Cooling measures taking effect
(China Daily)
Updated: 2004-07-09 10:44

Movements in major economic indicators

1. Fixed investment growth subsided, but continued in the fast lane

In the January-May period, fixed investment in projects upward of 500,000 yuan (US$60,000) totalled 1.5 trillion yuan (US$180 billion), up 34.8 per cent on a year-on-year basis and 8 percentage points lower than the January-April period.

The deceleration of investment growth in key industrial sectors became faster.

Investment growth in western regions was faster than in other parts of the country. In urban fixed investment in the January-May period, eastern areas totalled 913.2 billion yuan (US$110 billion), up 32.5 per cent on a year-on-year basis. Central areas reported 292.9 billion yuan (US$35 billion), up 40.7 per cent year on year. Western regions reported 312.2 billion yuan (US$37 billion), up 43.2 per cent from a year earlier.

Banking staff work at the credit and loan department of the Hai'an branch of the China Construction Bank in Jiangsu Province. In the first five months of this year, financial institutions approved 110.5 billion yuan (US$13.31 billion) less for loans than the corresponding period last year, indicating that the State's macroeconomic adjustment is taking effects.[newsphoto]

2. Retail sales growth accelerated, but stayed at safe levels

Retail sales totalled 416.6 billion yuan (US$50 billion) in May, up 17.8 per cent from the same period last year. The pace of acceleration was quite fast, but is based on last year's low base resulting from the SARS outbreak.

Because of the SARS outbreak, retail sales during the "Golden Week" of the May 1 holiday last year were low. Retail sales growth for May last year was only 4.3 per cent, while the pace for most months of the year was above 8 per cent.

Assuming that retail sales growth in May, 2003 was 8 per cent, the year-on-year growth in May this year would have been around 13 per cent only slightly higher than the first quarter.

The acceleration in retail sales in April and May was also directly attributable to rising prices. Taking out the factor of price rises, the real growth of retail sales in May was not too high.

3. Imports slowed down impressively, while this year's first single-month trade surplus was recorded

China's exports totalled US$44.9 billion in May, while imports reported US$42.8 billion, up 32.8 per cent and 35.4 per cent on a year-on-year basis respectively.

The imports growth was 7 percentage points lower than the 42.4 per cent recorded for the January-April period, while the growth in exports slowed by only 0.7 percentage points.

The decline in imports growth in May helped achieve China's first single-month trade surplus of US$2.1 billion, reversing the trend of deficits in the first four months of this year.

Subsidence in import growth in May reflected to some extent the achievements of China's macroeconomic measures. Macro controls in over-invested sectors such as steel and real estate have brought investment growth down in those sectors, resulting in an obvious slowdown in imports of ore and steel.

If the achievements of macroeconomic measures can be maintained, China's trade deficit will continue to shrink in coming months.

Although the trade picture improved substantially in May, over the long run trade conditions have not improved significantly. Prices for processed goods exported are falling, while the prices for imported rudimentary goods are rising. Trade growth is mainly driven by processing trade, while conventional trade's share in total trade continues to shrink, restricting the contribution of trade growth to economic growth.

The high growth in foreign trade came at the cost of huge consumption of energy and raw materials, which aggravated the domestic shortages of coal, electricity, oil and transportation capacity.

These problems cannot be solved overnight.

Economic structural adjustments need to use high technologies vigorously to upgrade conventional industries, instead of passively accepting the inward shift of international manufacturing, which simply solidifies existing industrial structures.

4. Lending growth slackened slightly

All renminbi loan numbers at financial institutions continued their downtrend in May. By that month, the annualized growth in renminbi loans had been falling for nine consecutive months.

Outstanding renminbi loans of all financial institutions at the end of May rose by 18.6 per cent from a year earlier, which was down 1.3 percentage points from one month earlier and down 3.1 percentage points on a year-on-year basis.

Foreign currency denominated loans as well as medium and long-term loans maintained rapid growth. The balance of foreign currency loans at the end of May was up 26.6 per cent from a year earlier, staying in the fast lane although the pace was 1.9 percentage points down from April.

Outstanding medium- and long-term loans at the end of May rose by 32.7 per cent year on year, 3 percentage points faster than the pace a month earlier. The relatively fast growth in medium- and long-term loans has not been contained.

Decreases in new loans mainly came from short-term loans and loans granted through commercial bills. These decreases will inevitably result in fewer working capital loans for businesses and fewer loans for small and medium-sized enterprises. This deserves attention.

5. Money supply growth came down marginally, returning to safe levels

The balance of M2 (including cash in circulation and all deposits) at the end of May was up 17.5 per cent on a year-on-year basis, which was 1.6 percentage points slower than the previous month and down 2.7 percentage points from a year earlier.

The pronounced deceleration in M2 growth mainly resulted from a diversion of savings deposits because of negative real interest rates on deposits. Outstanding savings deposits at the end of May rose by an annualized 16.9 per cent, down 0.9 percentage point from April and down 3 percentage points from a year earlier.

New savings deposits in May totalled 43.5 billion yuan (US$5.2 billion), which was 72.3 billion yuan (US$8.7 billion) less than the same period last year.

6. Prices accelerated, but remained in a safe range

In May, the consumer price index for the entire nation rose by 4.4 per cent from the same period last year, with a 3.9 per cent rise in cities and a 5.2 increase in the countryside.

Looking at the components of the index, consumables rose by 5.1 per cent from April, services rose by 2.2 per cent and food increased by 11.8 per cent. Food prices are still the factor determining the trends in the consumer price index, with earlier grain price increases spilling over to other food categories being the major force that shaped the price situation in May.

Price adjustments in resources were another major factor. The National Development and Reform Commission adjusted electricity prices nationwide in May, while water and refined oil prices were raised in some regions, resulting in a 6.6 per cent increase in water, electricity and fuels prices, which was noticeably faster than the previous month.

Policy recommendations

In May, 2004, industrial production continued on its rapid growth curve, although the pace slowed moderately. Industrial enterprises' profits continued to grow, but at a slower pace.

Fiscal revenues rose strongly as in previous months, but the growth rate was notably lower. Consumption accelerated. Exports' performance was better than expected, with its growth gathering speed.

The relatively fast money and credit growth was contained, while rapid investment growth and low-level capacity expansion in certain sectors and regions was brought under preliminary control, which means the macroeconomic management measures are having some initial effects.

Bottleneck constraints within energy and transportation remained quite a big problem, while the growth of fixed investment in certain industries remained on the fast side. Therefore, the current strength in macroeconomic management must be maintained, so as to prevent a rebound in fixed investment in certain sectors and regions and ensure a soft landing for the Chinese economy.

With price increases accelerating to approach or pass the 5 per cent level, policymakers need to assess the real effect of earlier macroeconomic policies with cool, clear minds.

With the Comprehensive Alert Index hitting a peak, further tightening measures should be avoided, let alone jamming brakes on the economy. This would prevent synergies between drastic macroeconomic measures and the sequential deceleration of economic growth starting in the third quarter of this year, which could result in a hard landing.

1. Keep policy consistent and stable to ensure an economic soft landing

In maintaining policy consistency and stability, we need to, first of all, keep macroeconomic management strong to prevent fixed investment in certain sectors and regions from accelerating again.

A major reason that macroeconomic management was upscaled again and again and administrative methods were used eventually was that this ongoing round of frenzied investment was mainly driven by local governments, which made the effect of market adjustments and monetary policy actions somewhat obscure.

Administrative measures such as controlling the scale of loans, restricting favourable electricity prices and penalizing strictly persons responsible for wrongdoings, have had noticeable effect on curbing the investment frenzy.

But once administrative controls are loosened up, suspended projects may start running again and investment may start to accelerate again. Therefore, we need to do a good job of implementing the State's macroeconomic policies, enhance management of land and credits, to ensure an economic soft landing.

On the other side of the coin, we need to calmly observe the effect of the macroeconomic adjustments and in the meantime refrain from taking further tightening measures, or putting brakes on growth.

A cursory look at May's data, which suggests an acceleration in prices, may increase expectations of an interest rate rise. Yet, at the same time, investment and loans slowed down impressively.

Since price level is an indicator lagging behind investment and lending, with macroeconomic management having started to work and to continue working, we should closely watch trends in prices, investment and lending.

As long as investment and economic growth come back to appropriate levels in the third quarter and price growth does not quicken, an interest rate rise can be put on hold in the near term, but market-oriented reform of the interest rate regime needs to be promoted vigorously.

2. Standardize land management and enforce the implementation of a strict farming land protection system

The fundamental role of market mechanisms in allocating land should be promoted. Land management laws and regulations should be perfected, and the enforcement of those laws and regulations should be enhanced to put pressure on land-related malpractice.

3. Press ahead with structural reform while maintaining quantitative controls

The current fast investment growth is structurally imbalanced. Therefore, while continuing to use monetary policy to enforce quantitative adjustment, policymakers need to enhance structural adjustment with fiscal policy.

Fiscal policy needs to be revised wherever appropriate in terms of where the funds are used, while its "proactiveness" should be gradually reduced.

Fiscal support should be strengthened for such underdeveloped areas as agriculture, high-tech industries, transportation, energy, health and environmental protection.

The support of fiscal policy for public education at the elementary and middle school levels, as well as the public medicare system, should be enhanced.

Also, greater efforts need to be made to guarantee urban residents minimum living standards and enhance rural infrastructure construction, which could help improve the environment and expectations for increased private consumption.

4. Maximize the guiding role of industrial policy while ensuring the fundamental role of market mechanisms in resource allocation

The following targets need to be met while identifying "strategic industries" for this stage of economic development:

First, not only the advantage of abundant labour resources should be fully utilized, but industrial upgrading needs to be promoted promptly to strengthen the nation's competitiveness in capital and technology-intensive industries.

Second, the problem of a big population relative to limited resources, especially the shortage in quality energy, must be addressed now.

Third, it is essential to build a national defence technology industry that is based on modern high technologies to realize national defence modernization.

Meanwhile, the utilization of foreign capital needs to be combined with industrial upgrading. Using foreign capital to fill up domestic funding shortfalls is not an urgent need currently, while boosting high-tech industries should be the prime use of foreign capital.

Close