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Consumption, investment, export are figuratively described as the 'three horses of Troika' hauling China's economic growth. In the first half of this year, China's economy has maintained a steady and rapid growth. Thanks to the promotion forces by the "Troika", the overall situation is good. Then, where was the "troika" going in the first half of the year? What are its features and problems? How should China improve in the second half of the year? Recently, the reporter interviewed some authorities in reviewing the economic situation in the first half of the year and has been thinking over the economic development in the second half.
Consumption: slightly accelerating but still to be tapped
Interviewee: Zheng Xinli, Deputy Director of the Policy Research Office of the CCCPC
Consumption has accelerated, but is still expected to contribute more to the economic growth.
Housing could be both a private and public good, and therefore could not be excessively marketized.
"To sum up the consumption situation in the first half of the year," Zheng Xinli, Deputy Director of the Policy Research Office of the CCCPC said, "the general consumption grew stably and healthily at a slightly faster speed compared with that of last year."
Zheng believes that there are four characteristics of consumption in the first half of the year.
First, the market sales grew fast. In the first five months, the total retail sales of consumer goods increased by 13.2 percent.
Second, some popular goods sustained in great demand. Vigorous market sales have contributed to the substantial growth of major industrial output. In the first five months, six categories of products reported an increase of more than 20 percent, including 60.1 percent growth in car output, 58.1 percent growth in mobile phones, 46.7 percent growth in IC products, 25 percent growth in computer, 24.6 percent growth in steel, and 20.4 percent growth in cement.
Third, the market prices were fairly stable. In the first five months, the consumer price index rose by only 1.2%.
Fourth, the housing prices rose too fast, affecting housing consumption and receiving consumers' complaints. "Residential products have a dual identity. They are both personal items whose prices are determined by the market, and public goods that should meet the housing needs of low-income persons," Zheng Xinli said, "therefore, house prices can not be excessively marketized."
"For the price issue, the government's attitude and policies are essential. If the government controls the price properly, it will help maintain the housing prices and even the entire market prices at a stable level. If the government simply lets the prices slide, or even regards it as the means to stimulate the economy, then it will be likely to drink poison to quench thirst," said Zheng.
For example, in Germany, each resident will start to place deposits in their residential banks right after he/she was born. The government subsidizes the interest. Once the resident needs to buy a house after he/she grows up, he/she can withdraw the deposits from the bank. The bank will also provide a residential loan, which matches the amount of the deposit so as to provide a stable financial support to the resident. At the same time, the government strictly controls the residential land supply. As a result, both housing supply and demand grow stably. In the past 50 years, the German housing prices and the whole market prices only changed slightly.
If high investment rate and low consumption rate co-exist for a long term, deflation is likely to stage a comeback.
Although consumers' demand increased slightly, its contribution to the economic growth is far from enough. From 2003, the investment rate exceeded 40 percent for three consecutive years. In 2004, the rate hit 44.2 percent. Last year, the rate reached the highest level ever since the founding of a new China. Correspondingly, the consumption rate has been low. In the first half of this year, the high investment rate and low consumption rate have still co-existed.
"If things continue this way, the supply capacity coming from investment will become excessive in the next few years. Then insufficient demand and deflation are likely to come back," said Zheng, "Now the economic growth is too much reliant on the growth of investment and exports. This should be changed. Consumption should be playing a bigger role in hauling the economy."
Zheng believes that there are four ways to expand consumption in the second half of the year:
First, we must continue to foster and expand consumption hotspots, including consumption of vehicles, housing, telecommunications, education, tourism and other services.
Second, we should focus on expanding consumption to adjust the investment structure. We should increase the intensity of investment to the infrastructure construction, which can help promote consumption. Through such means, we can both raise consumer demand and enhance investment returns. Zheng gave an example, "By strengthening the construction of communications infrastructure and integrating communications network, the Internet and cable television networks, consumers will be able to use broadband telephone network and spend less on traditional phone calls. Then, telecommunications consumption will be subsequently promoted."
Third, we must continue to tap the potential of consumer credit. At present, consumer credit loans account for 15 ?§C 20 percent of the loans of major commercial banks. But comparing with the proportion of 30 percent of developed countries, there is still a gap in between.
In addition, we must attach importance to the expansion of rural area consumption. Statistics show that the proportion of the consumer goods retail out of the total consumption retail in county or lower level areas has decreased from the 66 percent at the beginning of the reform to the current 34 percent. The purchased commodities by 5 or more rural residents are equivalent to that by one urban resident. "We should promote a new socialist rural development to raise farmers' income and invigorate the rural market as soon as possible."
Investment: growing too rapidly and restraint becoming stricter
Interviewee: Wang Yuanjing, researcher for National Investment Institute under the National Development and Reform Commission (NDRC)
Although the investment growth in the first half of the year did not lead to inflation and did not encounter a bottleneck of supply shortage of: coal, electricity, oil and transport, the financial, ecological, and resource constraints has become increasingly stringent.
We should pay attention to the constraining factors, which might tie down the rapid growth of investment. Some of these factors are almost approaching their maximum.
Data from the National Bureau of Statistics shows that from January to May this year, China's urban fixed asset investment reached 2544.347 billion Yuan, an increase of 30.3% over the same period of the previous year. Although the increase rate is 4.5 percentage points lower than that of 2004, compared with the same period last year, it has reported an increased of 3.9 percentage points.
How does the robust investment impact the macroeconomic and macro-control? In research and management institutions, both views of "excessive investment" and "investment growth normal" have a lot of supporters. Wang Yuanjing, researcher for National Investment Institute under the National Development and Reform Commission (NDRC) believes that it does not make sense to give a simple evaluation on the level of investment. If economic development allows, which means both economic development demand and sustainability apply, even a growth rate higher than 30% is still moderate. Otherwise, even a growth rate that is much lower than 30% is still too high.
Wang analyzed other macroeconomic indicators. In May, the consumer price index rose by 1.4%, down by 0.4 percentage points from the same period of last year; the producer prices of industrial products increased by 2.4 percent; the purchase price of raw materials, fuel, power went up by 5.5%, but all of these increase rates were maintained at a low level. Thus, the overall investment and economic growth has neither brought about sharp consumer price rise as they did from 1993 to 1995, nor led to a price soaring in industrial products especially raw materials as they did in 2004. Corresponding to the rapid investment and economic growth, the price rises actually fell. In addition, the rapid growing investment did not encounter the bottleneck of the supply shortages of coal, electricity, oil and transport as serious as that of 2004. So far, some bottleneck factors restricting China's economic development have basically been eliminated. From the perspective of supply, the sustainability of economic growth and investment are more secure.
In the absence of inflation and bottlenecks, can we prove that the current investment growth is reasonable? Wang pointed out that to tell whether the investment growth is reasonable or not, one should not merely look at the investment growth rate itself, but should also look further to those factors behind the investment growth. First, whether the high investment will lead to financial risks, ecological pressure and waste of resources. Second, whether the government and business investment behavior are reasonable during the rapid growth of investment, and so on. In the first half of this year, one of the remarkable phenomena in economic operation is that the monetary and credit growth increase too rapidly. The amount of new loan for the first quarter this year has exceeded the level of 50% of the annual target. The amount of new loans for the first five months even exceeded the level of 70% of the annual target. Rapid growth of commercial bank loans have been caused both by the strong lending will of commercial banks and the stimulating investment impulse of local governments and enterprises. Therefore, whether the behaviors in these areas are reasonable or not, is crucial in determining the size of the potential financial risks. Regarding ecological and environmental resources, both energy and land supply tensions and ecological pressures have occurred in step with the rapid growth of investment, and have drawn increasing attention from the community. Wang emphasized that compared with the question of whether the overall investment is overheating; we should pay more attention to the restraining conditions on the rapid growth in investment because some of them are approaching their limits.
From now on, lowering energy consumption and reducing pollution will become threshold indicators for project market access.
Relevant departments have noticed the problems occurred during the current economic operation such as the over-rapid growth of fixed asset investment. They have paid full attention to these questions and taken some initial regulatory measures. In regards to the monetary policy regulation, the central bank has taken steps in introducing loan interest raise, issuing directed bonds, and raising savings deposit prepaid reserve ratio. In terms of investment, China has taken more stringent control on the real estate market. It has also issued controlling signals to excessive industries such as steel, textiles, tourmaline, coal, etc. This series of regulatory measures are to tighten the reins for the dashing investment horse.
Recently, an official of National Development and Reform Commission (NDRC) said that from the second half of the year NDRC will strictly control newly launched projects, comprehensively clear up the projects in construction and strictly examine the proposed projects. NDRC will accelerate phasing out those industries with excessive or backward production capacity. It will make definite the main task for reducing energy consumption and cutting down pollution for different areas. The official emphasized, "From now on, lowering energy consumption and reducing pollution will become threshold indicators for project market access."
Exports: sustained and rapid growth with surplus expanded
Interviewee: Wang Zixian, Deputy Director-General of Foreign Investment Management Department under the Ministry of Foreign Trade and Economic Cooperation.
Better-than-expected export growth rate was achieved during the first half, which is not easy at all. We should attach great importance to the expanding trade surplus.
The export growth is expected to enter a more stable period of adjustment this year.
Latest statistics from the customs show that China's export growth during the first half of the year hit 25.2%. Wang Zixian, Deputy Director-General of Foreign Investment Management Department under the Ministry of Foreign Trade and Economic Cooperation said that after high-rate growth for four successive years, China's exports could still maintain such a fast growth rate. It is more than expected and nothing easy at all.
Wang also pointed out that comparing with the same period last year, the exports from this year have shown a symptoms of change: the export growth rate dropped remarkably, continuing the adjustment momentum occurred after the exchange rate reform last year. Exports of foreign-funded enterprises and processing trade have remained stable and become the main support for the increasing exports during the first half of the year; under the pressure of slight appreciation of the RMB exchange rate and other factors, exporting structure shows an inclination of improvement with trading conditions and self-adaptive capacity of enterprises being improved. Generally speaking, the export growth this year may be entering a more stable period for further adjustment with trade balance showing a delicate change.
Regarding the current export competitiveness, Wang called on an objective assessment. The fundamental situation is that most of our exporting production enterprises are excessively reliant on their labor cost advantages and price competition. This has not been changed. The overall non-price competitiveness is not strong enough. For example, general trade exports especially state-owned enterprises exports have slowed down, which has manifested a decline in their competitiveness.
To reduce trade surplus, we should play fully the role of import policy instead of those restricting exports.
Trade surplus is a key point in the map of macro-economy for the first half of the year. From early this year, the scale of trade surplus is still large but showing signs of a slowing down growth rate. Wang indicated that the increasing trade surplus neither result from China's new policy to encourage export, nor from the non-trade protection and imports restrictions. In addition to certain conventional factors, there are some new special factors that actually led to the increasing trade surplus. In the first half of this year, "high investment and low consumption" continued. Production capacity surplus continued to push exports growth and weaken imports attraction; the original bottleneck sectors have eased in supply, which have also mitigated the import demand.
According to Wang, the expanding trade surplus aggravated trade friction and intensified people's expectations towards Yuan appreciation, which, as a result, created problems and more pressures on the domestic economy and the macro-control. This year, this trend continues growing, which worth greater attention from the government. Trade imbalance results from internal imbalance in the economic structure. Experience of developed countries shows that it requires a long time to correct the imbalance in the economic structure, during which trade imbalance becomes a problem that everyone has to face. For instance, countries like Japan and Germany still maintain a huge trade surplus today. We must be prepared for a long-term involvement in fighting against trade imbalances and trade frictions. "But it is obvious to attend to the superficial based on unilateral willingness for those people to anticipate to resolve the trade imbalances through sharp RMB appreciation", said the trade exporter.
According to Wang, the existing exports policy and trade policy fit in with the WTO rules and international practice. Compared with developed countries and many newly industrialized economies in neighboring countries, China still has a large gap to catch up in terms of trade promotion, public services and policy efficiency. To restrict exports so as to reduce trade surplus will not only affect employment, income, taxes, consumer and social stability, but also intensify the excessive production, and eventually, aggravate the internal economic structural imbalance. In the short term, China should give full play to the role of imports policy, actively expand the imports of high-tech intermediate products, in particular the key equipment and software technology imports, thereby easing the pressure on trade surplus.
Exports are expected to keep on decreasing in the second half of the year. The annual foreign trade surplus will remain a similar level to that of last year.
"The exports trend of the first half of the year once again demonstrated that the most crucial point here is to further speed up the transformation of foreign trade growth pattern." Wang emphasized that China should enhance the support for enterprises to develop new products and new markets, assist self-developed brands and independent intellectual property rights on products, improve the enterprises' non-price competitiveness, encourage them to focus on differentiation competition, and, introduce more efficient, low-cost hedge financial instruments. China should ask for the joint efforts of all parties to eliminate the adverse effect of the internal and external environmental variables on exports, avoid sharp and severe fluctuation of exports volume, and ensure a smooth and fast economic operation in the first year of the 11th Five-Year Plan. This requires a more careful consideration and choice in macro-control policy.
Wang believes that the, "high exports and low imports" pattern had changed considerably. He forecasted that exports would continue decreasing during the second half of the year. The annual exports growth rate is to hit 15%; in the several months following, the imports growth rate will be approaching to or even exceeding the growth rate of exports. Trade surplus will shrink. The annual surplus may remain at a similar level with that of last year.
Editor: Yan
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