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Worries that some sectors of the Chinese economy may be overheating have taken hold among more government officials and economists when compared with last year, despite a number of differing opinions. The State Information Centre examines China's economic performance and trends in its latest report, using its business warning signal system.
China's economic growth will, in our view, find itself in a "high-growth, mild downshift" situation in the first quarter of this year, with combined efforts involving strong cyclical momentum and macroeconomics policies, .
We see domestic spending accelerating and prices edging upward, industrial production staying on a stable growth path, and investment and exports subsiding by varying degrees.
Our preliminary forecast puts gross domestic product (GDP) growth at 9 percent year-on-year for the first quarter, down by 0.9 of a percentage point from a year ago.
Forecasts of major economic indicators
Investment growth will stay at high levels, with a mild downshift. Investments by the State and other economic sectors rose by 26.7 percent year-on-year last year, with investment warning signals indicating excessive growth during the first 10 months. That growth started to slow down on a monthly-adjusted basis starting in August, and returned to a tendency of excessive growth in November.
In 2004, investment growth will remain in the fast lane, but not at last year's levels. A couple of the major reasons includes a slowdown in foreign direct investment, the central bank's hike in the bank reserve ratio and stricter supervision of property loans which may cool down credit growth.
As well, the investment frenzy in real estate, tighter government controls on investment in steel, cement and aluminium, moves to tighten land management and a fall in infrastructure-targetted treasury bond issuance are other factors associated with growth.
We see investments, by State and other economic sectors, rising by 21.5 percent year-on-year in the first quarter, down by 10.1 percentage points from the same period last year.
Consumption growth will remain stable. Although the SARS (severe acute respiratory syndrome) outbreak had significant impact on consumption in 2003, this was confined to the second quarter. Removing this contingency, nominal retail sales maintained stable growth. That growth registered 9.2 percent year-on-year in the first quarter of 2003, 0.4 percentage points above the average of the previous year.
Thanks to the positive effect of new growth areas such as residential real estate, automobiles and telecommunication services, the current growth rate of nominal retail sales is in a phase of what would be considered normal growth.
Taking out price fluctuations, actual retail sales growth was on a downturn in the latter half of 2003. The tendency was reversed with a robust rebound in actual spending in July and August, and retail sales growth is now climbing upward.
This year, with a further improvement in the consumption environment and policy stimuli, the key areas of consumption will continue to see strong growth, while the income of rural workers is expected to accelerate, increasing rural spending.
Provided an absence of contingencies, we see consumption gathering speed in the first quarter, with retail sales growing 10.5 percent year-on-year, up 1.3 percentage points from a year earlier.
Import and export growth rates will slacken significantly. Foreign trade sustained its rapid growth last year after strong rises in 2002, soaring by 37.1 percent on a year-on-year basis, sending signals the sector could be overheating.
But trade growth is already becoming an issue.
Although a relatively favourable international environment will accommodate rapid trade growth this year, barriers exist, with adjustments in tax rebate policies possibly constraining exports in the first quarter.
Trade protectionism resurfacing, technical barriers having an increasingly restrictive effect on Chinese exports, and the renminbi firming on the back of the US dollar's recent mild strengthening.
We see exports growing by 19.9 percent this quarter, 13.6 percentage points down from the same period last year. Imports are expected to grow by 19.1 percent, 23 percentage points down from a year earlier, to bring foreign trade into basic balance.
Industrial production will continue its rapid pace, but this may dip a little below last year's levels. Despite the SARS outbreak, industrial production last year maintained the high growth that started at the end of 2001, registering a hefty annualized 17 percent. Industrial production warning signals have lurked since June 2003, with telecommunications equipment, transportation equipment and the metallurgical industry being major driving forces.
Meanwhile, profitability among industrial manufacturers rose strongly, with sales income surging by 27.9 percent in the January-to-October period and causing concern of overheating.
Considering the expected slowdown in investment and exports and supply shortages of electricity, coal, oil and transportation services, we see industrial output growth downshifting in the first quarter. Our preliminary forecast is that industrial added-value will rise by 14.5 percent, down 2.7 percentage points from a year earlier.
Price indicators will stay at low levels. The consumer price index (CPI) ended a downward spiral in 2003 and then started to edge upward, rising 1.2 percent from 2002. From a monthly perspective, CPI picked up speed after July.
This year, an aggregate oversupply may possibly remain. But with agricultural prices rebounding, an expected pickup in energy prices, monetary supply remaining steady and continued robust spending, we see the CPI rising by an annualized 3 percent this quarter, 1.7 percentage points faster than the fourth quarter of 2003.
Credit and monetary supply growth will downshift from last year's levels. After it staged a quick rebound in 2002, growth of M1 (cash in circulation and demand deposits) hovered last year in a narrow 18-20 percent range. That indicates the central bank's moves to raise bank reserve requirements and tighten housing loan policies are having a contractive effect on monetary growth.
After a quick pickup in 2002, loan growth made moderate moves in February before it hit its all-year high of 23.63 percent in August, but lost some steam after September, when the central bank stepped up efforts to curb loan hikes.
Given the fast growth of money supply and lending in 2003, the central bank is likely to take a stronger stance on controlling loans this year.
That, coupled with an obvious slowdown in export growth, will greatly lessen the pressure of foreign exchange positions on base money. This year, base money and broader money supplies will see slower growth.
2. The leading index has started to subside, and the comprehensive business warning index is expected to return to normal levels.
Further, three out of the five components that make up the leading index, namely steel output, cargo delivery at major coastal harbours and new commercial real estate, are expected to see slower growth this quarter.
These are primarily due to changes in policies on tax rebates, lending, industrial structure and management as well as the high base of last year.
Out of the five indicators that make up the coincident index, industrial added value, fixed asset investments, fiscal revenue and M1 will also slow down.
The economic cyclical indicator will subsequently fall back mildly in the first quarter.
According to the State Information Centre's overall analysis , industrial value added and industrial businesses' sale incomes will move out of the overheated phase, where they stayed in the latter half of 2003, slowing down this quarter.
Foreign trade and investment will also level off.
Consumption will pick up slightly, while CPI, M1, total lending and fiscal income will likely stay at their current momentum. Power generation is causing concern of overheating at this point.
Hence, seven of the warning signals will be in normal growth modes this quarter. The overall comprehensive business warning index will return to what is known the green warning phase in its index jargon, indicating that the economy will come back to a healthy growth path in the first half of this year.
Policy recommendations
We need to observe the real effect of earlier policy adjustments in a discreet manner, and refrain from taking further constrictive measures at a time of continued high economic growth.
The overall macroeconomic policy should be consistent and stable to prevent synergies between aggressive macro policies and the natural adjusted quarterly decline in economic growth.
The policy should also steer clear of the possibility of falling export and investment demand, which can lead to an unwantedly rapid economic slowdown.
Fiscal policy should be revised further. The necessity of using aggressive government spending on public facilities to push economic growth is weaker in 2004, justifying a shift in the function of the proactive fiscal policy.
The proactive fiscal policy should be more focused on spurring organic economic growth, while giving some consideration to medium- and long-term development issues.
Proceeds from treasury bonds should be mainly used to complete projects already under construction, while the utilization of such funds needs to be tilted more towards improving living conditions in rural areas, adjusting economic structure, protecting the environment and promoting growth in the central and western regions of the nation.
Fiscal policy needs to enhance support to ongoing reform and promote improvements in market economic systems to ensure the healthy and rapid growth of the economy.
Monetary policy needs to maintain its support of economic growth. With economic growth accelerating, investment demand rising fast, loans surging and, at the same time, domestic spending remaining sluggish, the macro policy needs to consider risks on both sides, making co-ordination between monetary and fiscal policies increasingly important.
With the marginal effect of the proactive fiscal policy weakening, financial reform needs to accelerate to strengthen the role of monetary policy in spurring economic growth. Currently, monetary policy moves are already having some restrictive effects on credit and monetary growth.
Therefore, monetary policy this year should stick to fine-tuning measures, rather than "stepping on the gas" or "putting on the brakes," to maintain appropriate growth in both money supply and lending.
Stimulating domestic consumption remains a priority. China's investment ratio has grown noticeably in recent years, hitting 45 percent in 2003, while consumption ratio kept falling.
To ensure healthy economic growth, the consumption ratio needs to be higher.
A discreet stance is appropriate when handling regional imbalances in emerging consumption engines such as real estate, automobiles and telecommunications, so that spending momentum does not erode during the investment soft-landing in those areas. Meanwhile, new growth areas for consumption need to be fostered.
Forceful measures need to be taken to improve rural household income. The key reason for lacklustre effective demand in recent years involves the low incomes of rural workers.
In addition to tax favours, we recommend raising the share for agriculture in total fiscal spending, speeding up the construction of agricultural infrastructure and improving the ecological environment.
We suggest upscaling investment in small- and medium-sized rural infrastructure projects to absorb local excessive labor, while promoting the development of township enterprises by supporting farmers to start non-agricultural businesses.
(China Daily February 20, 2004)
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