please leave a message on the website.