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Promoting Steady Transition of Economic Operation towards the New Normal Performance


--- An analysis of economic situation in 2013 and prospects for 2014

Liu Shijin, Yu bin & Chen Changsheng

This year marks the beginning of the overall implementation of the spirit of the 18th National Congress of the Communist Party of China and the conjuncture to accelerate development mode transformation against the backdrop of growth phase conversion. In the face of complicated domestic and overseas situations, the Chinese government adopted a series of regulatory measures, which effectively guided the market expectation and led economic operation to turn around and show positive signs of transition towards the new normal performance. However, restricted by structural problems, the foundation of current economic recovery remains unstable, and the annual GDP growth is expected to stand at around 7.6%. Looking into 2014, as international economy stabilizes in general and domestic demand growth faces downward pressure, the economic growth is predicted to be slightly higher than 7%. While implementing prudent fiscal and monetary policies, China should adhere to the guideline of seeking improvement in stability and promoting progress through stability, strive to release the dividend of reform and stimulate market energy and social creativity, so as to substantially reduce corporate operational cost and promote economic operation to steadily transit towards the new normal performance.

I. Foundation for Economic Rebound Was Unstable and Structural Problems Were Extrusive

Since July, economic operation showed the trend of a turnaround as driven mainly by the following forces. As external markets further stabilized and export rebounded, though growth remained low, false trading considerably reduced compared with the beginning of the year and the driving effect on economic growth was strengthened. Investment in infrastructure and manufacturing picked up and the driving effect on upper-stream industries including heavy industry by over 20% growth of fixed assets investment was phasing in. Tax reduction for small and micro businesses, scope expansion of VAT for business tax, administration streamlining & power delegation to lower levels, gradually relieved restriction for railway investment as well as the setting up of Shanghai Free Trade Zone boosted market energy and improved expectations. Growth of resident consumption stabilized, and the structure was slightly improved. In addition, the low base number in the same period of last year was also a factor.

1. Rebound foundation was still unstable

First, rebound for heavy industry was not sustained. Driven by continuous recovery of investment in real estate and infrastructure, growth of heavy industries such as coal & ferrous metal mining and dressing, steel, power and railway manufacturing picked up. However, real estate investment distinctly fell back in August, and growth of the first eight months dropped by 1.2 percentage points than the first seven. Daily average coal consumption of power plants since September slightly decreased, and coal inventory days of major plants increased from around 15 days in August to 19 days, with power generation growth expected to slow down. Prices of industrial goods such as thread steal, coking coal, coke, steam coal and nonferrous metals dropped back after the mid and late August. Despite its continuous recovery in September, PMI remained lower than market expectation.

Second, the rebound didn't trigger active inventory adjustment. Normally, economic recovery is first reflected by improved expectation among enterprises and increased inventory. Economic situation turned around since July and August, but inventory level comparatively dropped. In August, inventory of industrial finished goods was RMB3.19 trillion yuan, growing only by 5.7% on a year-on-year basis, and 1.5 percentage points lower than June; meanwhile, the ratio between finished goods inventory to GDP was near the bottom since 2008. Finished goods inventory index and inventory index of raw materials in PMI were both below the boundary of 50. It meant that demand driven by previous investment rebound mainly played the role of maintaining production and absorbing inventory, but didn’t cause the virtuous cycle of increased inventory, higher capacity utilization and expanded production. If demand expansion cannot sustain, the momentum of economic rebound might reverse.

Third, profits of industrial enterprises were concentrated in a few industries. From January to August, profits of industrial enterprises rose by 12.8% on a year-on-year basis, but profit growth from main business was only 4.9%. Among them, new profits of power and heating, petroleum refining and coking, and nuclear fuel totaled RMB145.6 billion yuan, accounting for 86.5% of those of all industrial enterprises above designated scale.

2. Structural problems were extrusive

(1) Capital allocation was unreasonable and prices rose.

Money supply growth was noticeably higher than GDP nominal growth, and it was expected that M2 share in GDP at the end of August would exceed 200% and the size of social financing would rapidly expand. However, problems such as the mismatch of allocation of resources and terms in the financial system were extrusive, and capital chain kept extending and was increasingly sensitive to liquidity policies of the central bank. Capital price climbed to a higher level. Considerable new capital was directly or indirectly allocated to fields such as real estate and infrastructure, and liabilities of industrial enterprises failed to synchronically grow along with money and social financing. Real estate bubble and intangible government guarantee supported the rapid expansion of monetary credit, further twisted financial resource allocation, pushed market interest rate up, and squeezed out capital demand of small and medium enterprises.

(2) Real estate market pointed to a polarized trend and risks accumulated. Previously, changes with the real estate market in first-tier and second-tier cities as well as third-tier and fourth-tier cities tended to be consistent and first-tier cities were usually leading and driving such changes. However, after the rapid development in recent years, regional patterns changed as a trend. Third-tier and fourth-tier cities were in sufficient supply of both housing and land and started to see supply exceed demand due to consistently increased housing supply and slowed population agglomeration. But under the current fiscal framework, in order to promote municipal construction and maintain fiscal balance, local governments continued to supply land, causing housing supply and demand to further relax and bubble to burst in some cities. On the contrary, first-tier and second-tier cities were in tight supply of both housing and land. Because of the increased employment absorbing ability and relatively sound public services, city size continued to expand and rigid demand was strong. However, the share of land for housing in these cities was low and both land and housing were in short supply, which intensified the pressure of price rising and caused the bubble to further expand.

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