China sees changes in economic environment
(Xinhua)
Updated: 2004-04-09 11:28

Latest figures from the Chinese central bank showed that prices of capital goods and consumer goods surged 8.8 percent and 7.4 percent over last year.

Though the Chinese government predicts that the inflation rate will be kept within three percent this year, the internal and external conditions for the economy have already changed remarkably.

Since China came out of the shadow of a deflationary trend in 2003, the prices of certain commodities and services have rocketed and had profound influence on the economy as a whole. The first quarter saw 24 provincial power grids switched off for some time due to electricity shortages, an increase of two grids over the toll of last year. The country is expected to experience the most serious power shortage for years in 2004.

In the same time, the shortage of transport capacity has exacerbated the shortage of coal, grain, fertilizer and oil in certain areas of the country. So far this year, railway transport orders have exceeded actual carriage capacity by two fold. The hike in prices of fertilizer and farming material markets was so large that the government interfered by urging railway operators to increase transportation.

However, the decrease of grain output over consecutive years and dropping reserves have driven up grain prices, adding inflationary pressure on the economy. Figures released by the People's Bank of China showed the hike of grain prices was one of the major factors for the record high prices of corporate merchandise in March. The prices of unprocessed grain surged 28.4 percent year on year in the month.

On the other hand, international market fluctuations have also had a greater influence on China's economy as it depends more on imports to meet the economy's demand for steel, aluminum, copper, oil and other resources. In February alone, China's imports of crude oil jumped 60 percent over the same month of last year.

After the OPEC decided to curb production, China has raised the prices of gasoline and jet fuel recently.

Chen Huai, a senior research fellow with the Development Research Center under the State Council of China, said since the Chinese currency is closely linked with the US dollar in exchange rates, the depreciation of the dollar against other western currencies will increase the cost of China's imports. In the first two months of 2004, the country saw a trade deficit of US$7.9 billion, in contrast with a high-than-expected trade surplus last year.

The Chinese economy is obviously at a crucial junction as it switches tracks from a planned economy to a market economy. The widening gap between urban and rural incomes and between the rich and poor are hindering China's efforts to stimulate consumption. According to the Ministry of Commerce, 77 percent of the 600 kinds of important merchandise in China are in over-supply. This is a rare thing in other countries as the per capita GDP topped US$1,000 per year.

The lack of consumption motive has made investment the sole major engine of China's economy. The relocation of global manufacturing capacity to China helped boost the country's demand for investment. In the first two months of this year, investment in fixed assets soared to an all time high growth of 54 percent since 1994. On the other hand, final consumption accounted for only 57 percent of the country's GDP in 2003, more than 20 percentage points lower than the global ratio for the past decade. In the meantime, excessive consumption of resources and relatively low returns of Chinese investment have made the high growth rate not sustainable.

Chinese economist Chang Xiuze said as the environment of China' s economy changed, the country should readjust the focus of promoting growth. He said as capital investment slows down and exports runs into more difficulties, consumption and the expansion of non-government sectors will add strong impetus to the economy.

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