The China Economy Yearbook, Volume 5 : Analysis and Forecast of China's Economic Situation [1 ed.] 9789004216860, 9789004182486

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The China Economy Yearbook, Volume 5

The Chinese Academy of Social Sciences Yearbooks: Economy

International Advisory Board

Albert Park, Oxford University

VOLUME 5

BEIJING 2011

The China Economy Yearbook, Volume 5 Chief Editor

Chen Jiagui Deputy Chief Editors

Liu Shucheng and Wang Tongsan

LEIDEN • BOSTON 2011

This yearbook is the result of a co-publication agreement between Social Sciences Academic Press and Koninklijke Brill NV. These articles were translated into English from the original《经济蓝皮书2010年: 中国经济分析与预测》Jingji lan pi shu 2010 nian: Zhongguo jingji xingshi fenxi yu yuce with financial support from China Book International, supported by the General Administration of Press and Publication and the Information Office of the State Council of China. This book is printed on acid-free paper.

ISSN 1872-7220 ISBN 978 90 04 18248 6 Copyright 2011 by Koninklijke Brill NV, Leiden, The Netherlands, and by Social Sciences Academic Press, Beijing, China. Koninklijke Brill NV incorporates the imprints Brill, Hotei Publishing, IDC Publishers, Martinus Nijhoff Publishers and VSP. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill NV provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, MA 01923, USA. Fees are subject to change.

CONTENTS List of Figures .............................................................................

ix

List of Tables ..............................................................................

xiii

Acknowledgments .......................................................................

xv

List of Contributors ....................................................................

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Effectively Maintaining Economic Growth and Restructuring Industries ................................................................................. Chen Jiagui

1

Financial Situation and Monetary Policy: Assessment and Suggestions .............................................................................. Li Yang, China Academy of Social Sciences

9

Analysis and Forecast of China’s Economic Situation— Report, Autumn 2009 ............................................................ “Analysis and Forecast of China’s Economic Situation” Project Group

21

Retrospective of 60 Years of Economic Growth Curve in New China and Prospects for the Future ....................................... Liu Shucheng

37

Analysis of and Projections for China’s Economic Situation, 2009–2010 ............................................................................... Zhang Liqun

61

Analysis of China’s Economic Development Trend and Recommendations for Macro Control Policies in 2010 ....... Fan Jianping

75

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contents

Analysis and Forecast of China’s Economic Situation, 2009–2010 ............................................................................... Chen Lei and Li Ying

93

Current Economic Trends and Macro Control Policy Orientation for 2010 .............................................................. Zheng Xinli

119

China’s Economy: Advancing Stably against the Wind— A Review of 2009 and Outlook for 2010 .............................. Zheng Jingping

127

China’s Macro-Economic Situation and Policies, 2009–2010 ... School of Economics of Renmin University of China Analysis of Uncertainties Involved in China’s Economic Recovery in 2010 .................................................................... Qin Wanshun and Qian Shichun Analysis and Forecast of China’s Capital Market in 2009–2010 ............................................................................... Wang Guogang and Zhang Yuewen, Institute of Finance and Banking, CASS

139

153

161

Review of Financial and Economic Situation in 2009 and Outlook for 2010 .................................................................... Ma Shuanyou

183

Financial Operations under the Moderately Loose Monetary Policy ....................................................................................... Wang Yi, Yan Xiandong, and Li Guanglei

199

Shanghai Stock Exchange Review of 2009 and Outlook for 2010 ................................................................................... Wu Qian and Zhu Pingfang

219

Analysis and Forecast of China’s Foreign Trade Situation in 2009 .................................................................................... Pei Changhong

235

contents Major Impact in 2009 and Structural Shortages in 2010— Interpretation of the Complexity of China’s Employment Situation .................................................................................. Cai Fang

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247

China’s Agricultural Economy in 2009 and Outlook for 2010 ................................................................................... Li Guoxiang

257

Analysis of the Real Estate Market in 2009 and Its Outlook for 2010 ................................................................................... Liang Shuang

269

The Environment Situation in 2009 and the Outlook for Environmental Protection in 2010 ......................................... Shu Qing

279

Analysis and Forecast of Taiwan’s Economic Situation ........... Zhang Guanhua

289

Analysis and Forecast of Hong Kong’s Economic Situation .... Helen Chan

301

Analysis and Forecast of Macao’s Economic Situation ............. “Macao Economy Analysis and Forecast” Research Group, Huaqiao University

327

Analysis of Global Economic Situation in 2009 and Outlook for 2010 ................................................................................... Zhang Yuyan and Tian Feng

341

Appendix: Statistics .....................................................................

361

Index ...........................................................................................

369

LIST OF FIGURES Figure 1.1 Changes in Central Bank Benchmark Interest Rate Since 2008 ..................................................................... Figure 1.2 Changes in Reserve Currency Inventory Since 2008 ......................................................................................... Figure 1.3 YoY Growth of Planned Investment for New Projects ........................................................................... Figure 3.1 China’s Economic Growth Rate Fluctuation Curve (1950–2009) ................................................................. Figure 3.2 Percentages for Output Values of Chinese Industries (1952~2008) ........................................................... Figure 3.3 China’s Urbanisation Rate (1949~2008) .............. Figure 3.4 Year-on-Year Monthly Growth Rate of Added Value of National Industrial Enterprises above a Designated Size ....................................................................... Figure 5.1 Seasonally Adjusted Changes in GDP .................. Figure 5.2 China Macro-Economic Leading Composite Index and Coincidence Composite Index Chart .................. Figure 6.1 Forecasting the Economic Cycle: Coincident Composite Index and Lagging Composite Index ................. Figure 6.2 Forecasting the Economic Operations Trend: Leading Composite Index and Diffusion Index .................... Figure 6.3 Forecasting the Economic Operations Trend: Coincident Diffusion Index and Leading Diffusion Index .... Figure 6.4 Monthly Climate Trend Composite Index ........... Figure 6.5 Early Warning System Symbols ............................ Figure 6.6 Price Tendency: Comparison of Coincident Composite Index, CPI, and PPI ............................................ Figure 6.7 Comparison of CPI and Food CPI ....................... Figure 6.8 Comparison of CPI and Urban Grain Retail Price Index .............................................................................. Figure 6.9a PPI Impulse Response Function to Economic Climate Impact ....................................................................... Figure 6.9b CPI Impulse Response Function to Economic Climate Impact ....................................................................... Figure 7.1 Annual Growth Rate of the Chinese Economy ...

12 13 20 38 47 49 51 78 79 96 99 100 102 103 110 111 111 113 113 128

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list of figures

Figure 7.2 Urban Investment in Fixed Assets and Care Sales, January–August 2009 ................................................... Figure 7.3 Unemployment Rate in the USA and Eurozone . Figure 7.4 PMI Changes in China’s Manufacturing .............. Figure 7.5 Changes in World Trade Volume ........................ Figure 7.6 China’s Year-on-Year Export Growth Rate ......... Figure 8.1a Absolute Gap and Relative Gap of China’s National Income—Static Forecast ......................................... Figure 8.1b Absolute Gap and Relative Gap of China’s National Income—Dynamic Forecast ................................... Figure 8.2 Recovery Process of the Chinese Economy .......... Figure 8.3 China’s Economic Fluctuations and Economic Growth Patterns ...................................................................... Figure 8.4a The Supply Structure of China’s Economic Growth .................................................................................... Figure 8.4b The Demand Structure of China’s Economic Growth .................................................................................... Figure 8.5 China’s Price Formation Model ............................ Figure 8.6a China’s M1 Supply Growth Rate ....................... Figure 8.6b China’s M2 Supply Growth Rate ....................... Figure 8.7 Dynamic Effect of China’s Food Prices ................ Figure 9.1 Changes in China’s Investment, Consumption and Export Growth Rates ( January 2003–August 2009) ..... Figure 9.2 Forecast Relations between GDP Growth Rates for the United States, Japan, and Europe, and China’s Export Growth Rate (2003–2012) ......................................... Figure 9.3 Growth Rates of Investment in Fixed Assets for Different Types of Enterprises (February 2004– August 2009) ........................................................................... Figure 9.4 Relations between M2, Credit Balance Growth Rate, and CPI ( January 1998 to August 2009) .................... Figure 10.1 CSI Enterprise Bond Composite Index .............. Figure 10.2 Wide Range of Bonds Issued, January– September 2009 ...................................................................... Figure 10.3 Changes in the Types of Bonds on the Bond Market ..................................................................................... Figure 10.4 Monthly Growth Rate (%) of Urban Investment in Fixed Assets, 2008–2009 .................................................... Figure 10.5 Monthly YoY Growth Rates (%) of Total Retail Sales of Consumer Goods, 2008–2009 ..................................

130 133 134 136 136 141 142 144 144 147 147 148 151 151 152 154 156 157 158 168 169 170 172 173

list of figures Figure 10.6 CPI Monthly YoY Changes, 2008–2009 ............ Figure 10.7 Monthly YoY Change Trend of the Raw Materials, Fuels, Power Purchasing Price Index ................... Figure 10.8 Monthly Growth Rates of Financial Institution Domestic and Foreign Currency Loans ................................. Figure 10.9 Increase in Deposits by Month in 2009 .............. Figure 10.10 Inter-Bank Lending Rate by Month ................. Figure 13.1 Money Supply Growth Rate ............................... Figure 13.2 Rapid Credit Growth .......................................... Figure 13.3 Monthly New Loans in 2009 Far Exceeded the Monthly Average for 2002–2008 ........................................... Figure 13.4 Balance and Growth Rate of Real Estate Loans Figure 13.5 Changes in RMB Deposits .................................. Figure 13.6 The Market Interest Rate is Running Low ........ Figure 13.7 The Excess Reserves Rate of Financial Institutions Has Picked Up ..................................................... Figure 13.8 The RMB Exchange Rate Remained Generally Stable ....................................................................................... Figure 13.9 The Gap between the Money Supply Amount and the GDP Growth Widened Sharply ............................... Figure 13.10 National Housing Sale Price Growth Rates ..... Figure 13.11 Breakdown of Foreign Exchange Reserves Structure, 2008–2009 ............................................................. Figure 13.12 The USD Nominal Effective Exchange Rate Has Tended to Depreciate Since March 2009 ..................... Figure 13.13 Changes in the Nominal Effective Exchange Rate and Foreign Exchange Reserves ................................... Figure 14.1 Huge Amounts of Credit Boosted the Stock Market in the First Half of 2009 ........................................... Figure 14.2 IPO Financing Since the Second Half of 2006 ... Figure 14.3 Monthly Distribution of Floating Amount of Non-Tradable Shares in 2009 ................................................ Figure 14.4 Credit Provision Will Grow Steadily in the Fourth Quarter of 2009 ......................................................... Figure 14.5 Floating of Non-Tradable Shares in 4Q 2009 and 2010 ................................................................................. Figure 16.1 Changes in the Labour Market State Index ....... Figure 21.1 Hong Kong’s Economy Improved in Q2 2009 ... Figure 21.2 The Decline in Total Goods Exports Reduced Significantly in Q2 2009 ........................................................

xi 174 175 177 178 179 202 203 204 205 206 207 208 209 210 211 212 214 216 220 222 223 230 231 249 302 303

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Figure 21.3 The Decline of Total Exports of Goods Narrowed ................................................................................. Figure 21.4 The Decline in Total Exports of Services Narrowed Due to an Improvement in the External Environment ........................................................................... Figure 21.5 The Decline in Total Imports of Services Narrowed ................................................................................ Figure 21.6 The Performance of Private Consumption Improved Markedly over the Preceding Quarter .................. Figure 21.7 Overall Investment Expenditure Declined Further as Business Sentiment Remained Cautious .............. Figure 21.8 The Rise in Unemployment Slowed Down Noticeably in Q2 2009 ........................................................... Figure 21.9 Consumer Price Inflation Declined Further in Q2 2009 .................................................................................. Figure 21.10 World GDP during Two Recent Economic Crises ....................................................................................... Figure 21.11a Effects of Economic Crises on East Asian Goods Exports ........................................................................ Figure 21.11b Hong Kong’s Goods Exports Decline Sharply in Global Economic Crises ..................................................... Figure 21.12a The Stock Market Fell Sharply in the Two Crises ....................................................................................... Figure 21.12b HK Housing Market Performed Relatively Stably in Current Crisis .......................................................... Figure 21.13a Local Interest Rates Are Relatively Low in the Current Crisis ......................................................................... Figure 21.13b Credit Conditions Are Better during the Current Crisis ......................................................................... Figure 21.14a Retail Sales Declined Relatively Slightly in the Current Crisis ......................................................................... Figure 21.14b Restaurant Revenue Declined Relatively Slightly in the Current Crisis ................................................. Figure 21.15 The Labour Market Responded More Flexibly Shedding Fewer Jobs .............................................................. Figure 23.1 Derivatives Market Turnover .............................. Figure 23.2 Primary Product Price Index ...............................

304 305 306 307 308 309 309 313 314 314 315 315 315 315 315 315 316 354 357

LIST OF TABLES Table 1.1 Market Liquidity Supply, 2007–2009 .................... Table 2.1 Projected Major National Economic Indices, 2009–2010 ............................................................................... Table 3.1 Share of Enterprises of Various Ownerships in Total Industrial Output Value ............................................... Table 3.2 Percentages Ownership Forms for Urban Employment ............................................................................ Table 3.3 Industrial Production and Investment Growth Rates in the First Half of 2009 .............................................. Table 3.4 International Financial Institution Forecasts for China’s Economic Growth Rate in 2010 .............................. Table 5.1 China’s Main Economic Indicators: Estimates for 2009–2010 ............................................................................... Table 6.1 Monthly Climate Index Sets of the Chinese Economy ................................................................................. Table 6.2 Forecast of Major Macro-Economic Indices ......... Table 7.1 IMF World Economic Forecast for 2009 and 2010 ......................................................................................... Table 8.1 Forecast of China’s Macro-Economic Indicators in 2009 and 2010 ........................................................................ Table 8.2 China’s Real GDP Growth Rate Forecast ............ Table 8.3 Accounting of Elements in China’s Economic Growth .................................................................................... Table 8.4 Evolutionary History of China’s Inflation .............. Table 8.5 Stationary Inflation Rate of China’s Industrial Sector ...................................................................................... Table 8.6 China’s Non-Walrasian Equilibrium Economic Characteristics ......................................................................... Table 10.1 Financing from Securities Markets over January–September 2009 ....................................................... Table 10.2 Stock Market Trading, January–September 2009 ......................................................................................... Table 10.3 Global Stock Market Growth Rankings, January–July 2009 ..................................................................

13 24 44 45 50 52 91 95 105 129 140 145 146 146 147 149 163 164 165

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list of tables

Table 10.4 Key Performance Indicators of Listed Companies for 2008–2009 ......................................................................... Table 13.1 The Relationship between Loan Growth Rates and Nominal GDP Growth Since the Start of the Reform and Opening Up Period ......................................................... Table 14.1 List of Bond Market Issues in the First Three Quarters of 2009 .................................................................... Table 15.1 Rate of Change in Monthly Exports, September 2008–August 2009 .................................................................. Table 15.2 Decrease in Imports and Exports between China and Principal Trade Partners, January–August 2009 ........... Table 15.3 Changes in the Volume and Value of China’s Exports, January–August 2009 ............................................... Table 15.4 Changes in the Volume and Value of China’s Imports, January–August 2009 .............................................. Table 15.5 China’s Foreign Trade, January–August 2009 .... Table 16.1 Rural Working-Age Depopulation Trend ............ Table 21.1 Exports of Major East Asian Economies ............. Table 23.1 Forecast Global GDP Growth Rates in Real Terms, 2009–2010 .................................................................. Table 23.2 Unemployment Rate in the Advanced Economies, 2009–2010 ........................................................... Table 23.3 World Trade Situation and Medium-Term Outlook, 2007–2014 ............................................................... Table 23.4 FDI Flows in Advanced Economies .....................

166 210 224 235 236 237 239 239 256 303 343 346 348 350

ACKNOWLEDGMENTS This book is an abridged translation of Jingji lanpi shu 2010 nian: Zhongguo jingji fenxi yu yuce 经济蓝皮书2010年：中国经济分析与预测 [2009 Blue Book of Economics: Analysis and Forecast of China’s Economic Situation], the benchmark annual report on China’s economic situation. The research included in this third volume to appear in English is based on a symposium held in autumn 2009 titled Analysis and Forecast of China’s Economic Situation, organised by the Analysis and Forecast Project Group for China’s Economic Situation of the Institute of Economics, China Academy of Social Sciences (CASS). The article authors are experts and scholars from various government sectors, scientific research organisations, and institutes of higher learning. Its contents include in-depth analyses of China’s economic situation in 2009 and forecasts for 2010, focusing in particular on issues arising from current economic performance, while economic trend forecasts and solutions are proposed based on a combination of quantitative and qualitative analysis. Chen Jiagui, the vice president and director of the CASS Institute of Economics, and Li Yang, the vice president of CASS, were the Project Group’s general supervisor and chief editor of this book respectively. Liu Shucheng and Wang Tongsan were the executive directors of the Project Group and deputy chief editors of this book respectively. We would like to take this opportunity to express our sincere thanks to the aforementioned for their excellent work on and support of this book, without which The China Economy Yearbook, Volume 5 would have not be available in either its Chinese or English versions. I would also like to acknowledge the devotion and diligence of translators Zhang Yang, as well as to Jonathan Cobb, who served as the final translator for the book. Thanks are also due to Deng Yonghong, Qiu Yang and Guo Rongrong of the Social Sciences Academic Press for the invaluable assistance they have provided throughout the translation and publishing processes of this book. Special appreciation is reserved for the China Book International Group, whose guidance

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and financial support were instrumental in the translation of this book. And last, but by no means least, we would like to express our thanks to our friends at home and abroad for their support of the publication of this book and their interest in China’s economic development. The Editors October 26, 2010

LIST OF CONTRIBUTORS Throughout this volume, Chinese names are always ordered according to standard practice in China, with surnames preceding given names. To clarify this ordering, surnames are in small capital letters in the following list of contributors. CAI Fang is a director of the Institute of Population and Labour Economics, CASS, and holds a PhD in Economics. Major works include China’s Floating Population Problem《中国流动人口问题》, Transition of the Employment Structure under Dual Labour Market Conditions《二元劳动力 市场条件下的就业体制转换》, and Migration Hindrance, Human Capital, and Labour Force Mobility 《迁移障碍、人力资本和劳动力流动》. CHEN Jiagui holds a PhD in Economics, and is vice president of the Chinese Academy of Social Sciences (CASS). He is a director of the Institute of Industrial Economics, CASS, researcher, and president of the Chinese Institute of Business Administration. His major research works include Business Operations and the Market《企业经营与市场》, Entrepreneurship《企业学》, Theory and Practice of Joint Stock Systems《股份 制的理论与实践》, The Market Economy and Business Operations《市场经 济与企业经营》, and Operation and Development of Modern Large and Middlesized Enterprises《现代大中型企业经营与发展》. CHEN Lei is assistant dean of the Institute of Mathematics & Quantitative Economics, Dongbei University of Finance & Economics, as well as a professor and PhD in Economics. Major research interests include quantitative economics, economic cycle fluctuations, and financial and macroeconomic analysis and forecasts. Major works include Empirical Research into Economic cycle Fluctuations in the Transition Period of China《中国 转型时期经济周期波动实证研究》. FAN Jianping is a chief economist and director at the Economic Foreign Department, State Information Centre. LI Guanglei is a staff member at the People’s Bank of China.

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list of contributors

LI Guoxiang works at the Rural Development Institute of CASS, where he was previously a Doctoral Student. Major research works include Study of Strategic Adjustment to Agricultural Structures, and Research into Rural Development and Increasing Farmers’ Incomes. LI Yang is a director and researcher at the Institute of Finance and Banking, CASS and a member of the Institute of Economics, CASS. LI Ying is assistant dean of the Institute of Mathematics & Quantitative Economics, Dongbei University of Finance & Economics, as well as a professor and PhD in Economics. LIANG Shuang is an Expert at the Policy Research Centre of the Ministry of Housing and Urban-Rural Development, whose works include An Analysis of Japan’s Economic Policies in the 1990s《试析二十世纪九十 年代日本经济政策》. LIU Shucheng is a director and researcher at the Institute of Economics of CASS, as well as chief editor of Economic Study《经济研究》, whose major research achievements include Cyclic Swings of the Chinese Economy 《中国经济的周期波动》, A New Phase in the Cyclical Swings of the Chinese Economy 《中国经济周期波动的新阶段》, and Prosperity and Stability—A Study of China’s Economic Fluctuations《繁荣与稳定—中 国经济波动研究》. MA Shuanyou is a director at the Economic Forecasting Department of the Ministry of Finance of the People’s Republic of China. PEI Changhong is a director and researcher at the Institute of Finance and Trade Economics, CASS. QIN Wanshun is a professor at the Department of Applied Economics, Guanghua School of Management, Peking University. Major research interests include macroeconomics quantitative analysis and mathematical economics. Major academic achievements include China’s Macroeconometric Model and The Causes and Structure of China’s Inflation.

list of contributors

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QIAN Shichun is a graduate of Guanghua School of Management, Peking University. Major academic works include Empirical Research into Issues in China’s Total Factor Productivity《中国全要素生产率问题 实证研究》. TIAN Feng is a holds a doctorate from, and is an associate researcher at, the Institute of World Economics & Politics, CASS. WANG Guogang is a deputy director at the Financial Research Centre, CASS, whose works include Governing Deflation and Developing the Capital Market《治理通货紧缩与发展资本市场》and An Analysis of the Change Mechanisms in Stock market and Economic Trends in China《中国股市走势 与经济走势的异动机制分析》. WANG Yi is a staff member at the People’s Bank of China. WU Qian is a staff member at Franklin Templeton Sealand Fund Management Co., Ltd. YAN Xiandong is a staff member at the People’s Bank of China. ZHANG Liqun is vice secretary-general of the Academic Board of the Development Research Centre of the State Council, and a director and professor at the No. 1 Macroeconomic Research Office. ZHANG Yuewen is an associate researcher at the Institute of Finance and Banking, CASS. ZHANG Yuyan is a director, doctoral tutor & researcher at the Institute of World Economics & Politics, CASS. ZHENG Jingping is the spokesman for the National Bureau of Statistics, and director of its General Affairs Department. His major research interests are macroeconomic analysis and econometrics, mathematical statistics, purchasing power parity, and international economics. His published research findings include Understanding China’s Economic Indices《解读中国经济指标》and Comparative Study of Government Statistical Systems at Home and Abroad《中外政府统计体制比较研究》.

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ZHENG Xinli is a staff member of the China Center for International Economic Exchanges. ZHU Pingfang is a vice president of the School of Economics, Shanghai University of Finance and Economics, a professor, and a doctoral advisor with major research interests in econometric theory and its application in macro-economy and finance, scientific and technological input, management of science and technology, and policies of science and technology.

EFFECTIVELY MAINTAINING ECONOMIC GROWTH AND RESTRUCTURING INDUSTRIES Chen Jiagui Although China’s economy suffered from the severe impact of the international financial crisis in 2009, it tended to recover as a whole through wide-ranging efforts from all parts. The goal of maintaining economic growth is achievable, and annual GDP growth is expected to reach approximately 8.3 percent. With continued rapid economic growth, the tough task remains to restructure the economy and transform the pattern of economic development. Effective economic management in 2010 and onwards, other than continuing to maintain stable, rapid economic growth, will focus on the effective handling of the relationship between maintaining economic growth and economic restructuring, with a further emphasis on pushing forward the restructuring and transformation of the pattern of economic development. Economic restructuring is extremely wide-ranging. This includes not only a restructuring of the national income distribution pattern, but also of investment and consumption; it includes not only a restructuring of the primary, secondary and tertiary industries but also an adjustment to the internal structure of each industry and the structure of industrial organisation; it includes not only an adjustment of regional structures but also of the dualistic urban and rural structure; not only an adjustment of the structure of ownership but also a strategic adjustment of the state-owned economy. There is an intimate relationship between maintaining economic growth and the economic restructuring process. Their common goal is to ensure that the national economy maintains stable, rapid development and to promote the transformation of the pattern of economic development, but they also have different emphases. Maintaining economic growth is a short-term goal, which is a tactical measure; economic restructuring is however a long-term goal, which is a strategic measure. It is therefore essential to effectively manage the relationship between maintaining economic growth and economic restructuring, and combine these. We will achieve the goal of maintaining economic growth and promote restructuring as part of the process of maintaining economic growth. Macro-economic policy

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and practical arrangements must not ignore economic restructuring or postpone its progress for the sake of maintaining short-term economic growth. Nor on the other hand should we allow the economic structure to deteriorate and worsen the difficulties to be faced as part of subsequent restructuring in order to maintain short-term economic growth. The two aspects should be combined such that these coordinate and interact with each other. The promotion of economic restructuring in the process of maintaining economic growth is a major topic. A long-term task of macroeconomic control and economic initiatives as a whole is how to maintain stable, rapid economic development while promoting restructuring. To ensure that both tasks proceed hand in hand, the current emphasis is on the effective handling of the relationship between maintaining economic growth and restructuring the organisation of China’s industries. Restructuring the organisation of industries is a significant part of the restructuring of an industrial sector, a significant guarantee for improving the degree of industrial organisation, and a significant method for enhancing and improving the vitality of, and overall benefits to, the national economy. A rational industrial organisation structure tracks a country’s overall level of industrial development, helps to prevent market monopolisation to ensure orderly competition among businesses, helps to develop specialisation and cooperation between companies, as well as to ensure the coordinated development of large, medium, small and micro-sized enterprises. Excess capacity and an irrational industrial organisation structure are the major issues which currently appear in China’s economic structure. The relevant data show that China’s iron and steel industry had established a production capacity of 660 million tonnes by the end of 2008, with a further production capacity of 58 million tonnes under construction, meaning that surplus production capacity has reached 200 million tonnes; China’s cement production capacity has reached 1.87 billion tonnes, beyond actual demand; but more than 400 cement production lines are still under construction, which will increase production capacity by 600 million tonnes; China’s electrolytic aluminium production capacity over recent years has been 18 million tonnes with total demand of only approximately 12 million tonnes, but 2 million tonnes’ production capacity remains under construction; there is also severe excess production capacity in the shipbuilding, chemical and sheet glass sectors. In addition, a number of promising new industries

effectively maintaining economic growth

3

such as solar energy, wind energy, and others also suffer from blind development and redundant construction. Relevant statistics indicate that excess production capacity existed to different degrees in 19 out of 24 industries in the first quarter of 2009. With the high speed development of investment, the problem of excess production capacity is likely to worsen. In addition to excess production capacity in a number of industries, China’s manufacturing sector is also frustrated by issues of poor organisation, low specialisation and cooperation, prominent far-reaching shortcomings both large and small, major enterprises lacking both sufficient size and capabilities, small and micro-sized enterprises lacking distinguishing features, the slow growth of leading enterprises and the difficulty in eliminating inferior enterprises. The State Council formulated the industrial restructuring and revitalisation plan at the end of 2008 in order to take on the challenges of the international financial crisis, curb a significant short-term decline in China’s economy, and promote industrial restructuring as well as the transformation of the pattern of economic development. This plan combines maintaining economic growth and economic restructuring, and ensures that these promote each other. It is vital to fully and accurately grasp its spirit and implement it in a meticulous manner in practical initiatives. Revitalisation does not mean merely a blind increase in production capacity, but rather an improvement in the quality of various industries. Restructuring and revitalisation should therefore be combined instead of merely emphasising revitalisation at the cost of restructuring. The favourable opportunities afforded by the current insufficient levels of external demand, the low economic growth rate and the severe pressure on certain companies to rely on market forces should enable us to improve the outlook and undergo industrial restructuring in order to achieve industrial revitalisation, improve industrial quality and benefits, and achieve a transformation in the pattern of economic growth. The government must play a guiding role in the industrial restructuring process, but more importantly, it should be ensured that the market mechanism plays a full, fundamental role in this process. The government should not attempt to introduce policies to assist enterprises characterised by obsolete products, high energy consumption, weak economic performance, or activities which generate severe levels of environmental pollution or destroy the ecological environment. Such enterprises should be allowed to go bankrupt. Furthermore,

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high-quality enterprises should be encouraged to merge with such backward enterprises to accelerate the pace of the merger, reorganisation and elimination of backward production capacity. Attention should be paid to the following issues during the restructuring of the industrial organisation: First, the issue of company expansion must be handled appropriately. In order to improve the organisation of an industry and enhance the international competitiveness of its enterprises, it is necessary to encourage a small number of enterprises to become larger and more powerful, and form large corporate holding groups. One issue currently worthy of close attention is the trend for certain provincial and municipal governments and state-owned asset departments to group all state-owned enterprises in the same sector in a single region together to form “large groups” simply for the sake of creating larger, more capable enterprises. In large groups of this kind, however, certain members are already corporate group companies which have achieved considerable scale, and which have equal strengths and similar products. They are competitors, not partners, and are unable to offer each other any additional advantages. In groups of this kind, the headquarters is not a group company but an administrative body, which leads to the constantly and continuously criticised pattern of establishing branches ahead of their parent company. Such administrative bodies remove the powers of the grass-root enterprises and solicit powers from the competent authorities, and completely take over the administrative means for managing grass-root enterprises. This creates a lengthy and inefficient management chain comprising the government’s management bodies (departments, industrial bureaus, etc.), state-owned assets supervision and administration commissions, administrative groups, listed companies and other companies (groups) at the same level, and subsidiary and associated companies. Experience has proven that this approach and pattern of corporate expansion are inefficient and success is only attained with difficulty. The pattern in fact replicates the type of industrial companies that were strongly opposed and eventually eliminated in the 1980s. The creation of groups of this kind is a construct of the desires of leading officials and a freak combination of executive and capital power. It is therefore clear that these must be firmly opposed. Practice has proven that the development of a major enterprise group must conform to the major principles of economic instruments, and have mutual complementarities as a core precondition; one major enterprise (group company) must form the

effectively maintaining economic growth

5

core thereof, linking to other companies through property rights and recombining their respective production capacities as the main means of achieving a multiplier effect. As part of the industrial organisational restructuring process, transregional mergers and the integration of major enterprises should be supported, because such actions are mainly achieved through economic means, and generally achieve better results. Current enterprise mergers and reorganisations, especially those which reach across provinces, autonomous regions and municipalities, are still subject to the constraints of considerable executive power and administrative measures. Macro-economic control should therefore be strengthened to support trans-regional mergers and reorganisations of state-held enterprises and national enterprises which enjoy competitive advantages for the sake of the national interest, not regional interests, so as to accelerate the pace of product structure adjustment and fully benefit from the effect of economies of scale, thus enabling the domestic “mining” of Chinese enterprises to “go global”, and absorb and integrate global resources so as to be able to participate in the global competitive arena. Second, effective, practical means must be found to solve the difficulties encountered by small-sized enterprises in the process of development. Small-sized enterprises account for over 95 percent of the total, and the vast majority of these are non-state enterprises. They have made huge contributions to China’s booming economy, providing employment and expanding exports. In the implementation of industrial restructuring and revitalisation planning, more attention should be paid to the development of small and micro-sized enterprises, by creating a free environment for such development, and assisting them to resolve the difficulties that exist in the development process. The results of numerous surveys show that China’s small and micro-sized enterprises face four major problems. First, there is a problem with the criteria for dividing enterprises by size. China’s medium-sized enterprises are relatively larger in scale and their operating patterns, internal management organisation and economic and social environments are basically the same as for large enterprises, but differ greatly from small and micro-sized enterprises. Therefore, from a policy support perspective, it is not advisable to lump medium-sized enterprises together with small and micro-sized enterprises, but these should instead be grouped with large enterprises. For instance, with regard to the issue of financing, it has been found that small and medium-sized enterprises have difficulties in finding financing; but financial institution data prove

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that there is no difficulty in financing small and medium-sized enterprises. The problem lies in the fact that the data provided by financial institutions mainly focus on medium-sized enterprises, not small and micro-sized enterprises. Our survey also proves that medium-sized enterprises have no difficulty in obtaining financing. Furthermore, the size of small-sized enterprises as defined by the Statistics Bureau is too large, and a high number of enterprises that should be included in the medium-sized enterprise category are classified as small-sized enterprises. To ensure that policies promoting small and micro-sized enterprises work better, a new criterion for the division of medium and small-sized enterprises should be established, and the class of micro-sized enterprises should preferentially be increased. Second, the social support system for small and micro-sized enterprise development remains unsound, and systems covering administration, financing and guarantees, information provision and technical services all need considerable improvement. Third, government policies are insufficiently well well-targeted and implemented. Those measures issued to encourage the development of small and medium-sized enterprises are all focused on medium-sized enterprises, and are of little use to small and micro-sized enterprises. Fourth, enterprises need to improve their own quality. Besides strengthening internal management and improving management standards, small-sized enterprises must develop their specific fields of expertise, excellence, specialisations and strengths. Only in this way will China form an industrial organisation that comprises enterprises of different sizes characterised by a sound division of labour and harmonious development. Third, the reform of monopoly industries must be accelerated. First of all, access control should be relaxed to encourage the non-state economy to enter certain monopoly industries so as to finally turn these monopolies into competitive industry players. Secondly, the government should gradually abolish the special rights awarded to certain such industries. The government should not provide special support or aid to provide them with monopoly profits and merely assume the responsibility for profits, not losses. When profitable, such companies share the proceeds among themselves, but once they incur losses, they beg for state subsidies. These monopoly industries ought to be introduced to the market, to transform these state-owned enterprises into real market players with independent operations, self-development, self-control as well as sole responsibility for their own profits and losses. The government should also strengthen regulatory control of these

effectively maintaining economic growth

7

monopoly industries and incorporate government capital operations of monopoly enterprises into the national budget, and government capital should be used with care. The pricing of products and services in these monopoly industries must be more transparent. Fourth, reform of trade associations should continue to be pushed forward. China’s trade associations have undergone considerable development, and a number have played an increasing role since the start of China’s reform and opening up, particularly since the abolition of the Ministry of Industry and the Bureau of Industry. But China’s existing trade associations are excessively bogged down in administrative duties, and the majority are unable to perform their due role. We should therefore continue to promote trade association reform. Such associations should be non-governmental organisations which enterprises can voluntarily join and in which they can play a democratic role. They should be bridges between enterprises and the government, and proactively develop the services they provide for enterprises. Nor should these be administrative agencies, either directly or in disguised form, which receive a simple fiscal allotment. On the other hand, the government should also continue to transfer power and no longer undertake tasks that ought rightly to be shouldered by trade associations. Unless this is achieved, it will be difficult to make progress in reforming administrative organisations and consolidate the achievements which have been made so far, in a continuous cycle in which once reforms are completed, the organisation once again bloats.

FINANCIAL SITUATION AND MONETARY POLICY: ASSESSMENT AND SUGGESTIONS Li Yang China Academy of Social Sciences I. Economic Situation in 2009 and 2010: General Assessment Since the close of 2008, China’s economy has undergone separate stages: a halt in its decline, stabilisation and return to growth. With the implementation of a package of economic stimulus policies and their respective impacts, the domestic economy has exhibited a relatively remarkable recovery trend. In the third quarter of 2009, GDP grew by 8.9 percent, and forecasts suggest that annual GDP may grow by 8.3 percent. In our opinion, it is very probable that the GDP growth rate will exceed 8 percent in 2010. This opinion is based on two key points: First, domestically, consumption demand has maintained a stable upward trend, investment demand has maintained a certain intensity, and the contribution of exports to economic growth will turn positive in 2010 after a period of negative performance in 2009. Overall, domestic factors will guarantee that the national economy in 2010 will maintain an upward track over that for 2009. Second, internationally, the global economy has stabilised. A recovery to pre-crisis levels will be difficult, but there has nonetheless been a return to a track of positive growth. Our research shows that the influence rate of net exports on China’s economic growth is approximately 65 percent. Based on this kind of connection, the stabilisation of the global economy will have a positive impact on China’s economic growth. Based on the aforementioned assessment, we believe that the economic and macro control initiatives for 2010 should prioritise restructuring and the deepening of reform, with no particular attention paid to “maintaining economic growth”.

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II. Currency Credit Data and Monetary Policy Operations in 2009 Must Be Correctly Assessed China witnessed record-high currency and credit growth in 2009. This generated extensive doubt, rooted in the assessment of currency and credit data and monetary policy operation trends in 2009. A careful analysis of these data is therefore required. This involves a review of issues on three levels: First, what does the growth in currency supply and credit in 2009 actually mean? Second, what is the force driving this high monetary and credit supply growth? Specifically, did the central bank’s monetary policy or other economic factors result in the high level of growth of the currency and credit supply? Third, if the central bank’s monetary policy operations were not the major reason underpinning the high level of growth of the monetary and credit supply, what monetary policy should be selected for the next year? A. Assessment of Currency and Credit Expansion in 2009 China’s money supply structure is relatively unique, i.e. deposits account for a sizeable percentage of monetary aggregates. For instance, a wide range of deposits accounted for 93.8 percent of M2 as of the end of September 2009; and a wide range of deposits accounted for 81.5 percent of M1. This is to say that the variation in deposits determines the variation in China’s money supply to a major extent. Because of this connection, the relationship between deposits and loans becomes a key factor for understanding China’s money and credit growth trends. With regard to the relationship between deposits and loans, deposits may have led to loans or similarly, loans may have led to deposits. The economic operation implications of both, however, are quite the inverse. If the increase in deposits is mostly attributable to increases in primary deposits (incurred by the growth of the national economy), the money supply is basically neutral; in contrast, if the increase in deposits is attributable to an increase of loans (incurred by deposit/ loan operations in the banking system), the money supply is expansive. It is our assessment that China’s current situation is dominated by the former, namely that the money supply is basically neutral.

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We must also analyse the structure of incremental deposits. Under normal conditions, enterprise, private and government deposits account for relatively stable percentages of total deposits. Therefore, an abnormal change in the deposits of a certain sector is worthy of attention. This indeed occurred this year, when China’s deposit growth rate reached a record high, and the growth of enterprise deposits was in particular unprecedented. From January to September, deposits from society as a whole increased by RMB 11.75 trillion, of which RMB 6.64 trillion or 56.5 percent comprised non-financial company deposits, and RMB 5.6 trillion or 47.6 percent were enterprise deposits. Historically, non-financial company deposits normally accounted for only approximately 30 percent of the total, and the sharp growth in enterprise deposits appears abnormal. Thus, the significance of macro policy has altered considerably. In our opinion, the high growth in non-financial company deposits, and particularly those of enterprises, is meaningful in two ways during periods of rapid money supply and credit growth. 1. A segment of bank loans do not generate borrowers’ purchasing power for the current year, but rather purchasing power for the coming year through the spreading function of deposits. This means that this year’s high levels of money supply and credit growth provided no major stimulus; 2. As loans are spread over to the following year through deposits, no strong deflationary effect will be felt, even though the money and credit growth rate for the next year will be lower than that for the current year. B. What Role Has the Central Bank Played in the High Level of Money and Credit Supply Growth? It used to be believed that the central bank controlled the expansion or contraction of the money and credit supply. This is a conventional concept, but this is not currently so applicable, either internationally or domestically. This statement certainly requires explanation through complex financial theories, but it also can be explained through a simple phenomenon: if the central bank’s policy operations result in a sharp expansion in the money and credit supply, we would certainly see that the central bank’s monetary policy operations this year exhibited relatively sharp expansion. This is not however the case.

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To implement an expansive monetary policy, the central bank can resort to a price means and a quantity means, which mainly include: 1. Reducing the legal reserve rate (price and quantity means); 2. Reducing the interest rate (price means); 3. Increasing the supply of reserve currency (quantity means); and 4. Providing a net supply of liquidity to the market (quantity means). Let’s observe the individual changes that have occurred this year. 1. There were no changes to the required reserve ratio this year; 2. There were no changes to the benchmark interest rate set by the central bank. However, the marketisation interest rate underwent considerable changes. By month, the market interest rate was relatively low before the end of June but it rose gradually from July onwards (see Figure 1.1 below):

3.5 3 2.5

Weighted average interbank interest rate Bond pledged repo rate Excess reserve rate

2 1.5 1 0.5 0

09/2009

08/2009

07/2009

06/2009

05/2009

04/2009

03/2009

02/2009

01/2009

12/2008

11/2008

10/2008

09/2008

08/2008

06/2008

07/2008

05/2008

04/2008

03/2008

02/2008

01/2008

Figure 1.1 Changes in Central Bank Benchmark Interest Rate Since 2008.

3. Decreased supply of reserve currency (Figure 1.2); The total size of the central bank’s balance sheet has continued to rise since 2008, but its growth rate has declined dramatically, with the growth in total assets of the central bank falling from 49.2 percent in January 2008 to 5.9 percent in August 2009. In line with the slowdown in the growth of total assets of the central bank, the growth in liabilities also slowed down, and reserve currency growth in particular slowed down sharply. The year-on-year growth rate of the reserve currency inventory fell from 49.2 percent in January 2008 to 5.9 percent in August 2009 (see Figure 1.2). Furthermore, the reserve currency inventory dropped from RMB 12.9222 trillion at the end of December 2008 to RMB 12.4536 trillion at the end of August 2009 with a net decrease of RMB 468.6 billion.

financial situation and monetary policy Reserve currency

70.000 60.000 50.000 40.000 30.000 20.000 10.000 0.000

07/2009

05/2009

03/2009

01/2009

11/2008

09/2008

07/2008

05/2008

03/2008

Reserve

01/2008

Figure 1.2

13

Changes in Reserve Currency Inventory Since 2008.

4. Market liquidity supply decreased in comparison with 2007 and 2008. This means that the central bank reduced liquidity in 2009 to a greater degree than in 2007 and 2008. Overall, the four primary indicators give above, which indicate the degree of tightness of monetary policy, show that China’s monetary policy is neutral, and even slightly tight. C. Suggestions for Monetary Policy for 2009 The neutral and slightly tight monetary policy, however, has led to relatively expansive money supply and credit growth. This contradiction requires explanation. In our opinion, this is the result of the high savings ratio. It is well known that China’s savings ratio has exhibited an upward trend over the last twenty years. Roughly speaking, domestically, an increase in savings is reflected in the inflow of bank deposits; externally, this is Table 1.1

Market Liquidity Supply, 2007–2009

(All figures in RMB)

Before Sep. 2009

2008

2007

Net supply through open market operations

0.7878 trillion

–0.7879 trillion

0.5333 trillion

RMB counterpart of foreign exchange reserves

1.6943 trillion

4.0054 trillion

2.9397 trillion

Total

2.4821 trillion

3.2175 trillion

3.4730 trillion

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reflected in the increase in foreign exchange reserves. This means that this growth is based on the high savings ratio of the national economy, since the central bank has not pumped money into the financial system. This is quite different from the United States, where the entire financial system will suffer from a lack of funding sources for loans if no money had been provided by the country’s central bank. As China’s financial institutions have never lacked funding to provide loans, China’s monetary policy operations have always remained relatively passive since the end of the last century. As a result, when full market regulatory means were applied in 2007 but didn’t have the anticipated effect, the central bank had to implement credit control means with relatively powerful administrative regulatory characteristics in order to maintain control over bank loans. The policy implication is that monetary policy operations for the coming year should remain firm due to the decline in the efficacy of monetary policy. As long as there is no acute change in current conditions, the pattern of moderately loose monetary policy should not be changed, and only small adjustments are needed to the money supply growth rate and incremental credit scale. This will help to maintain confidence in and expectations towards the stability and continuity of China’s macro-economic policy, both domestically and abroad. While maintaining a stable macro policy, it is however important to resolve various potential issues from the microscopic perspective, by intensifying regulation. In other words, we must find new means to counter the increasing loss of efficacy of conventional means of monetary regulation. III. Monetary Policy for 2010 Macro-economic control will be implemented from the microscopic view, and by means of financial regulation. In our opinion, the major direction of monetary policy operations of 2010 will be to intensify the regulation and control of balance sheets (microstructure) of a wide range of institutions (financial and other) and strengthen macro-prudential regulation.

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A. The Implementation of Macro-Prudential Regulation is the Latest International Trend The descent in efficacy of conventional monetary policy is a global issue, and one that has been worsening for the past two decades. To address this issue, the world community had already held a great many discussions before the outbreak of the current financial crisis, such as the proposal for inflation targeting, indices of financial conditions and greater attention to be paid to financial stability, etc. But these discussions failed to achieve the intended effect. The current crisis has directly shown that these aforementioned efforts are in vain. The major reason is that they fail to directly address the reasons for the declining efficacy of conventional monetary policy, and the solutions they propose are thus still constrained by the framework of conventional concepts. Following the sharp impact of the financial crisis, a new concept, macro-prudential regulation, has gained extensive attention among the world community. The macro-prudential regulation concept is not only a challenge to and development of traditional macro-economic theories but parts of it are also relatively complicated. Its basic logic and contents can be summarised as below: 1. Due to the ongoing expansion of financial liberalisation, continuous financial innovations and expanding financial markets, revolutionary changes have occurred in the conduction channels for monetary policy, with the result that conventional monetary policy regulates the money and credit supply insufficiently effectively; 2. Conventional macro-economic theories and monetary policy theories based on these suffer from a grave lack of micro-economic foundations, and also neglect the monetary policy effect of regulation; 3. Effective monetary policy operations must fully consider the policy effect of the market’s micro-economic structure and regulation. Paying attention to the market’s micro-economic structure means paying greater attention to structural indices such as the capital sufficiency rate, the quality of assets, capacity to earn profits and earning rate, liquidity, and sensibility to market risk of the regulated objects via their balance sheets, while also adjusting accounting standards so as to provide a more accurate reflection of the risks faced by financial and non-financial institutions. Implementing monetary policy from the regulatory perspective means expanding the scope of regulation,

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implementing a reasonable remuneration system, improving the corporate governance mechanism, and institutionalising pressure tests. B. China Has Taken Concrete Steps towards Implementing Macro-Prudential Regulation During an interview with Dominique Strauss-Kahn, managing director of the International Monetary Fund in February 2008, Chinese Premier Wen Jiabao declared that China would participate in the Financial Section Appraisal Planning system (FSAP). Chairman Hu Jintao has also expressed a positive attitude towards similar international discussions in the three G20 summits held since the autumn of 2008. China’s central bank and a number of regulatory departments (such as the China Banking Regulation Committee) have started to investigate issues affecting the implementation of macro-prudential regulation and implemented a number of measures as a result. IV. Commodity Prices With regard to commodity price levels and their changes over the next year, two issues are worthy of attention: First, how high is the probability that prices will rise next year? Second, what levels of price rise are worthy of attention? A. Price Determinants in China China is currently witnessing the co-existence of factors leading to a rise and fall in prices. Overall, it is probable that prices will rise next year, but this rise will be approximately 2 percent. The factors leading to a fall in prices are mainly reflected in the macro-economic side. In an open market economy, the basic factor determining price levels is the difference in supply and demand. So far, China’s low demand has not altered substantially. As the supply aspect of the macroeconomic operation, China’s savings ratio has maintained an uptrend since the early 1990s. Increasing overcapacity has been reflected in the structural aspect. National Bureau of Statistics figures show that of China’s 24 major industries, 19 suffered from excess capacity to

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differing degrees in the first quarter of 2009. The existence of a macroeconomic equilibrium based on a high savings ratio renders long-term unremitting price inflation in China an impossibility. The major factors leading to price inflation are supply shock, imports from abroad, and the high-speed expansion of the money and credit supply. The term “supply shock” mostly refers to a situation in which the supply factor which supports economic growth is unable to keep pace with increasing demand for rapid economic growth. Owing to the effect of the “short-side rule”, China’s economy from time to time exhibits a phenomenon whereby the undersupply of a certain resource or product results in a rise in prices, which then pushes up overall price levels. Experience in recent years indicates that this kind of relative supply insufficiency frequently occurs in the agricultural products sector. “Imported” inflation refers to a situation whereby the price trends on the international market impose an increasing impact on Chinese prices through imports as China’s economy becomes increasingly connected to the world economy. This “imported” impact was displayed most clearly from the second half of 2007 through to the first half of 2008. This was particularly evident in the impact of the rapid expansion of the money and credit supply on prices. Put simply, superabundant money and credit working as the carriers of demand will sooner or later be reflected in prices. Particularly worthy of attention is the fact that the impact of a superabundant money and credit supply is not usually reflected in a rise in prices of general goods covered by CPI and PPI, but is instead reflected in the soaring prices of assets such as stocks and real estate. This undoubtedly increases the difficulty of assessing the situation as well as macro control. B. Prices for the Coming Year Particular attention should be paid to factors which may generate inflation. For reasons attributable to dollar depreciation, the global economic recovery and the revitalisation of international venture capital since the beginning of 2009, petroleum prices on the international markets have recovered by approximately 60 percent while the prices of copper, aluminium, zinc and other non-ferrous metals have rebounded to varying degrees. Food prices rose by approximately 20 percent. These factors cannot but impose pressure on China’s commodities prices. Domestically, China’s grain prices rose for

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six consecutive months, with figures of 0.2 percent, 1.0 percent, 1.5 percent, 0.4 percent, 0.8 percent, and 0.6 percent for the months of January to June respectively over the preceding month, and a cumulative increase of 4.9 percent. These data show the existence of the factors which triggered price rises in a short period in the first half of 2010. On the basis of price downtrends in 2009 in particular, it is possible to see a certain recovery increase in prices. Our calculations show that commodities prices may rise by approximately 2 percent in the coming year. C. Price Inflation Remains Reasonable The prices of commodities are generating extensive concern. Behind this concern lies a single worry—that any price inflation is harmful. This is a flawed view. Theory and experience in numerous nations, including China, indicate that price inflation to a certain degree is not only normal but also beneficial to economic activities. That is because appropriate price inflation can generate corporate enthusiasm to operate and expand production; only when enterprises continue to operate and expanding production capacity can employment opportunities continue to increase. Only when employment opportunities continually increase can the population continually improve their income. Of course, a certain “moderation” is required in these price rises. A figure of 5 percent is usually regarded as a moderate level. D. Policy Implications The special factors affecting China’s price trends here, it should be pointed out, refer to policy implications. In our opinion, long-term unremitting price inflation is impossible in China, and a certain degree of price inflation is beneficial. For this reason, in the event of a certain rise in prices (for example, approximately 3 percent), there is no particular need (particularly on the side of the central bank and other national macro-economic control bodies) to publicise or take immediate action; second, if this rise in prices reaches a level which requires measures to be taken, macro-economic policy, and monetary policy in particular, should be carefully applied.

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V. Local Financing Platforms and Investment A. Local Government Financing Channels Local governments play an important role in the current expansive policy. As part of the expansion driven by local governments, sources of funding have always a focus of attention. Local financing channels are summarised below: (1) A wide range of professional investment companies (for urban railways, express highways, urban infrastructure, development areas or industrial zones, whose names mostly include the terms “urban construction investment company”, or “economic construction investment company”) have developed as the backbone of local government credit. Major financing forms are loans and corporate bonds. (2) Urban planning bonds, institutional bonds (including “urban investment bonds”), corporate bonds, short-term bills (RMB 0.3 trillion issued, the net issue may be negative), medium-term notes (RMB 0.6 trillion notes have been issued so far this year, and another RMB 0.1 trillion notes may be issued by the end of the year). Total issues for this year total approximately RMB 1.2 trillion (for non-financial institutions), with a net issue of RMB 1.1 trillion. (3) Bundled loans; (4) Arrangements with finance offices (bureaus); (5) Local government debt (entrusted issues by the Ministry of Finance) of RMB 0.2 trillion has been issued. Of the aforementioned five financing channels, the first three channels are usually referred to as local financing platforms. From a dynamic point of view, local financing platforms developed rapidly at the end of last year and the first half of this year, but their growth rate has slowed since the second half of this year. B. Investment is the Key to Stabilising Macro-Economic Operations The major factors determining the growth and fluctuations of the Chinese economy remain investment, and imports and exports. The issue of monetary policy should therefore be analysed by combining it with investment. A number of people have focused on monetary policy alone, which is kind of misleading. In our opinion, monetary

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policy is only a derivative of investment policy. In other words, China’s monetary policy has been “kidnapped” by investment policy. When the investment scale under construction is very large due to endless approvals for new projects, any contraction in monetary policy will have no effect. In our opinion, strict control must be retained over the number of government, public and infrastructure projects for construction in the coming year, as new projects for the current year have already set a new record high. In the financial sector, the major task of banks in the coming year will be the refinancing of this year’s projects, which will exert a major burden. The launch of an increased number of new projects may drain bank funding, leading to an eventual dependence on monetary issue, which would certain crowd out investment in the private sector. In the final analysis, China’s final economic recovery will not appear until excessive production capacity is fully eliminated, social investment grows effectively, private capital is revitalised and FDI is set to the appropriate level.

87.7

87.3

Q1 & Q2, 2009

81.7

28.7

Figure 1.3

01-08/2009

2008

5.4

2007

100 90 80 70 60 50 40 30 20 10 0

Q1, 2009

YoY growth of planned investment for new projects (%)

YoY Growth of Planned Investment for New Projects (%).

ANALYSIS AND FORECAST OF CHINA’S ECONOMIC SITUATION—REPORT, AUTUMN 2009 “Analysis and Forecast of China’s Economic Situation” Project Group In 2009, China’s economic and social development faced significant challenges due to the impact of the international financial crisis and China’s own cyclical adjustment. The CPC Central Committee and the State Council proposed prioritising continued stable, rapid economic growth in economic initiatives and launched a series of economic stimulus policies including the RMB 4 Trillion Investment Plan《四万亿投 资计划》and the Top Ten Major Industries Revitalisation Plan《十 大产业振兴规划》. These reversed the excessive economic downtrend from the second half of 2008 onwards, and achieved a widespread, rapid stabilisation of confidence. The rate of economic recovery went beyond market expectations, and a number of positive changes also occurred in the economic structure and the transformation of the pattern of economic development. The Chinese economy maintained a healthy trend with rapid growth and an improving structure. The international financial crisis has had a far-reaching impact on the world economy, and, due to its in-depth participation in economic globalisation, China was also embroiled in this. The impact of the financial crisis has exposed and highlighted a number of inherent contradictions in China’s economic development. Coping positively with the international financial crisis will be a daunting task. It is important to continue to properly adhere to and implement the Scientific Outlook on Development in 2010, and macro-economic control will further emphasise the transformation of the economic development pattern, strategic economic restructuring and improvements in the quality and benefits of economic growth. Maintaining the continuity and stability of macro-economic policy must be accompanied by effective policy reserves to calmly deal with new conditions and issues which may potentially occur at home and abroad. This report analyses and provides a forecast of China’s economic development trends and major issues in 2009 and 2010 through a combination of model simulations and empirical analysis.

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project group I. Forecast of Major National Economic Indicators

In terms of quarterly economic operations, China’s national economy tended to stabilise and recover in 2009. It is expected that China’s GDP growth will reach approximately 8.3 percent in 2009, thus achieving the economic growth target of maintaining economic growth of at least 8 percent. As long as the global financial crisis does not exacerbate and no large-scale natural disasters or other major issues occur domestically in 2010, China’s GDP growth will steadily recover to a rate of approximately 9 percent. In 2009, agricultural production maintained steady growth, with primary industry added value growing by 5.6 percent. Allowing for the natural cyclical factors of agricultural production, agricultural production conditions will be relatively harsh in 2010, and primary industry added value is expected to drop, to a growth figure of 5.1 percent. The financial crisis seriously affected China’s secondary industry, but the industrial economy has picked up substantially since the second quarter. Secondary industry added value is expected to be 8.6 percent in 2009 and 9.4 percent in 2010. In 2009, the real estate industry picked up, thus providing support for the stable recovery of the tertiary industry. The tertiary industry is expected to rise by 8.7 percent and 9.5 percent in 2009 and 2010 respectively. In 2009, China’s fixed asset investment experienced accelerated growth due to the boosting effect of the package of economic stimulus policies and become the major force driving domestic demand and maintaining economic growth. Total investment in fixed assets for the entire year of 2009 is expected to reach approximately RMB 22.74 trillion at a nominal growth rate of 32 percent, an increase of 6.5 percentage points over the preceding year, and a 16-year high; the real growth rate will be 34.4 percent, 2.26 times the figure for 2008. If China continues to implement a proactive fiscal policy and a moderately loose monetary policy in 2010, investment in fixed assets will still grow at a high rate, with an expected nominal growth rate of 23.9 percent, and will likely account for over 70 percent of GDP. Since 2008, China’s price levels have seen considerable fluctuations. The consumer price index, retail price index and capital goods price index rose by 5.9 percent, 5.9 percent and 8.9 percent in 2008 respectively, far higher than in previous years. The spread of the international financial crisis resulted in a slowdown in economic growth at home and abroad, and then a decline in final demand in the first half

analysis and forecast of china’s economic situation

23

of 2009, keeping prices at a low level, and the consumer price index, retail price index and capital goods price index dropped 1.1 percent, 1.4 percent and 2.6 percent year-on-year respectively. The data for the last few months show that the relative ratios of the consumer price index and the producer price index all increased. The consumer price index, the retail price index and the capital goods price index in 2009 are estimated to drop by 0.5 percent, 0.8 percent and 1.8 percent separately. Price levels will rebound in 2010, and the consumer price index, the retail price index and the capital goods price index are expected to rise by 2.1 percent, 1.8 percent and 1.3 percent respectively. The international financial crisis has had a substantial impact on private income, and particularly rural residents’ incomes. The government implemented a string of policies to guarantee agricultural workers’ income and increased transfer income considerably, but growth in rural residents’ income still tended to decline. The real per capita net income of rural residents is expected to rise by 6.8 percent and 7.1 percent in 2009 and 2010 respectively; the situation whereby the rural income growth rate is lower than the urban income growth rate will continue, with gaps of 2.4 and 2.1 percentage points in 2009 and 2010 respectively. In recent years, consumption demand has maintained a steady uptrend. Using comparable prices, the growth rate of gross retail sales of consumer goods rose from 12 percent in 2002 to 14.8 percent in 2008. The policy package drafted to deal with the financial crisis specifically stressed “actively boosting domestic demand, and consumption demand in particular”. The government has implemented policies and measures including increasing minimum grain procurement prices, increasing crop-planting subsidies for agricultural workers, providing fiscal subsidies to support rural households to purchase home appliances and vehicles, reducing the purchase tax for small-displacement automobiles, all of which has had a positive effect. Gross retail sales of consumer goods are expected to reach RMB 12.5 trillion and RMB 14.8 trillion in 2009 and 2010 respectively, with real growth of 16.3 percent and 16.4 percent separately. Affected by a string of negative factors including the global economic slowdown, the deterioration and spread of the US financial crisis, China’s domestic economic slowdown, and international trade protectionism, China’s foreign trade ended over seven years of rapid growth in November 2008, and had declined for ten consecutive months by August 2009. China’s imports and exports are expected to

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grow negatively in 2009, by –21.0 percent and –19.5 percent respectively, and the annual foreign trade surplus will reach approximately USD 250 billion. In the second half of 2009, the global economy started to show signs of warming up. The global economy is now exiting a recession unprecedented since World War II. The strength of the economic recovery has not been vigorous, but another recession is unlikely. The latest data show that in August, China’s total imports and exports, exports, and imports grew by 2.3 percent, 3.4 percent and 1 percent over July respectively. The new export orders index rose over the expansion line of 50 percent for several consecutive months from May onwards. It is estimated that China’s foreign trade will look up in 2010, and import and export growth are expected to recover to 2008 levels with import growth of 18.7 percent and export growth of 17.3 percent. The Chinese economy experienced a sharp decline, bottomed out, stabilised and recovered within a relatively short period of time, and its recovery trend is strong. Overall, economic growth in 2010 will be better than in 2009, and GDP growth will steadily recover to 9 percent or higher. While achieving the target of maintaining growth, increasing attention must be paid to the quality of the recovery, and strive to maintain steady growth on the basis of restructuring and boosting domestic demand. Table 2.1 shows projections for China’s major national economic indices in 2009 and 2010. Table 2.1

Projected Major National Economic Indices, 2009–2010

Name of indicator (1) Gross and industrial indicators GDP growth rate (%) Growth rate of primary industry added value (%) Growth rate of secondary industry added value (%) Of which: Heavy industry (%) Light industry (%) Growth rate of the tertiary industry added value (%) (2) Total fixed asset investment Total investment size (RMB billion) Nominal growth rate (%) Real growth rate (%) Investment rate (%)

2009 8.3 5.6 8.6 8.9 8.5 8.7

2010 9.1 5.1 9.4 9.7 9.3 9.5

22,740.0 28,174.0 32.0 23.9 34.4 22.3 51.2 53.3

analysis and forecast of china’s economic situation

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Table 2.1 (cont.) Name of indicator

2009

(3) Prices Growth rate of retail price index (%) Growth rate of consumer price index (%) Growth rate of investment goods price index (%) GDP deflator (%) (4) Private income and consumption Real Growth Rate of Urban Per Capita Disposable Income (%) Real growth rate of rural per capita net income (%) (5) Consumer market Gross retail sales of consumer goods (RMB billion) Nominal growth rate (%) Real growth rate (%) (6) Fiscal Fiscal revenue (RMB billion) Growth rate (%) Fiscal expenditure (RMB billion) Growth rate (%) (7) Finance Balance of residents’ deposits (RMB billion) Growth rate (%) Incremental currency issue (RMB billion) New loans (RMB billion) Balance of loans (RMB billion) Growth rate of balance of loans (8) Foreign trade Total imports (USD billion) Growth rate (%) Total exports (USD billion) Growth rate (%) Foreign trade surplus (USD billion)

2010

–0.8 –0.5 –1.8 0.3

1.8 2.1 1.3 2.0

9.2 6.8

9.1 7.1

12,500.0 14,800.0 15.3 18.4 16.3 16.4 6,632.0 8.2 7,442.0 19.2

7,847.0 18.3 8,894.0 19.5

25,586.0 29,030.0 17.4 13.5 401.0 442.0 10,170.0 8,340.0 40,509.0 48,908.0 33.5 20.7 895.0 –21.0 1,150.0 –19.5 255.0

1,062.0 18.7 1,349.0 17.3 287.0

II. Analysis of China’s Macro-Economic Situation A. The Global Economy Has Begun to Recover at a Slow Pace One important factor determining whether domestic economic growth will deteriorate is the world economic trend. The International Monetary Fund and the World Bank have issued basically similar forecasts for the world economy in 2009 and 2010, except for different opinions

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on the degrees of negative and positive growth. According to the two organisations’ forecasts, the global economy is expected to grow negatively in 2009 by –1.4 percent and –2.9 percent, and then return to positive growth in 2010 with 2.5 percent and 2 percent respectively. In the first half of 2009, the world economy picked up slightly under the stimulation and support of macro-economic policies. The economic situation in the United States and other major trade partners was better than expected. The recession started to improve. Major European countries also exhibited recovering economic growth to different degrees. According to the latest OECD forecast, the United States, the Euro area and the Western Group of Seven nations registered quarterly growth of 1.6 percent, 0.3 percent and 1.2 percent at an annual rate respectively, showing that developed nations will recover together. The world economy has shown signs of recovery but the impact of the financial crisis will remain over the short term. Numerous countries remain afflicted with high unemployment rates. The United States’ unemployment rate was 9.4 percent in July, and is expected to rise up to 10 percent during the course of the year. France and Germany also recorded rising unemployment rates with 9.4 percent and 7.7 percent in July respectively. A large number of financial markets remain distressed, and a sharp rise in trade protectionism is further weakening the trade environment. All of these factors increase the risk of unsustainable world economic recovery. B. The Sustainability of Domestic Economic Growth Needs to Be Improved To deal with the impact and risk incurred by the international financial crisis, the CPC Central Committee and the State Council made timely adjustments to macro-economic policy from the fourth quarter of 2008 onwards, and achieved positive results with a recovery in economic growth driven by domestic demand, as well as positive changes in the restructuring and changes of the development pattern. This has been mainly reflected in two aspects: First, the tertiary industry developed at a higher speed and registered positive changes in its structure. In the first half of 2009, the tertiary industry grew by 8.3 percent, an increase of 1.7 percentage points over the secondary industry, and its percentage of GDP rose to 41.3 percent, while its contribution to economic growth was up to 47.4 percent. Second, the investment structure was optimised. Investment growth in the primary and secondary industries

analysis and forecast of china’s economic situation

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accelerated. In the first half of the year, of total urban investment in fixed assets, investment in agriculture, forestry, animal husbandry and fishery grew by 68.9 percent year-on-year, while investment in the tertiary industry grew by 36.6 percent, both higher than the 29 percent figure for the secondary industry; investment in China’s western and central regions grew by 42.1 percent and 38.1 percent respectively, noticeably higher than the eastern region. Objectively, home-grown power for economic growth remains weak, and no substantial improvements occurred in “growth through investment”. China’s consumption rate has remained low, from 62.5 percent in 1990 to 48.6 percent in 2008, and domestic demand does not play enough of a role to drive economic growth. With the further expansion of investment in fixed assets in 2009, the percentage of consumption to GDP declined further. Measures to boost consumption such as providing subsidies for agricultural workers to purchase household appliances and trade in household appliances and vehicles were able to generate a positive stimulus effect on consumption demand in the short term, but these are of little use in facilitating the formation of a stable, intelligent mechanism for consumption growth. To proactively eliminate the effects of the crisis, the Chinese economy must primarily rely on the role of government-led investment in fixed assets; but for the economy to achieve sustained growth, it must rely on demand for consumption and private investment. Compared with the rapid growth of state-owned investments, private investment has not been effectively primed. National Bureau of Statistics data show that investment in fixed assets by society as a whole, the government and state-owned enterprises, and the non-state sector grew by 33.5 percent, 50.7 percent, and 27.2 percent respectively in the first half of 2009. Of these, social investment increased by 7.2 percentage points year-on-year, but investment from the non-state sector declined by 1.3 percentage points. The immediate cause for the low levels of immediate private investment is insufficient market demand at home and abroad. China’s unsound financial system and higher market access thresholds are further institutional barriers preventing the development of the private economy. In recent years, central and local governments have all sought to resolve the issue of small and medium-sized enterprises facing financing difficulties, but this issue remains prominent due to a lack of multi-tiered financial services systems and effective institutional innovation. In terms of market access, sectors for private investment are limited. According to the existing

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market access pattern, of the more than 80 industries available in China, 72 allow access to government capital, 62 allow foreign capital, but only 41 allow private capital. The private economy faces market access barriers in certain high return fields such as monopoly industries, social programmes, infrastructure and public services. C. Avoid an Excessively Rapid or Slow Economic Upturn The Chinese economy has entered a new key phase, which not only focuses on stable economic recovery, but also on eliminating future risk. In the economic upturn process, it is important on the one hand to avoid haste, thus leading widespread overheating of the economy and currency inflation. China’s economic growth nose-dived in the early 1990s and, the country’s GDP growth was a mere 3.8 percent in 1990. To stimulate economic growth, the Central Government decided to expand investment by directly establishing enterprises, development areas and projects. By the end of 1991, China had a total of 117 development areas but by the end of 1992, this figure had burgeoned to more than 2,700 such areas. Society as a whole demonstrated unprecedented enthusiasm for the investment and construction process. GDP growth increased rapidly, reaching 9.2 percent and 14.2 percent in 1991 and 1992 respectively. As none of the necessary supervisory or constraint mechanisms ha been erected to regulate the behaviour of local governments and state-owned enterprises and the at-the-time still unclear economic and financial structures, China’s economy overheated rapidly, and the consumer price index soared from 6.4 percent in 1992 to 24.1 percent in 1994, triggering the most serious inflation since the initiation of the reform and opening up period. In fact, the economic operation process is always coupled with alternating expansions and contractions. This cyclical feature of economic operations is a kind of objective existence. The study found that since WWII, in the event that a major financial crisis strikes a nation, this results in a decline in asset prices, a drop in production and employment, and a rise in government debt, and the crisis always leads to a decline in production (per capita GDP) by an average of approximately 1.9 years. Therefore, policies and measures to stimulate economic recovery must take full account of the cyclical nature of economic operations and not be overly hasty. On the other hand, it must be clearly understood that considerable difficulties and uncertainties are inherent in the stabilisation of external

analysis and forecast of china’s economic situation

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demand, meaning that it is important not to avoid the repeated use of domestic demand to offset insufficient external demand which may prevent economic recovery. In 1997, China started to suffer a slowdown in economic growth and face sluggish domestic demand as well as scant total demand, with the further appearance of deflation due to the impact of the Asian financial crisis. Since 1998, the Central Committee had implemented a macro-economic control policy dominated by proactive fiscal policy. Due to weak policy strength and other causes, however, China’s economic growth still declined sharply in 1998 (GDP growth fell by 1.5 percentage points), and the declining trend continued in 1999 (GDP growth fell by 0.2 percentage points). The economy however recovered steadily in 2000 and 2001, with GDP growth figures of 8.4 percent and 8.3 percent respectively. By 2002, GDP growth had returned to a relatively high rate of 9.1 percent. Undoubtedly, proactive fiscal policy played an important role in helping the economy to recover to this rapid growth rate, but due to a lack of experience of control initiatives and a grasp of control rhythm, this economic adjustment took approximately 4 years to implement. The severity of the present crisis determines that its adjustment may require a longer time. We should therefore fully assess the difficulties, actively promote and implement a range of promulgated policies, and draft policy reserves to calmly deal with new situations and issues which may potentially appear at home and abroad in order to ensure stable, rapid economic recovery. III. Guard against Inflation Risk in the Business Upturn Process China’s prices have fluctuated considerably since 2008, from working to prevent inflation at the beginning of the year to being under deflationary pressure by the year’s end, reflecting not only the simultaneous existence of inflationary and deflationary factors in price changes but also their alternating dominance. With regard to future price trends, we believe that no there will be no apparent inflation in 2009 and 2010, but it will be important to guard against multiple factors that may trigger inflation during the business upturn process and the issues which are thereby incurred, thus laying the proper policy groundwork to resist inflation.

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A. There is No Change in the Weak Demand Pattern, Nor Is There Any Apparent Inflation in the Near Future The Chinese government has taken a series of measures to boost domestic demand since 1998, but the issue of weak demand has not essentially been alleviated. The choice to strive to expand external demand to maintain economic growth is therefore an important one. One major symptom of scant domestic demand is excess production capacity. The excess production capacity problem was relatively prominent in a number of industries in 2003, particularly upstream industries, due to excessive investment. But the excess production capacity problem was not as serious as expected in subsequent years, as external demand soaked up considerable excess production capacity together with the effect of regulatory policies. With the outbreak of the international financial crisis in 2008, however, the space in which to soak up domestic excess production capacity through exports has shrunk substantially, and the excess production capacity problem has become increasingly noticeable. In the first quarter of 2009, excess production capacity was a problem to varying degrees in 19 industries of China’s 24 industry sectors. With the continuing high levels of investment, the existing issue of excess capacity can only worsen. In an open market economy, the basic factor which determines prices is the contrast of supply and demand. As no there has been no substantial change in China’s weak demand pattern, weak demand will generate pressure forcing prices to come down. B. Guard against Multiple Factors Triggering Inflation during the Business Upturn Since the beginning of 2009, international oil prices have risen by approximately 60 percent, iron ore and non-ferrous metal prices by approximately 40 percent, and grain prices by approximately 20 percent. From January to June 2009, China’s grain prices rose month-onmonth for six consecutive months, with a total increase of 4.9 percent. These data show that factors remain which are capable of triggering inflation in the short term. Current inflationary pressure is mainly reflected in aggravated inflation expectations due to the impact of imported inflation and relative surplus liquidity. With increasing economic globalisation and the shift and adjustment of international industries, China is becoming more

analysis and forecast of china’s economic situation

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closely related to the global economy, and significant changes have occurred to the factors affecting China’s prices. In contrast to the inflation triggered by the price rises in the 1980s and the credit expansion in 1990s, imported inflationary pressure is imposing a more direct and apparent impact on driving up China’s prices. The considerable price inflation in 2008 were marked by obvious imported inflation features. Recently, major commodity prices on the international markets rose again, with crude oil returning to USD 75 per barrel and the prices of non-ferrous metals such as copper, aluminium and zinc also rebounding to different degrees. The strong rebound of major commodity prices can be attributed to two factors, the first being the improvement in the fundamentals of the world economy, which has stimulated resource demand, the other being the accelerating depreciation of the dollar, which gives resources greater financial attributes, while considerable demand for speculation or risk avoidance also increased price fluctuations in crude oil and other products. A significant rebound in major commodities increased upstream production costs. Due the cost-push effect, enterprises raised final product prices to offset lost profits, thus generating upward pressure on domestic consumer prices. Empirical analysis also shows that the extremely rapid growth of China’s money supply and credit may drive up economic growth and inflation in the short term. In the first half of 2009, M1 and M2 grew constantly with a generally expansionary trend, both reaching record levels since May 1995 and May 1996 respectively. Incremental loans reached RMB 7.37 trillion and are expected to exceed RMB 10 trillion for 2009 as a whole. If banks are unable to recover this excess liquidity, a situation may develop in which excess capital will remain active in the market after economic recovery, generating forming inflationary pressure. Besides the considerable liquidity released at home, inflows of foreign capital will also aggravate the imbalance in monetary supply and demand. To deal with the international financial crisis, the United States, European countries and Japan also reduced their interest rates to record lows; furthermore, major central banks such as the Federal Reserve applied a loose monetary policy to pump vast amounts of money into the market. Extraordinary policies of this kind increase the rise of redundant liquidity worldwide while stimulating the recovery of the economy. In an environment of loose monetary policy, large-scale capital inflows undoubtedly increase inflationary risk.

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project group IV. The Role of Fiscal Policy in the Expansionary Policy Mix Must Be Further Expanded

Since the beginning of the year, loans have expanded exponentially in order to boost domestic demand and achieve the intended growth target of 8 percent. Although this has played a positive role in boosting economic growth, it has also had a certain negative impact, leading to an excessive rise in stock market and housing prices, creating a certain level of bubble risk; the expansion of the volume of money has also created potential inflation risk. Current monetary policy intensity will therefore be difficult to sustain. China’s current macro-economic problems are mainly caused by structural problems, and monetary policy is unable to effectively address them. In view of the current macro-economic situation, it is therefore necessary to make greater use of fiscal instruments and expand the issuance of national bonds to boost domestic demand and provide the impetus for continued, rapid economic growth. China’s deficit rate has remained below 3 percent since the start of its reform and opening up period. Even in the four years from 1998 to 2002, when a proactive fiscal policy was adopted, the deficit rate did not break through the “warning line”, i.e. China’s annual financial deficit did not exceed 3 percent of GDP, and the balance of public debt did not exceed 60 percent of GDP. To deal with the international financial crisis, China has once again since 2008 implemented an expansionary fiscal policy, and increased government investment. Based on a budget deficit of RMB 950 billion for 2009, the deficit ratio is expected to reach 2.9 percent, close to the “EU standard” deficit ceiling. In fact, the principle underlying the EU standard rate is that a country’s standard of living should not drop because of any increased issuance of national bonds. The ceiling deficit ratio and debt ratio is determined based on a consideration of the potential economic growth rate, interest rates and population growth rate that reflect each member country’s economic development level on the one hand, and on the other hand, this is finally determined by each member country through negotiation. Therefore, the “EU standard” is not a rigid, unchangeable criterion. Germany and France’s fiscal deficit-GDP ratio exceeded the warning line of 3 percent for the first time to reach 3.5 percent and 3.2 percent in 2002, and 3.9 percent and 4.1 percent in 2003 respectively.

analysis and forecast of china’s economic situation

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China is a developing country, and it is not enough simply to maintain the current national standard of living – this should instead improve every year. An appropriate national debt scale standard must therefore be established based on China’s own situation. The basic rule for this is that the rate of improvement of the national standard of living should not be slowed down by the expansion in the size of national debt. Taking China’s potential economic growth rate, interest rate, population growth rate, consumption level and hidden debt into overall consideration, the deficit ratio is reckoned to potentially reach approximately 5 percent. Up to RMB 1.5 trillion of national debt can therefore be issued. To do so may provide a powerful instrument for macro-economic control. Increasing government spending is the most proactive, direct and effective means of boosting domestic demand. At the current stage, China’s deficit ratio should take into account China’s practical situation, and may possibly exceed the limit of 3 percent—the binding “EU standard”—in consideration of the ongoing impact of the international financial crisis and aggravated factors bringing about reduced fiscal revenue and increased fiscal expenditures. To expand the size of the government deficit, additional fiscal expenditure should be focused on basic public services and investment should be increased in sectors affecting the population’s well-being so as to promote consumption growth and improve the quality of economic growth; a higher level of fiscal expenditure should be allocated to sectors such as new energy, major environmental protection projects and environmental protection in an effort to combine proactive fiscal policy with the fostering of new hubs of economic growth; the additional fiscal expenditure should be used to support economic development in rural areas, thus increasing agricultural incomes and accelerate the drive to construct a new socialist countryside. V. Policy Recommendations The depression stage of a economic cycle is of great significance to economic growth. Only at this stage do equipment updates, technical and product innovation, and asset reorganisation become the focus of attention and undergo large-scale implementation. And only those enterprises which perform better in these fields win the opportunity to survive and develop. It is important to pay increased attention to the

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opportunities and challenges contained in this crisis and to understand that developed western nations are likely to use the crisis to make further progress in technological and product innovation. Thus, in addition to doing everything possible to maintain growth, China needs to actively leverage the superior aspects of the socialist system, seize opportunities to take the initiative in the implementation of economic restructuring, accelerate the transformation of the economic development pattern, and energetically promote scientific and technological innovation as well as the development of domestic brands so as to create better conditions for improving China’s overall strength and international competitiveness, and build a strong foundation for an economic rebound and long-term rapid, stable economic growth. Of course, the objective effect of each measure for maintaining growth must also be analysed, and the potential side effects of certain measures prevented or exacerbated, and minimising the possible negative effects. A. Focus should be placed on resolving the issue of underconsumption and accelerate adjustments to the national income distribution structure. The percentage of personal income in national income distribution should be gradually raised, and the percentage of labour compensation in initial distribution also increased so as to enable greater numbers of people to share the results of the reform and opening up process. B. The currently unbalanced economic structure must basically be improved so as to successfully complete the transition from a dualistic development pattern to an integrated, urban and rural development pattern. It is therefore necessary to boost efforts to develop a new-type rural economy, expand the importance of non-agricultural industries in the rural economy, accelerate the rural urbanisation drive to achieve the industrialisation and urbanisation of the rural economy in an effort to provide more opportunities and greater scope for agricultural workers to move to non-agricultural industries and areas, and promote and achieve the construction of a new socialist countryside. C. Price reforms must be continued, with prices being used as leverage to improve the efficiency of allocation of resources as well as promote economic restructuring and the transformation of the pattern of economic growth. The reform of resource factor prices should be pushed forward by steps and stages to establish a pricing mechanism that reflects market supply and demand, the scarcity of resources, the cost of pollution losses, as well as intra-generational and

analysis and forecast of china’s economic situation

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inter-generational equity cost. Grain pricing mechanism reform must also be implemented at the appropriate time. D. Measures to boost the development of the service industry—and particularly the modern service industry—should be combined with macro-economic control policy to boost domestic demand to enable the service industry to play a full role in restructuring, expanding employment and improving people’s well-being. E. Restructuring should be employed to promote energy conservation and emissions reductions, and the latter should be used as a powerful instrument for the former. Improvements to industrial access and exit mechanisms should be used to achieve the goal of controlling and piloting industrial increments, and adjusting and optimising industrial stock. Greater efforts will be made to construct a single integrated group of energy conservation, environmental protection and technological upgrade projects, and accelerate the elimination of backward productive capacity in order to promote the optimisation and upgrading of the industrial structure. The year 2010 will be the final year for implementing the 11th Five-Year Plan. Faced with a complex economic situation while in a crucial phase of economic recovery, China should continue to implement the Scientific Outlook on Development, proactive fiscal policy and moderately loose monetary policy according to the Central Committee’s economic plan and measures to maintain policy continuity and stability, expand the economic recovery trend, and improve the quality of the economic recovery in a bid to achieve rapid, stable economic development.

RETROSPECTIVE OF 60 YEARS OF ECONOMIC GROWTH CURVE IN NEW CHINA AND PROSPECTS FOR THE FUTURE Liu Shucheng I. A 60-Year Curve of Profound Change New China has now reached the age of 60. During this lifetime, the Chinese economy has made remarkable achievements, and, from the perspective of annual economic growth, it has experienced quite a few economic cycles. Figure 3.1 shows the fluctuation curve of the economic growth rate over the past 60 years (in which the 1950–1952 section reflects the growth rate of gross social output; the 1953–2009 section reflects the growth rate of gross domestic product (GDP); the figure for 2009 is 8 percent as estimated in this article).1 October 1, 1949 saw the founding of New China. The foundling nation’s economy recovered rapidly through concerted effort in 1950, 1951 and 1952. In these three years, the growth rates of gross social product were 22.6 percent, 20.1 percent and 23.8 percent respectively, marking a resumption of growth in the initial stages of the new China. China embarked upon large-scale economic construction in 1953, and has been involved in an industrialisation drive since then. By 2009, the growth rate of GDP had experienced 10 cycles, divided according to the “trough-trough” method.

1 Sources: 1950–1952: Quanguo gesheng, zizhiqu, zhixiashi lishi tongji ziliao huipian 1949–1989 全国各省、自治区、直辖市历史统计资料汇编 1949–1989 [Compilation of Historical Statistics of the Provinces, Autonomous Regions and Municipalities, 1949–1989], Zhongguo Tongji Chubanshe, (1990): 9; 1953–1992: Xin Zhongguo wushi nian tongji ziliao huipian 新中国五十年统计资料汇编 [Comprehensive Statistical Data and Materials on 50 Years of New China], Zhongguo Tongji Chubanshe, (1999): 5; 1993–2007: Zhongguo tongji nianlan 2008 中国统计 年鉴 2008 [China Statistical Yearbook, 2008], Zhongguo Tongji Chubanshe, (2008): 40; 2008: Zhongguo tongji zhaiyao 2009 中国统计摘要 2009 [China Statistical Abstract, 2009]), Zhongguo Tongji Chubanshe, (2009): 22; The figure for 2009 is 8%, and was estimated in this article.

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% 30

1

1952 1950 20

2

3

1958 1964

4

6

5

7

8

9

10

1970

1951

1984

1953

1978

1992

2007

1987

1975

10

1986 1957

1981

1972

0 1962

1968

1999

2008 2009

1990

1976

–10

–20

1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

1961 –30

Figure 3.1 China’s Economic Growth Rate Fluctuation Curve (1950–2009).

The first Five-Year Plan was launched in 1953. In that year, there was considerable investment in fixed assets, and the economic growth rate reached 15.6 percent. The extra-rapid economic growth, however, created an imbalance in normal economic operations, and high growth of this kind was difficult to sustain. Economic growth fell back to approximately 4 percent in 1954, and 6 percent in 1955. Following the implementation of gentle economic regulation, the Chinese economy once again accelerated, and the growth rate rose to 15 percent in 1956; this again proved difficult to sustain, and the economic growth rate fell back to approximately 5 percent in 1957. The period from 1953 to 1957 marked the first economic cycle. In 1958, the “Great Leap Forward” campaign boosted the economic growth rate to 21.3 percent. This was however followed by negative growth for the years 1960 and 1961, and 1962 recorded a sharp decline in the economic growth rate. In 1961 in particular, economic growth dropped to a rock-bottom figure of –27.3 percent. There was thus a gap of almost 50 percentage points between the peak economic growth rate (21.3 percent) in 1958 and the trough (–27.3 percent) in 1961. This marked the second cycle.

retrospective of 60 years of economic growth curve

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After adjusting economic regulation once again, the economic growth rate rose to 18.3 percent, marking the initial peak of national defence construction. The Cultural Revolution was then launched in 1966. The economic growth rate fell back in 1967 and 1968, with negative growth appearing, thus marking the third economic cycle. By 1970, the economic growth rate had recovered to 19.4 percent, marking the late peak of national defence construction. This then fell back to approximately 3 percent in 1972, marking the completion of the fourth cycle. The late stage of the Cultural Revolution then commenced. Economic growth recovered slightly in 1973, but fell off in 1974. It recovered slightly again in 1975, but fell off again in 1976, with negative growth appearing. During this period, economic growth was weak. In October 1976, the “Gang of Four” was smashed, marking the end of the Cultural Revolution. These two minor fluctuations comprised the fifth cycle. If the fluctuation curve of the Chinese economic growth rate in the nation’s first sixty years of growth is taken to be an electrocardiogram of an economic body, the heart beat was very weak in the middle and late periods of the Cultural Revolution, or from 1972 to 1976, where the national economy verged on collapse. Before this period, however, the nation suffered from an excessively strong pulse, which suffered violent fluctuations. From the founding of the New China in 1949 until 1976, China suffered a number of setbacks in the process of socialist construction, but overall, the nation still made considerable achievements, basically establishing an independent and comparatively integrated industrial system and national economic system, essentially resolving the problem of starting from scratch in the country’s drive to industrialise. The Report to the Seventeenth National Congress of the Communist Party of China on October 15, 2007 points out that: “We must never forget that the great cause of reform and opening up was implemented on a foundation laid by the Party’s first generation of central collective leadership focusing on Comrade Mao Zedong, who founded Mao Zedong Thought, led the whole Party and the people of all ethnic groups in establishing the People’s Republic and scoring great achievements in our socialist revolution and construction, and gained invaluable experience in its painstaking research of laws governing socialist construction. The victory in the new-democratic revolution and the establishment of the basic system of socialism provided the fundamental political

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prerequisites and institutional basis for every area of development and progress in contemporary China.”2 Following the unseating of the “Gang of Four” and the end of the Cultural Revolution, the country as a whole was flooded with enthusiasm for “all out, high-speed” construction in 1977 and 1978. The economic growth rate rose to 11.7 percent in 1978 before dropping to approximately 5 percent in 1981, marking the end of the sixth cycle. The Third Plenary Session of the 11th Central Committee of the CPC restored order, terminating the historical process of “making class struggle a key focus” and shifting the work focus of the Party as a whole to socialist modernisation. China thus entered a new phase of reform, opening up and construction of a modern, socialist society. The Session also proposed that capital construction be performed in an active, pragmatic and gradual manner, as certain significant proportional imbalances in the national economy have yet to be completely corrected. In April 1979, a special Central Committee working conference was held to discuss economic issues, and proposed spending a period of three years to regulate the national economy. Under the impetus of rural and urban reform, the economic growth rate rose to 15.2 percent in 1984 before falling to approximately 8 percent, which comprised the seventh cycle. The economic growth rate was 11.6 percent in 1987 and 11.3 percent in 1988. The consumer price index (CPI) rose to 18.8 percent in 1988. During the regulation period, the economic growth rate dropped to 4.1 percent in 1989 and 3.8 percent in 1990. This marked the eighth economic cycle. The economic growth rate recovered to 9.2 percent in 1991. In 1992, Deng Xiaoping’s southern speech and the subsequent convening of the 14th National Congress of the CPC opened a new era for the processes of China’s reform and opening up and socialist modernisation. However, as a mere decade had elapsed in the implementation of reform and opening up in China, the original planned economy system had not been fully transformed, and its defects, which included investment hunger and the unilateral pursuit of development speed, had yet to be overcome. In 1994, the

2 Hu Jintao 胡锦涛: Gaoju Zhongguo tese shehui zhuyi weida qizhi, wei douqu quanmian jianshe xiaokang shehui xin shenli er fendou 高举中国特色社会主义伟 大旗帜, 为夺取全面建设小康社会新胜利而奋斗 [Hold High the Great Banner of Socialism with Chinese Characteristics and Strive for New Victories in Building a Moderately Prosperous Society in All Respects], Renmin Ribao, October 25, 2007.

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lagging CPI jumped to 24.1 percent. Through the deft handling of the overheated economy, the national economy successfully achieved a “soft landing” from the second half of 1993 to 1996, which not only reduced inflation significantly but also maintained a moderately rapid economic growth.3 Later, China successfully withstood the impact of the Asian financial crisis and overcame the problems of insufficient effective domestic demand. The economic growth rate steadily fell back to 7.6 percent in 1996, winding up the ninth cycle. China entered its current tenth economic cycle in 2000. By 2007, China’s economic growth rate had registered a growth range of 8–13 percent for eight consecutive years, or 8.4 percent, 8.3 percent, 9.1 percent, 10 percent, 10.1 percent, 10.4 percent, 11.6 percent and 13 percent respectively. During 2008 and 2009, the Chinese economy was confronted with four types of overlapping corrections at home and abroad, namely the overlap of domestic economic adjustment following the preceding three decades of long-term rapid growth with the cyclical adjustment of the domestic economy, the US economy’s cyclical recession and correction due to the subprime mortgage crisis, and the worldwide economic correction incurred by the international financial crisis triggered by the US subprime mortgage crisis.4 The economic growth rate fell back to 9 percent in 2008. Economic growth is predicted to fall back to approximately 8 percent in 2009, completing the tenth cycle. In 2010, the Chinese economy will hopefully enter a new cycle, namely, the growth stage of the eleventh economic cycle. Generally, China’s economic growth and the fluctuations therein have taken on a new state of “rapid, stable growth” in the 30–odd years since the implementation of the country’s reform and opening up policies. This new state exhibits five fluctuation features: 1. Strength of fluctuation: reasonable decline. The peak value of the economic growth rate for each economic cycle fell back to within an 11–15 percent range after the start of the reform and opening up

3 Liu Guoguang, Liu Shucheng: “On Soft Landing (《论”软着陆”》)”, the People’s Daily (《人民日报》), January 7, 1997. 4 Liu Shucheng 刘树成: 2008–2009 nian guoneiwai jingji zoushi fenxi 2008–2009 年国内外经济走势分析 [An Analysis of Economic Conditions at Home and Abroad in 2008–2009], from economy blue paper (spring) Zhongguo jingji qianjing fenxi—2009 nian qunji baogao 中国经济前景分析—2009 年春季报告 [Analysis of the Economic Prospect in China—Spring Report 2009], Shehui Kexue Wenxuan Chubanshe, April 2009.

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process, as well as in the 1980s and 1990s, compared to approximately 20 percent in the previous cycles. By the turn of the new century, in the tenth economic cycle, this peak value was controlled at 13 percent. 2. Depth of fluctuation: prominent improvement. Most of the troughs in the economic growth rate in the previous economic cycles were negative, but after the start of the reform and opening up process, the troughs in the economic growth rate during economic regulation were all positive, with no further appearance of negative growth. 3. Amplitude of fluctuation trend: shrinking. The gap between the peak and the trough of the economic growth rate of each cycle reduced from a maximum of almost 50 percentage points to 6–7 percentage points after the start of the reform and opening up process. The gap between the peak and the trough during the tenth economic cycle is expected to be a mere five percentage points. 4. Average altitude of fluctuation: moderate rise. In the 26 years from 1953 to 1978, the average GDP growth rate was 6.1 percent; in the 31 years from 1979 to 2009 (base year: 1978), this growth rate was 9.7 percent, a rise of 3.6 percentage points. 5. Length of fluctuation: remarkable extension. The cycle length of the first eight economic cycles was approximately five years on average, and these were characterised by their shortness. Since the mid-1990s, however, the length of the ninth and tenth economic cycles was prolonged to 9–10 years, extending these to intermediate cycles. During the tenth economic cycle in particular, the ascendant stage extended to eight years from one or two years in preceding cycles, an unprecedented feat in China’s 60–year history of economic development. II. New Changes in the Economic Structure Reflected in the Curve There are quite a few causes underlying the new “rapid, stable growth” of the Chinese economy. Using an “external impact-internal conduction” analytical framework, we have classified the main causes for the “rapid, stable growth” of the Chinese economy since the start of the reform and opening up process into two categories: one category comprises the continual improvements in macro-economic control as a form of external impact; the other is the enhanced growth and stability of the economic structure as an internal conduction mechanism.5 It is 5 Liu Shucheng, Zhang Xiaojing 刘树成、张晓晶: “Zhongguo jingji texu gaozengzhang de tedian he diqujian jingji chayi de suoxiao 中国经济持续高增长的特

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important at this point to emphasise the analysis of the seven major changes in China’s economic structure since the start of the reform and opening up process. A. The Changes in the Institutional Structure Have Created a Significant Institutional Foundation for the “Rapid, Stable Growth” of the Chinese Economy Since the start of the reform and opening up process, China’s economic system has undergone significant change, from a highly-concentrated planned economy to a socialist market economy. Under the former planned economy, an enterprise held no decision-making rights in areas such as production, supply, marketing or investment, and it was completely subject to centralised national planning and management, thus rigidifying economic life. In the socialist market economy, however, role-players in economic activity have decision-making rights; a series of market mechanisms such as price levers, competitive mechanisms and a production chain market have been introduced, and the market plays a fundamental role in the allocation of resources, which has injected unprecedented vitality into economic development. B. The Change in the Ownership Structure Has Established the Basic Economic System Conditions for the “Rapid, Stable Growth” of the National Economy The changes in the pattern of ownership include aspects focusing on output value as well as on employment. In terms of the changes in the pattern of ownership as these relate to output value, if we take the ownership structure of industrial enterprises as an example, significant changes have occurred in the share of different ownership enterprises of total industrial output value. In 1978, industrial enterprises were merely classified into state-owned industry and collective industry. These accounted for 77.6 percent and 22.4 percent of the value of total industrial output (prices for the current year) respectively. In terms of total industrial output value for industrial enterprises above a designated size (“above a designated size” refers to industrial enterprises with an annual income from core operations exceeding RMB 5 million) in 2007, ownership types were diversified based on their registration type (see Table 3.1). Of 点和地区间经济差异的缩小 [Features of Continual and High Growth of Chinese Economy and Shrinkage of Inter-regional Economic Disparities]” in Jingji yanjiu 经济研究 [Economic Study] (2007) 10.

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these,6 non-corporate state-owned enterprises accounted for 9 percent; collective-owned enterprises accounted for 2.5 percent; shareholding enterprises accounted for 0.9 percent; joint-owned enterprises (including state-owned joint owned enterprises) accounted for 0.4 percent; limited liability corporations (including wholly state-owned corporations) accounted for 22.3 percent; shareholding limited corporations (including state-held enterprises) accounted for 9.9 percent; private enterprises accounted for 23.2 percent; and other domestic enterprises accounted for 0.3 percent; units funded by entrepreneurs from Hong Kong, Macao and Taiwan (including Sino-foreign joint ventures, cooperative businesses, and exclusively foreign-owned enterprises in China) accounted for 10.5 percent; and foreign-funded enterprises (including Sino-foreign joint ventures, cooperative businesses, and exclusively foreign-owned enterprises in China) accounted for 21 percent. Table 3.1

1 2 3 4 5 6 7 8 9

10

Share of Enterprises of Various Ownerships in Total Industrial Output Value (%)

Registration type

1978

2007

State-owned enterprises (non-corporation system) Collective-owned enterprises Shareholding enterprises Joint owned enterprises (including state-owned joint owned enterprises) Limited liability corporations (including wholly stateowned corporations) Share-holding limited corporations (including stateheld enterprises) Private enterprises Other domestic enterprises Enterprises funded by entrepreneurs from Hong Kong, Macao and Taiwan (including Sino-foreign joint ventures, cooperative businesses, and exclusively foreign-owned enterprises in China) Foreign-funded enterprises (including Sino-foreign joint ventures, cooperative businesses, and exclusively foreign-owned enterprises in China)

77.6 22.4

9.0 2.5 0.9 0.4 22.3 9.9 23.2 0.3 10.5

21.0

6 Source: Calculated from data in Zhongguo Tongji Nianlan 2008 中国统计年鉴 2008 [China Statistical Yearbook, 2008], Zhongguo Tongi Chubanshe, (2008) 485.

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In terms of changes in the ownership structure as these relate to employment, if we take ownership type for the urban employment population as an example, there were mainly two types: state-owned units and collective units, accounting for 78.3 percent and 21.5 percent respectively; individual employment accounted for a mere 0.2 percent of the employment population. By 2007, however, considerable changes had occurred to the ownership structure in terms of employment. State-owned units now accounted for 21.9 percent of urban employment, down from 78.3 percent in 1978. Collective units accounted for 2.4 percent, down from 21.5 percent in 1978; and private enterprises and self-employed workers accounted for 26.9 percent together, while other urban employment types accounted for 32.9 percent (see Table 3.2).7 Table 3.2

1 2 3 4 5 6 7 8 9 10 11

Percentages of Ownership Forms in Urban Employment

By registration type

1978

2007

State-owned Units Urban Collective-Owned Units Share Holding Units Joint Owned Units (including state-owned joint owned enterprises) Limited Liability Corporations (including wholly stateowned corporations) Share-holding Limited Corporations (including stateheld enterprises) Private Enterprises Individuals Enterprises Funded by Entrepreneurs from Hong Kong, Macao and Taiwan Foreign-funded Enterprises Urban Others

78.3 21.5

21.9 2.4 0.6 0.1 7.1 2.7

0.2

15.6 11.3 2.3 3.1 32.9

The rebuilding of the micro-economic foundation as part of the reform and opening up process has enabled various kinds of economic ownership to develop and generate a mutually promotional effect, a diversification of market players and investment targets, enabling the implementation of the enthusiasm of the market players and investment 7 Source: Calculated from data in Zhongguo Tongji Nianlan 2008 中国统计年鉴 2008 [China Statistical Yearbook, 2008], Zhongguo Tongi Chubanshe, (2008) 110–111.

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targets, thus providing significant basic economic system conditions for rapid, stable economic growth. C. The Changes in the Resource Supply Structure Provide the Necessary Material Conditions for Rapid, Stable Economic Growth The introduction of the market mechanism, its fundamental role in the allocation of resources, and changes in the ownership structure have increased the vitality of economic supply and fundamentally altered the long-standing issue of critical shortages of supplied resources. The “bottlenecks” in the supply of resources such as coal, electricity, oil, transportation, materials (important raw materials such as iron and steel, cement) have been alleviated to different degrees, and certain resources even face a certain or phased relative surplus. This supports rapid, stable economic operations for materials. D. The Changes in the Industrial Structure Have Provided a Significant Institutional Foundation for the “Rapid, Stable Growth” of the Chinese Economy Significant changes have occurred in the output value structure of the three industry sectors of GDP (see Figure 3.2).8 The primary industry accounted for a declining percentage, dropping from 50.5 percent in 1952 to 28.2 percent in 1978, and 11.3 percent in 2008. The secondary industry accounted for 47.9 percent in 1978, from 20.9 percent in 1952; the secondary industry accounted for a relatively stable percentage from the start of the reform and opening up process onwards, with 48.6 percent in 2008. The tertiary industry accounted for 28.6 percent in 1952 and 23.9 percent in 1978, but has accounted for a rising percentage since the start of the reform and opening up process, reaching 40.1 percent in 2008.

8 Sources: 1952–1977: Zhongguo guonei shangchan zongzhi hesuan lishi ziliao 1952–1995 中国国内生产总值核算历史资料 1952–1995 [Historical Materials Relating to China Domestic GDP Accounting (1952–1995)], Department of National Accounts of the National Bureau of Statistics of China, Dongbei Caijing Daxue Chubanshe (1997) 30; 1997–2008: Zhongguo tongji shangyao 2009 中国统计摘要 2009 [China Statistical Abstract (2009)], Zhongguo Tongji Chunbanshe, (2009) 21.

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55 50

50.5 50.5

47.9

48.6

45 40.1 40 35 30 28.6

28.2 23.9

25 20

20.9

15 Primary industry

10

11.3 Secondary industry

5

Tertiary industry 0 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0

Figure 3.2

Percentages for Output Values of Chinese Industries (1952~2008).

Since the start of the reform and opening up process, the primary industry has accounted for a declining percentage of the total, the secondary industry has accounted for a relatively stable percentage, and the tertiary industry for an increasing percentage, allowing the economy to operate in a stable manner at a moderately high level. Of the three major industries, the primary industry is characterised by a lower growth rate, smaller fluctuation speed but an increasing vulnerability to natural conditions; the secondary industry is characterised by a high growth rate and considerable fluctuation magnitude; the tertiary industry features a higher growth rate, smaller fluctuation amplitude, and is not affected to any remarkable degree by natural conditions. The stability of the economy as a whole will therefore increase as the percentage of the tertiary industry increases.

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E. The Change in the Rural and Urban Population Structures Provides a Strong Demand Impetus for Stable, High-Level Economic Growth The reform and opening up process has encouraged labour force flows, promoted the drive towards industrialisation and increased the urbanisation rate (the percentage of the urban population in the total population). The increase in the urbanisation rate has generated huge demand for urban infrastructure and real estate, which has boosted development in various affected industries. China’s urbanisation rate was a mere 10.6 percent in 1949, but rose to 17.9 percent in 1978 and 45.7 percent in 2008. In contrast, the percentage of the rural population in the total population dropped from 89.4 percent in 1949 to 82.1 percent in 1978, and to 54.3 percent in 2008 (see Figure 3.3).9 F. The Changes in the Consumption Structure Have Generated New Consumption Demand for Stable, High-Level Economic Growth After the start of the reform and opening up process, the rise in per capita income has driven the development of the consumption structure from “eating, dressing and using” to ‘living and travelling”, from a survival mode to a development and enjoyment mode. This upgrading of the consumption structure has accelerated the adjustment and optimisation of the industrial structure and has generated a significant impetus for economic growth. G. The Changes in the Regional Structure Have Created a Broad Geographic Space for Stable, High-Level Economic Growth Since the start of the reform and opening up process, the economy grew rapidly in the eastern coastal areas in the 1980s and 1990s; the central and western areas have witnessed accelerated economic development since the late 1990s. The international financial crisis has had a severe impact on the eastern coastal areas, and the growth rates of both industrial production and of investment in fixed assets in the central and western regions have been sharply higher than those in

Source: 1949–1977: Zhongguo tongji nianlan 1983 中国统计年鉴 1983 [China Statistical Yearbook, 1983], Zhongguo Tongji Chubanshe (2008) 104; 1978–2008: Zhongguo tongji nianlan 2009 中国统计年鉴 2009 [China Statistical Yearbook, 2009], Zhongguo Tongji Chubanshe (2009) 40. 9

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% 100 Urban population % 89.4 90

Rural population % 82.1

80

70

60 54.3 50

45.7

40

30

20 17.9

0

10.6

1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

10

Figure 3.3

China’s Urbanisation Rate (1949–2008).

the eastern coastal areas. In the first half of 2009, the added value of industrial enterprises above a designated size recorded year-on-year growth of 7.0 percent; by region, that for the eastern region increased by 5.9 percent, in the central region by 6.8 percent and in the western region by 13.2 percent. In the first half of 2009, urban investment in fixed assets increased by 33.6 percent; by region, that in the eastern region increased by 26.7 percent, in the central region by 38.1 percent and in the western region by 42.1 percent (See Table 3.3).

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liu shucheng Table 3.3

Industrial Production and Investment Growth Rates in the First Half of 2009 (%)

Indicator Growth rate of added value of industrial enterprises above a designated size Growth rate of urban investments in fixed assets

Whole country

East

Centre

West

7.0

5.9

6.8

13.2

33.6

26.7

38.1

42.1

The above analysis shows that a number of significant changes have occurred to China’s economic structure since the start of the reform and opening up process. These new changes have also made it easier to deal with the impact of the international financial crisis on China’s economy, and these will continue to promote China’s economic development. III. A New Economic Cycle Is about to Start From a perspective of addressing the international financial crisis, China’s economic trend can be classified into three phases: A. The first phase was a sharp decline from July 2008 to February 2009. At this point, the sharp decline of economic growth became the single major issue affecting China’s overall economic and social development. The CPC Central Committee and the State Council put forward a clear primary mission for economic initiatives, i.e. maintaining stable, rapid economic development, implemented a proactive fiscal policy and a moderately loose monetary policy, and issued a package plan to respond to the international financial crisis. B. The second phase was a stabilised recovery, which started from March 2009 and is expected to last until the end of this year. China’s economy is currently in this phase. A series of macro-economic control measures have taken effect, affecting the excess decline trend of economic growth, but the foundations for economic recovery require further consolidation. C. By 2010, China’s economy is expected to enter the third stage, namely a full recovery phase, as well as enter the ascendant phase of a new economic cycle. This so-called “full recovery” indicates that the majority of industries or economic indicators will continue to move into a pick-up phase. In the current stabilised recovery phase, only certain leading industries and leading indices have so far bottomed out.

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The aforementioned two phases can be observed from the obvious fluctuations in the growth rate of industrial production (monthly year-on-year growth rate of the added value of industrial enterprises above a designated size) (see Figure 3.4).10 The growth rate of industrial production is an index which is typically used to reflect the operation of the real economy. This rate stood at 16 percent in June 2008, but declined to 3.8 percent in January-February 2009, or a drop of 12.2 percentage points over eight months. The economy recovered for six consecutive months from March to August 2009, forming a V-shape (see the dotted line in Figure 3.4).

% 20 17.8 18 16.0

16.0

16 14

15.7

15.4

14.7 12.3

12.8 12 11.4

10.7

10

10.8

8.9

8.3 8.2

8

7.3

5.6

6 5.4 4

3.8

2

2009-08

2009-07

2009-06

2009-05

2009-04

2009-03

2008-12

2009-1-2

2008-11

2008-10

2008-09

2008-08

2008-07

2008-05

2008-06

2008-04

2008-03

2008-1-2

0

Figure 3.4 Year-on-Year Monthly Growth Rate of Added Value of National Industrial Enterprises above a Designated Size.

10

Source: National Bureau of Statistics website.

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liu shucheng Table 3.4

International Financial Institution Forecasts for China’s Economic Growth Rate in 2010

Institution Morgan Stanley Barclays Capital BNP Paribas HSBC International Monetary Fund JP Morgan Chase Asian Development Bank UBS Securities Overall range

Forecast (%) 10.0 9.6 9.5 9.5 9.0 9.0 8.9 8.5 10.0

International financial institutions also forecast a remarkable recovery for China’s economic growth in 2010. During July-October 2009, different international financial institutions made the following forecasts for China’s economic growth in 2010 (see Table 3.4): Morgan Stanley: 10 percent; Barclays Capital: 9.6 percent; BNP Paribas: 9.5 percent; HSBC: 9.5 percent; IMF: 9 percent; JP Morgan Chase: 9 percent; Asian Development Bank: 8.9 percent; UBS Securities: 8.5 percent. The overall forecast range was 8.5–10 percent. IV. Greater Efforts Will Be Made to Prolong the Ascendant Stage of the New Economic Cycle The Chinese economy is expected to enter the ascendant stage of a new economic cycle (the 11th economic cycle) while effectively addressing the severe impact of the international financial crisis. The time is therefore ripe to initiate efforts to prolong the ascendant stage of the economic cycle. In the ascendant stage of the 10th economic cycle, the economic work conference of the Central Committee in November 2003 proposed that “China’s economic development is currently at the ascendant stage of the economic cycle.” and the aim of “cherishing, consolidating and developing the favourable trends of current economic development.”11

11 “Central Committee Economic Work Conference Convenes in Beijing”, Renmin Ribao, November 30, 2003.

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This was the first time that the term “economic cycle” was applied in a Central Committee economic work conference to analyse and assess China’s economic trends. At the time, this author wrote an article titled “Efforts Must Be Made to Prolong the Ascendant Stage of the Economic cycle”《努力延长经济周期的上升阶段》, which was published in the People’s Daily.12 The 10th economic cycle is about to wind up, after an actual life comprising an ascendant stage of eight years (2000–2007) and a descent stage of two years (2008–2009). The ascendant stage had expanded to eight years, a first in the history of China’s economic development since the foundation of the PRC in 1949. The onset of a new economic cycle is approaching, and it is clear that every effort must be made to extend the ascendant stage of this new cycle. The question is, how to prolong this? Based on historical experience and lessons learned, this will be based on our ability to grasp two fundamental points: first, to understand the waveform of the new economic cycle; and second, to understand the moderate growth interval of the new economic cycle. A. Understanding the Waveform of the New Economic Cycle China’s preceding ten economic cycles have exhibited three main undulating patterns: The first is of sharp growth and sharp decline. This was the waveform which typified the nation’s first eight economic cycles, dating from 1953 to the late 1980s, with the second cycle (from 1958 to 1962) being the most representative. The ascent stage was usually short, at a mere 1–2 years. The economic growth rate usually rose sharply, and then declined for two-four years. This meant that the economic cycle lasted for approximately five years on average. The second is of sharp growth and steady decline. Since the early 1990s, the waveform has shifted from one of sharp fluctuations to one of high growth and low decline. This was best reflected in the ninth economic cycle, from 1991 to 1999. This cycle had an ascent stage of two years and a descent stage of seven years, or a total of nine

12 Nuli yanchang jingji zhouqide shangsheng jieduan 努力延长经济周期的上升 阶段 [Efforts Are to Be Made to Extend the Ascent Stage of the Economic cycle], Renmin Ribao, December 18, 2003.

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years. Its ascent stage was the same as for the previous eight cycles, and still featured sharp fluctuations; but its descent stage differed from previous cycles. Learning from the lessons of history, the government implemented macro-economic controls to ensure a “soft landing”, which brought about a slow decline in the excessively high economic growth rate, and avoided a sharp decline after the preceding sharp growth. A “soft landing” was basically successfully achieved by the year 1996. Later, China successfully withstood the impact of the Asian financial crisis and overcame the issue of insufficient effective domestic demand. In this way, the economic growth rate declined from a peak of 14.2 percent in 1992 to 7.6 percent in 1999, with an annual average drop of 0.9 percentage points over the seven years. The third type is of steady growth and sharp decline. This occurred during the tenth economic cycle, from 2000 to 2009. From the very beginning of this cycle, the government learned from the historical lessons of sharp growth and sharp decline, and took measures to prevent sharp economic fluctuations so as to ensure a steady rise in the economic growth rate and thus successfully extend the ascendant stage of the economic cycle. After a rise of eight consecutive years, the economic growth rate had reached 13 percent, and was accelerating in 2007, under the impact of the inertia of domestic economic operations and international economic growth. Due to the sharp impact of the international financial crisis and the trend of domestic restructuring, economic growth then declined to 9 percent in 2008, a drop of 4 percentage points, thus forming a “steady growth and sharp decline” waveform. In the new economic cycle, we should work to achieve a new, effective fluctuating pattern, i.e. of steady growth and steady decline. The ascent stage of the economic cycle should be occur slowly over an extended period; the descent stage of the economic cycle should be marked by a smooth, mild decline. B. Understand the Moderate Growth Interval of the New Economic Cycle The key to achieving a fluctuating pattern of steady growth and steady decline is to grasp the appropriate growth interval of the new economic cycle, which requires an understanding of the economic growth rate.

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At present, the media have begun to discuss the issue of the type of growth rate which the Chinese economy should maintain after the rebound, and this is expected to soon become a topic of fevered discussion. There are five general opinions: The first view is that China should not continue to pursue high speed growth any longer, but should aim for a medium speed development of 7–8 percent. The second is that China can continue to maintain economic growth in excess of 10 percent once it has fully recovered. The third is that China is likely to maintain a growth rate in excess of 9 percent over the next decade or so (2008–2020). The fourth is that China’s average economic growth rate will be able to exceed 9.5 percent for the five years (2008–2012); it will then reach 8.6 percent for the subsequent decade (2013–2022), and 7.5 percent in the decade following that (2023–2032). The fifth is that China will be able to maintain moderate economic growth of 8–10 percent during the new economic cycle, or a medium cycle (such as about eight years, 2010–2017). This article supports the fifth view. This contains four layers of meaning: first, the growth rate should not be too low; second, the growth rate should not be too high; third, an appropriate growth range and its relevant factors should be selected; and fourth, tight tracking and appropriate regulation should be applied. (1) The Growth Rate Should Not Be Too Low An economic growth rate of less than 8 percent is inappropriate to China’s current stage of economic development. A rate lower than 8 percent will lead to severe difficulties in business operations, urban and rural employment, increases in private income and life standards as well as in state revenue and social programmes, thus impairing the stability and harmony of society as a whole. Affected by the international financial crisis, China’s GDP growth dropped to 6.8 percent in the fourth quarter of 2008 and 6.1 percent and 7.9 percent in the first and second quarters of 2009 respectively, generating serious challenges to business operations and urban and rural employment, and resulting in a continued negative growth of gross fiscal revenue from October 2008 to April 2009 (excluding December 2008). The economic growth rate should therefore be no lower than 8 percent.

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(2) The Growth Rate Should Not Be Too High The history of China’s economic cycles shows us that the crucial segment of “sharp growth and sharp decline” is “sharp growth”. Excessively rapid, urgent or high levels of “sharp growth” are liable to result in excessive pressure toward high energy and resource consumption levels, high pollution and high inflation, and lead to the destruction of various equilibrium relations necessary for normal economic operations, thus leading to a subsequent “sharp decline”. In China’s past ten economic cycles, the GDP growth rates for the peak years were: 15 percent in 1956; 21.3 percent in 1958; 18.3 percent in 1964; 19.4 percent in 1970; 8.7 percent in 1975 (late “Cultural Revolution”); 11.7 percent in 1978; 15.2 percent in 1984; 11.6 percent in 1987; 14.2 percent in 1992; and 13 percent in 2007. This empirical data shows us that the economic growth rate should preferably not exceed 11 percent. (3) An Appropriate Growth Range and Its Relevant Factors Should Be Selected How can the Chinese economy maintain an appropriate growth rate of 8–10 percent in the next medium economic cycle? The seven changes in the economic structure since the start of the reform and opening up process as analysed above are also the seven major factors that have promoted stable, rapid economic growth. These factors include the market economy system, ownership factors, resource supply factors, industrial structure factors, urbanisation factors, consumption upgrading factors, and regional development factors. These will continue to play a role in the new economic cycle. Special attention must however be paid to the increased urbanisation rate and the development of the relevant real estate industry, and the housing industry in particular, as these will remain the major driving forces behind the new economic cycle. The academic community has differing views with regard to improving China’s future urbanisation rate. These can be classified into the following four categories: The first view is that China’s urbanisation rate (45.7 percent in 2008) is underestimated in the current statistics because it does not include all migrant workers in urban areas. If these migrant workers are all included, the actual urbanisation rate will be relatively high (at approximately 60 percent). Therefore, there is relatively little space for future urbanisation, with a mere ten years and ten percentage points remaining.

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The second view contrasts with the first view, and states that the urbanisation rate is overestimated in the current statistics because migrant workers who have worked in cities and towns for more than half a year have been included. But if we consider that this segment of the migrant worker population have not become a part of the urban population in a true sense, the real urbanisation rate remains relatively low (less than 40 percent). There is therefore still considerable space for the development of urbanisation. A third view, based on existing statistics, believes that China remains in a phase of rapid urbanisation. By 2020, the urbanisation rate may reach approximately 60 percent; by 2030, this will reach a figure of 65–70 percent; by 2050, it will reach 75–80 percent, i.e. urbanisation will be achieved in the mid-21st century. The fourth view believes that the urbanisation rate will not necessarily be high, reaching slightly above 60 percent by 2020, due to China’s large population. Although opinions differ over the growth of China’s urbanisation rate, a common point of agreement is that there is still considerable space for the development of urbanisation in the next decade. This relates to the urbanisation rate not only in terms of quantity but also in terms of quality, such as by improving the construction of everyday life infrastructure, traffic and communications infrastructure, infrastructure for culture, education, health and medical treatment, environmental protection facilities, and residential construction for a wide range of residents (including urban residents and rural migrant workers). On the one hand, China suffers from excess production capacity for most general merchandises, while on the other, the supply of public goods or quasi-public goods (various infrastructure and low-income housing products as mentioned above) remains insufficient. This provides a significant driving force for China’s economic development. To ensure the smooth progress of the drive towards urbanisation, and making the housing industry in particular into an important mainstay industry of the new economic cycle, the issue of continuously rising housing prices must be resolved. If this issue cannot be effectively resolved, it will have a severe impact on urbanisation development, and even affect social stability. China’s housing industry has experienced three phases: in the first, the government took responsibility for the urban housing problem, due to a critical shortage of housing under a highly-intense planned economy system; the commoditisation of housing was then achieved. The market has encouraged a boom

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in the housing industry and this has also resulted in soaring housing prices; later, this marketisation and governmental responsibility were combined. In order to effectively inhibit the rising trend in housing prices, we must take a further “drastic” approach, i.e. expand government guarantees to cover the urban low-income and medium-income groups. However, housing security for the urban middle-income segment of the population guarantees that everyone has the right of residence and can rent a house, but does not guarantee that everyone has the right to housing property; this is government-protected and operates according to market-oriented principles. Rental housing is rated according to high, medium and low grades to provide selection. (4) Ensure Tight Tracking and Appropriate Regulation Stating that efforts should be made to extend the expansion phase of the economic cycle does not mean allowing economic growth to rise year-on-year as part of a cyclical uptrend, but rather, allowing the economy to grow steadily and fluctuate slightly within an appropriate growth range, so as not to lead to a sharp decline in the economic growth rate. Due care should be paid to the fact that economic growth is subject to growth inertia during the expansion stage of an economic cycle. Chain diffusion and accumulative scale effects between sectors, industries, enterprises, investment in fixed assets and production all come into play between economic expansion and price inflation during the growth stage, thus generating a risk that overall economic growth will shift from “rapid”, to “hot”, and to “overheating”. Macroeconomic control bodies must therefore tightly track economic trends and changes as well as make the necessary appropriate adjustments at the right times in order to extend the growth stage of the economic cycle and correct excess rapid growth in a stable manner. References 陈佳贵、刘树成、汪同三 Chen Jiagui (Ed.), Liu Shucheng, Wang Tongsan (Sub-ed.), 2009 nian Zhongguo jingji xingshi fenxi yu yuce 2009 年中国经济形势分析 与预测 [Analysis and Forecast of China’s Economic Situation in 2009], Shehui Kexue Wenxuan Chubanshe (2008). 陈佳贵、刘树成、汪同三 Chen Jiagui (Ed.), Liu Shucheng, Wang Tongsan (Sub-ed.), Zhongguo jingji qianjing fenxi – 2009 nian qunji baogao 中国经济前景分析—2009 年春

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季报告 [Analysis of the Economic Prospect in China—Spring Report 2009], Shehui kexue wenxuan chubanshe (2009). 刘树成 Liu Shucheng, Zhongguo jingji de zhouqi bodong 中国经济的周期波动 [Cyclical Fluctuations in China’s Economy], Zhongguo jingji chubanshe (1989). 刘树成 Liu Shucheng: Zhongguo jingji zhouqi bodong de xin jieduan 中国经济周期波 动的新阶段 [New Phase in China’s Economic cycle], Shanghai yuandong chubanshe (1996). 刘树成 Liu Shucheng, Fanrong yu wending—Zhongguo jingji bodong yanjiu 繁荣与稳定— 中国经济波动研究 [Prosperity and Stability: Studies on Economic Fluctuation in China], Shehui kexue wenxuan chubanshe (2000). 刘树成 Liu Shucheng: Jingji zhouqi yu hongguan diaokong 经济周期与宏观调控—繁荣 与稳定 II [Economic Cycle and Macro Regulation—Prosperity and Stability II], Shehui kexue wenxuan chubanshe (2005). 刘树成 Liu Shucheng: Zhongguo jingji zengzhang yu bodong 60 nian—fanrong yu wending III 中国经济增长与波动60年—繁荣与稳定 III [60 Years of China’s Economic Growth and Fluctuation: Prosperity and Stability III], Shehui kexue wenxuan chubanshe (2009).

ANALYSIS OF AND PROJECTIONS FOR CHINA’S ECONOMIC SITUATION, 2009–2010 Zhang Liqun Under the combined effects of the impact of the international financial crisis and the cyclic fall-back of the national economy, China’s economy declined significantly in the first quarter of 2009, with the economic growth rate dropping to 6.1 percent. Following a boost from the “package” plan and its own inherent development advantages, however, China’s economy started to stabilise and recover in a relatively short time in 2009, with a forecast annual economic growth rate exceeding 8 percent. This means that China’s economy has achieved new capabilities in terms of weathering adverse impacts and maintaining stable, rapid development, which will help to further shrink the country’s cyclic economic fluctuation spread. Looking forward to 2010, China’s economy faces the dual challenges of adjusting its growth foci and ensuring the transmission of the driving forces of economic growth. That is to say, altering the respective percentages of domestic and external demand requires adjusting industrial and product structures, as well as the pattern of the internal-oriented and export-oriented economies; economic growth requires its major driving force to switch from government to market forces. Economic development faces a series of new issues, and macro-economic control faces a new, rigorous test. The change in the economic situation requires that government policy places particular emphasis on supply rather than demand. I. Major Features of the Economic Situation in 2009 A. Growth in Total Demand Is Mainly Reliant on the Driving Force of Domestic Demand Exports declined sharply in 2009, and the contribution to economic growth from external demand decreased significantly. Exports increased by 17.3 percent in 2008, but are estimated to increase by

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–18 percent, or a decline of 35.3 percentage points in 2009, and this decline in export growth will affect the growth of total demand in 2009 by approximately 5 percentage points. The trade surplus is estimated to reach approximately USD 200 billion in 2009, a drop of almost USD 100 billion over 2008, which will cause GDP growth to decrease by approximately 2 percentage points. The significant rise in the rate of increase of domestic investment will contribute more significantly to economic growth. Social investment in fixed assets grew by 25.5 percent in 2008, or a real growth rate of 15.2 percent. In 2009, social investment in fixed assets is estimated to grow by 33 percent, or a real growth rate of approximately 41 percent, meaning that the real growth rate of investment will increase by over 40 percentage points. Investment growth will support the growth of total demand by approximately 15 percentage points. Consumption grew rapidly yet on a stable basis, providing an increasing contribution to economic growth. Total retail sales of consumer goods grew by 21.6 percent in 2008, or 14.8 percent in real terms; this is expected to grow by 15.5 percent in 2009, or approximately 17 percent in real terms, meaning that the real growth rate of consumption will increase by over 2 percentage points. Consumption growth will support the growth of total demand by approximately 4.2 percentage points. When the changes in the three major demands are incorporated, the increment in external demand is negative, but demand for domestic investment and consumption have increased rapidly to offset the reduction in external demand, and allowed total demand to achieve growth of approximately 14 percent; this will provide over 8 percent support for economic growth. Domestic demand will be a decisive factor in economic growth in 2009. B. The Accelerated Growth of Domestic Demand Is Primarily Attributable to Government Impetus From January to August, urban investment in fixed assets grew by 33 percent year-on-year, of which RMB 4.8729 trillion was in the form of state-owned and state-holding enterprise investments, an increase of 39.9 percent, accounting for 43 percent of gross investment compared to the 28.2 percent figure in 2008. In terms of actual investment, a total of RMB 13.2007 trillion was paid out from January to August, registering year-on-year growth of 39.1 percent; of which investment

analysis of and projections for china’s economic situation 63 as part of the national budget grew by 82.7 percent, domestic loans increased by 47.4 percent, self-generated funding increased by 33.3 percent, while foreign capital utilisation dropped 12.1 percent. Investment in national budget and domestic loans were the major factors driving up investment growth. These data show that the acceleration in investment growth has so far been mostly achieved through government impetus. C. The Growth of Domestic Demand Is Increasingly Pushed Forward by Market Forces China is in the midst of a process of rapid industrialisation and urbanisation. Industrialisation and urbanisation driven by an upgrading of the residential and travel consumption structures are major foci of both economic development and the market mechanism in the allocation of resources. China’s economy had been continuously heated up by domestic and external demand since 2004. To prevent economic growth from overheating, the government implemented a number of control measures, which have to a certain extent curbed the upgrading of the consumption structure, including private housing and vehicle purchases (for instance, credit control and interest increment measures curbed housing purchases considerably). With policy adjustments and the support of a series of measures to boost domestic demand, private consumption confidence has picked up. Measures such as tax reductions, interest rate reductions and the expansion of credit has given a positive encouragement to residents to buy housing, cars and other consumer items, and the upgrading of the consumption structure will certainly regain some of its former vigour. Car sales from January to August grew by 34.8 percent year-on-year, while sales of urban commercial housing from January to September grew by 44.8 percent year-on-year. Driven by the boom in demand, the automotive and real estate industries picked up rapidly, with vehicle production output from January to August growing by 27.1 percent year-on-year, an increase of 28.8 percentage points over the growth rate for January– February; real estate investment from January to September grew by 17.7 percent year-on-year, an increase of 16.6 percentage points over the figure for January–February; in September, monthly year-on-year growth reached 37 percent, and the real estate investment increment contributed approximately 7 percentage points to growth in urban fixed asset investment.

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D. Market-Driven Demand Growth Has Dropped to Below 2003–2007 Levels 2003–2007 marked the initial consumption structure upgrading phase, with rapid advances in industrialisation and urbanisation, acute structural changes, and soaring development in the heavy chemicals, energy and transportation sectors, forming a huge market expansionary force, coupled with continuous rapid export growth of 25–30 percent. By comparison, today’s market is recovering rapidly, but there remain significant differences from the previous phase. Firstly, the space for structural expansion has shrunken, overcapacity has to a certain degree appeared in the heavy chemicals and energy industries, industrial growth is mainly reflected in terms of structural optimisation and quality improvements instead of the former phase’s expansion of scale and quantity, and the growth of investment in industrial construction has also stabilised. Secondly, export growth has declined sharply. All of these have weakened market-driven demand expansion. Overall, against the background of the sharp decline of China’s economy in 2008 and a concentration of the factors driving economic decline, timely and effective macro-economic control in 2009 has suitably curbed further economic decline, and encouraged a rapid return to economic recovery. It is expected that annual economic growth will reach approximately 8.5 percent in 2009. This indicates that China enjoys huge economic development potential, that the government has improved its capabilities in terms of macro-economic control, that the economy is more tolerant of adverse impacts, and that a sound foundation now exists to support ongoing rapid, stable economic development. II. Economic Trend Projection for 2010 Against a background in which the world’s advanced economies continue to fluctuate, the forces driving China’s economic growth switch from the government to the market, and economic growth sees improved continuity and stability, China’s economy will hopefully grow at a gentle rate with relatively low inflation in 2010. A. Economic Recovery Stabilises, and the GDP Growth Rate Is Expected to Be Approximately 9.5 Percent In 2010, the external environment will remain relatively harsh, but will not deteriorate further. With improved export business flexibility

analysis of and projections for china’s economic situation 65 and competitiveness, it is expected that exports will end their period of negative growth and return to growth, albeit at a single-digit rate. Domestic demand will see moderate growth, driven by market forces. As long as no changes are made to the policies supporting private purchases of housing and vehicles, with the recovery of employment and income levels, and the continuous improvement of and increase in the housing and car supply, it is expected that the upgrading of the consumption structure will remain active, consumption will maintain higher levels of growth, and the real growth rate of consumption will remain at 2009 levels. In terms of investment growth, it is expected that increased government investment will basically fade off, and real estate investment will grow by 30–40 percent and become the main force driving investment growth. Furthermore, corporate investment will show higher levels of activity, and maintain a growth rate of approximately 20 percent under the impact of market forces. To summarise demand factors, it is expected that the GDP growth rate will reach approximately 9.5 percent in 2010. B. No Remarkable Inflation Will Appear, and CPI Is Expected to Rise by Less Than 3 Percent No evident inflation is expected to appear in 2010, against a background of stable general demand growth and sufficient production and supply. (1) Asset prices will not jump. The rigid demand for housing slackened in 2009; demand for housing for speculative investment has been brought under control (mortgage loans for second housing property have been returned to strict policy control, among other measures), and will not expand in a continuous, rapid manner. Real estate construction accelerated remarkably in 2009, and the housing supply will rise rapidly in the latter half of 2010. Based on these supply and demand conditions, housing prices are expected not to jump rapidly upwards. The stock market has a huge space for capacity expansion, including the floatation of large and small-sized non-tradable shares, the full floatation of heavyweight shares, IPOs and the openness of GEM. Levels of capital flowing into the stock market will increase rapidly but stock prices are unlikely to soar as stock market capacity expands rapidly and the macro-economic situation remains stable overall. (2) Commodity prices generally remained stable. In 2009, grain yields increased for the sixth consecutive year, with production of live

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hogs, oil crops and cotton all reaching new historic highs, enhancing the capacity to guarantee the food supply. The Engel coefficient of urban and rural residents continued to decline, and the elasticity of food expenditure against income growth has declined. Restricted by the supply and demand relationship, food prices are predicted not to register any remarkable rise in 2010. Government price intervention to stabilise farming incomes may result in price increases of certain agricultural products, but the increase amplitude will not be significant. The production capacity of industrial consumer goods remains strong. Even if demand (such as for private vehicles) grows rapidly, supply can be ensured. It is expected that prices will not rise unreasonably. The domestic supply capacity of industrial capital goods is relatively high, and demand growth is expected to remain generally stable, enabling prices to remain stable. Primary product prices on the international market may continue to rise due to the weakening of the US dollar, but absolute levels will not exceed 2007 levels, as the international financial system loses its ability to provide liquidity, de-leveraging reforms have weakened capacity to speculate in futures, which has curbed demand for speculating in primary product futures. The increasing prices of primary products on the international market have pushed up domestic PPI and increased enterprises’ production costs. This fierce market competition is predicted to decrease company profits, and will not be passed on to the CPI. Based on the above analysis, we predict that no remarkable inflation will occur in 2010, and the rise in CPI will remain within 3 percent. III. A Number of Basic Issues Require Attention The economic recovery mostly relied on government forces in 2009. It is therefore necessary to ensure that economic recovery becomes mainly reliant on market forces as early as possible. Fostering market forces requires an overall consideration of issues such as adjustments to the economic, industrial and product structures, improvements to corporate survival and development capacities, an upgrading of the consumption structure and the acceleration of urbanisation in order to address the profound changes in the Chinese economy’s internal and external environments. Consideration must also be given to how to further improve the government’s strong economic incentive policy.

analysis of and projections for china’s economic situation 67 A. Monetary and Fiscal Policy Have No Evident Negative Effects Experience—both historical and international—indicates that government-supported economic recovery is always accompanied by a number of negative effects. There has been widespread worry about monetary and fiscal policy for 2009. For instance, these may increase the risk of currency inflation, and cause a decline in investment results. From the perspective of the developing economic situation, excessive worry about these issues is unnecessary. The implementation of moderately loose monetary policy was followed by a period of extraordinary loan growth. Incremental loans in the first half of 2009 totalled RMB 7.37 trillion, equivalent to 1.77 times the incremental loans for 2008, and excessive growth in loan levels became a universal source of worry. As long as there are no changes to the key points of monetary policy, the growth in loans will basically return to normal in the second half of 2009. One substantial criterion for this is that the excessive growth of loans in the first halfyear brought with the need for self-adjustment. The implementation of a tight monetary policy was proposed at the economic work conference of the Party Central Committee in 2007, marking the first time in the last decade that a tight monetary policy was defined or the credit line management method used. Restricted by these measures, commercial banks significantly reduced their currency credit. The RMB loan balance for the January–July 2008 period increased by 14.8 percent, but saw a drop of nearly two percentage points compared to the year-on-year figures for 2007. Incremental loans increased by 14.5 percent in 2008, a drop of 4.5 percentage points compared to the previous year. The implementation of a moderately loose monetary policy was proposed at the economic work conference of the Party Central Committee in 2008, marking the first time that the term “moderately loose” had ever been used. The relatively strong monetary policy adjustments, and the cancellation of credit line control in particular, together with the concentrated launch of government investment projects and the booming real estate market in the first half of 2009 all provided better loan prospects for state-owned commercial banks, and a relatively strong expansion in commercial bank credit activities will definitely be seen, including supplementary corrections to 2008 currency credit business. By the second half of the year, the credit scale had reached the expectations of commercial banks on the one hand, while on the other also slowed down with the launch of government

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investment projects and the real estate market has tended to stabilise. The decrease in preferred loan projects is sure to stabilise commercial bank credit. These circumstances indicate that there will be no excessive supply of currency in 2010 as long as the current moderately loose monetary policy is carried over. The implementation of a proactive fiscal policy requires a significant increase in government investment expenditure. Current government investment has however mostly focused on infrastructure, public service facilities and post-disaster reconstruction, all of which require government investment. Furthermore, relatively strict audits and inspections will ensure that there are government investment as a whole incurs no overall errors or losses. Government investment into the heavy chemicals industry will not result in an irrational expansion of production capacity in the heavy chemical industry as long as it is superseded by market-driven investment in real estate, urban and industrial construction. Overall, monetary and fiscal policy have had no evident negative effects. B. The Drive towards Urbanisation Should Be Accelerated Urbanisation indicates a historic change in popular production and living standards, and provides a huge potential for an increment in income and consumption. Urban construction also contains huge investment growth potential. Urbanisation generates market demand and support for the production and living environments for industrialisation; and industrialisation provides support for the supply of products and employment opportunities for urbanisation. Industrialisation and urbanisation are mutually conditional, and promote and depend on each other. The continuous high levels of export growth since 2003 to a certain degree altered the relationship of industrialisation and urbanisation, and a number of the conditions for industrialisation were achieved through export growth. To achieve the goal of preventing overheated economic growth, the drive towards urbanisation has been controlled, regardless of whether the intended manner was achieved. For instance, the government has restricted the land and credit supply to control investment and prevent the real estate industry from heating up sharply. Urban governments do not however actively stabilise the number of new residents moving to urban areas. This has led to a situation in which the drive towards urbanisation has lagged behind the

analysis of and projections for china’s economic situation 69 industrialisation drive. During the 2003–2008 period, when industrial percentages increased continuously and rapidly, the annual urbanisation rate increased by a lowly 1.03 percentage points on average, a fall of 0.4 percentage points from the figure for 1998–2002. Furthermore, approximately 30 percent of the urban population did not hold urban resident status. This has restricted the expansion of consumption and the upgrade of the consumption structure, the growth of urban construction investment, the release of rural land for living needs, as well as the supply of urban construction land and urban housing; finally, it has also restricted the workforce supply in urban areas. Against a background of a slowdown in export growth which will extend to the long term, it is necessary to accelerate the drive towards urbanisation to offset the impact of the slowdown in export growth and push forward industrialisation. This will be the long-term major driving force for China’s continuous and rapid economic growth. C. The Key to Adjusting Overcapacity Is to Improve Market Exit Mechanisms Market mechanism regulation is a form of post-factum regulation. The existence of relative industrial overcapacity is a requirement for the full implementation of an open market mechanism—but the development of long-term shortages in the Chinese economy and a switch from a seller’s market to a buyer’s market imbued relative overcapacity with a sort of normality, thus providing not only the pressure but also the impetus for enterprises to take greater care when expanding industrial and service quality. In 2003, the sharp changes in the economic structure resulted in relative overcapacity, which became evident during the subsequent fallback of the economy. The key to adjusting this overcapacity is to establish an effective exit mechanism. Market competition requires businesses to be able to both establish and terminate themselves in a timely manner. It is very important to develop a responsibility system and a responsibility investigation mechanism for the market exit mechanism in order to enhance the internal constraints of a wide range of enterprises as well as those of various investors—including the government. The government must exercise caution when increasing its direct participation in industrial development in the name of regulating excessive production capacity as well as the consequences of protecting backward enterprises and impeding improvements to industrial capacity. Only through sound market access and exit mechanism regulation can enterprises form

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lasting, expansive investment activities to develop market demand on a sustainable ongoing basis. D. The Upgrading of the Export-Oriented Economy Must Be Promoted over the Long Term Following the international financial crisis, advanced economies led by the United States have entered a phase of adjustment, which is predicted to last for an extended period. Profound changes will also take place in the patterns of the world economy and the international division of labour. As China’s economy will increasingly rely on the stable, rapid growth of the domestic market and the optimisation and upgrading of the country’s industrial structure, the position of China’s economy in the world economy will change significantly, as will its position in the international division of labour. It is therefore important to establish goals and paths for the long term restructuring and upgrading of China’s export-oriented economy. IV. Policy Recommendations Based on the analysis above, it is recommended that support for the expansion of domestic demand be shifted from the government to the market as soon as possible while maintaining policy continuity and stability. Therefore, effective coordination should be ensured between short, medium and long-term policy, aggregate and structural policy, and a series of measures such as pushing forward reform, accelerating the drive towards urbanisation, adjusting the economic structure and changing the development mode must be applied in order to attempt to shift economic growth to a stable, healthy and continuous track characterised by enhanced quality benefits, a general coordination of the aggregate and structural relationship, lower resource and environmental costs, and a low inflation rate. A. Continue to Implement Moderately Loose Monetary Policy Based on an analysis of the money supply and prospects for inflation, it is recommended that the implementation of a moderately loose monetary policy with stable reserve fund and interest rates be continued

analysis of and projections for china’s economic situation 71 in 2010. The central bank must take care to encourage financial institutions to increase the supply of loans in a reasonable manner and maintain banking system liquidity at reasonable and abundant levels. This requires an optimisation of the credit structure, intensified financial support for real economic activities such as corporate internal investment, the reinforced development of consumer credit, the further improvement of real estate credit policy and applying the role of finance in support of the real estate industry. Financial reform and innovation must be positively pushed forward, risk control strengthened, and the self-restraint and independent development capacity of financial firms enhanced. Access to the financial markets must be freed up, and the development of small and medium-sized private financial institutions accelerated. B. Shift the Focus of Proactive Fiscal Policy to Relieve the Tax Burden on Enterprises and Individuals Meeting this year’s budget objectives has placed huge pressure on increasing revenue and reducing expenditure. Care should be taken not to increase the tax burden on businesses or impose a negative impact on enterprises facing difficulties to hinder revival of enterprises and market forces. A better approach would be to further optimise the fiscal expenditure structure, gradually stabilise government investment, further improve structural tax abatement policies with the emphasis placed firmly on relieving the tax burden enterprises and individuals, and enhancing enterprise investment and individual consumption capacity. C. Encourage the Real Estate Industry to Develop in a Sound, Sustainable Manner and Accelerate the Drive towards Urbanisation Care should be taken to nurture and protect real estate market demand and ensure the continuity and stability of associated policies. Finance and taxation measures should be further improved, and support intensified for reasonable public demands for the purchase of housing. This requires the full application of the positive effect of increased housing prices to stimulate supply, and using the market mechanism to accelerate the construction of urban housing; it also requires enhancing the sense of duty and feeling of urgency of governments at all levels and accelerating the construction of urban low-income housing, including

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low-rent housing. Short and long-term development should be combined, and real estate development should be coupled with the acceleration of the drive towards urbanisation. The formulation of long-term land resource planning and the allocation plan for cities and industries should be made dependent on industrialisation and urbanisation trends, so as to guide reasonable levels of progressive development; urban and rural development must be integrated, an active study performed of land circulation mode reform, and the relationship between agricultural production land and urban construction land must be coordinated so as to provide an effective increase in urban construction land; reform of the urban household registration system must be actively pushed forward, and urban public service coverage expanded. D. Further Relax Industry Access Restrictions and Improve the Market Exit Mechanism State-owned enterprises in natural monopolies which operate for the public benefit should be urged to establish a modern enterprise system based on the relevant laws and regulations as soon as possible through the introduction of the market mechanism, while placing an emphasis on social objectives. Access restrictions to competitive public service sectors should be relaxed. Market competition is in a position to promote their development as well as the reform of monopoly enterprises in these sectors, Relaxing restrictions governing access to the railway, tobacco, telecommunications, electric power, finance, culture and other service sectors as well as certain urban public service sectors will be beneficial, thus giving full rein to the investment enthusiasm of local governments, enterprises and individuals and promoting the development of these industries and sectors to meet increasing demands and improve services through competition. With regard to the issue of bankruptcy liquidation, systems and policies should be improved to encourage low-efficiency production capacity to exit the market as soon as possible and encourage enterprises—and state-owned enterprises in particular—to establish stricter risk responsibility constraints. E. Convert the Crisis into Potential and Appreciate the Opportunities Generated by the International Financial Crisis The international financial crisis had a considerable impact on China’s economy, but also generated significant opportunities in China.

analysis of and projections for china’s economic situation 73 In line with the achievement in addressing the financial crisis that we have already mentioned, the focus in 2010 should be firmly placed on the opportunities thereby generated. The current export-oriented economic development mode should be actively transferred, and the upgrading of the foreign trade processing industry promoted to allow Chinese enterprises to shift to a more upstream position in the product supply chain. Investments abroad to develop resources should preferably emphasise mergers and acquisitions in order to increase the advantages of China’s export products in terms of technical research and development, brand and marketing channels, and the government should preferably increase support for appropriate enterprise activities. China’s balance of payment position should be improved through a structural readjustment of internal and external demand, and the economic dependence relationship of China and the United States adjust in an effort to provide greater leeway for further opening to the outside world and future macro-economic control mechanisms. G. Further Strengthen the Protection of Resources and the Environment The economic situation in 2009 and 2010 provides a good opportunity to improve the protection of resources and the environment. It is therefore recommended that this opportunity be grasped so as to provide a major impetus to energy conservation and pollutant emissions reduction initiatives. The role of the market mechanism should be emphasised, the prices of coal and electricity should be resolved in a more timely manner, the pricing mechanism of natural gas should be improved, and the price of non-agricultural water raised. A resource tax reform scheme should be promulgated as soon as possible, and research into a scheme for levying environment tax should be accelerated. Support for the research and development of energy-effective and environmental protection technologies should be enhanced, and advanced and appropriate technologies for energy efficiency and environmental protection should be actively introduced. Finance, taxation, industry and technology policy should continue to be used to encourage enterprises to save energy and reduce pollutant emissions.

ANALYSIS OF CHINA’S ECONOMIC DEVELOPMENT TREND AND RECOMMENDATIONS FOR MACRO CONTROL POLICIES IN 2010 Fan Jianping In 2009, China’s economy ended its sharp decline following the international financial crisis, guided by a policy of expanding domestic demand, and took on a trend of stabilised recovery by quarter; annual GDP is predicted to grow by approximately 8.5 percent. In 2010, the world economy will recover slowly and China’s external demand will hopefully recover. The Chinese economy will however be faced with a range of issues such as the declining effectiveness of economic stimulus policies, overcapacity in certain sectors, lack of capacity for independent growth, and an increasing risk of bad assets in the banking sector. It is predicted that China will register economic growth of approximately 8.5 percent, an increase in CPI of approximately 2.5 percent, and continued improvement in its employment and international balance of payments in 2010. Maintaining stable economic growth should continue to be the priority target for macro economic control in 2010, a proactive fiscal policy and moderately loose monetary policy should be maintained, and efforts should be made to “maintain economic growth, adjust the economic structure, promote reform and improve the people’s well-being”. I. China’s Economy Takes on a Stabilised Recovery Trend in 2009 Following the outbreak of the international financial crisis, the Chinese government promulgated a series of policy measures including a RMB 4 trillion investment stimulus plan, a revitalisation plan for ten key industries, increasing scientific and technological input, improving popular well-being, and stabilising exports. This plan package has curbed the sharp decline of the economy, stabilised investor and consumer confidence and promoted the stable recovery of the economy.

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A. Policy Stimulus Has Created Soaring Domestic Demand Investment and consumption became the major impetus behind China’s economic growth in 2009. In the first half of the year, capital contributed 6.2 percentage points to economic growth, while end-user consumption contributed 3.8 percentage points, meaning that domestic demand boosted economic growth by ten percentage points. The acceleration of domestic demand was slightly higher than the average growth rate of the Chinese economy of 9.8 percent over the thirty years since the implementation of the country’s reform and opening up policies. Investment grew rapidly. Total urban investment in fixed assets reached RMB 11.2985 trillion during January–August, marking year-on-year growth of 33 percent or a rise of 5.6 percentage points. Infrastructure investment led by the government became the major force behind the current significant increase in investment. During January–August, state-owned and state-held investment registered nominal growth of 39.9 percent, or 6.9 percentage points higher than the average; in terms of actually utilised funds, capital investment within the national budget increased by 82.7 percent, or 43.6 percentage points higher than the average. Furthermore, investment in infrastructure and popular well-being sectors such as agriculture, railway, medical care, and environmental protection received a boost from the optimised investment structure. Consumption improved in a stable manner. Over the January– August period, gross retail sales of consumer goods increased by 15.1 percent, with real growth registering 17.0 percent, 3.2 percentage points higher that the same period for the preceding year. The housing and car markets were very active: over January–August, national commercial housing sales recovered, growing by 42.9 percent from the negative growth figure posted at the beginning of the year; a total of 8.331 million cars were sold, an increase of 29.2 percent, with an extreme growth spurt of 81.7 percent occurring in August. Consumption of household appliances, building materials and furniture reached considerable levels. The “home appliances for the countryside” policy got into high gear, and household appliances eligible for subsidies increased to 12 types in 9 different classifications. The ceiling prices for certain products were also increased. The result was a sharp increase in the penetration of household appliances in rural areas. In the first half of 2009, a total of 9.61 million household appliances were sold as part of this campaign, generating sales revenue of RMB 16.2 billion.

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The campaign is predicted to increase this year’s rural consumption by RMB 150 billion. B. Industrial Production Growth Recovered Significantly Over the January–August period, China’s added value for industries above a designated size increased by 8.1 percent year-on-year, with a growth of 5.1 percent in the first quarter, 9.1 percent in the second quarter and 12.3 percent in August. The growth of heavy industry recovered remarkably, from 2.7 percent in January–February to 13.2 percent in August. Power output recovered month by month, recording cumulative growth of 0.8 percent from January to August before soaring to 9.3 percent in August. Freight transport throughput has recovered in steady steps since May, registering growth of 1.8 percent during January–May, reaching 4.3 percent during January–August, and peaking at 12.5 percent in August. In the first half of 2009, China’s GDP grew by 7.1 percent compared to the preceding year, registering 7.9 percent in the second quarter, an increase of 1.1 percentage points and 1.8 percentage points compared to the fourth quarter of 2008 and the first quarter of 2009; the economic growth rate in the second quarter, after adjustment, converts to an annual rate in excess of 16 percent, a new high in cumulative quarterly growth since 1997. It is predicted that GDP year-on-year growth in the third and fourth quarters will continue to recover, but their cumulative relative growth will be significantly lower than the second quarter. It is predicted that China will see year-on-year economic growth of 9 percent in the third quarter, 10 percent in the fourth quarter, and annual growth of 8.5 percent in 2009, ensuring that the goal of maintaining economic growth above 8 percent for the year as whole can be achieved. C. The Price Decline Momentum Has Been Checked Affected by the carry-over effect from the previous year and relatively insufficient demand, China’s CPI and PPI both declined compared to the preceding year. During January–August, the CPI declined by 1.2 percent, while the PPI declined by 6.4 percent. The price decline momentum has however been checked since July, when the CPI stabilised; in August, the CPI rose by 0.5 percent compared to July, and

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19 9 19 7 Q 97 1 19 Q 9 3 19 8 Q 9 1 19 8 Q 9 3 19 7 Q 99 1 20 Q 0 3 20 0 Q 00 1 20 Q 0 3 20 1 Q 01 1 20 Q 0 3 20 2 Q 0 1 20 2 Q 0 3 20 3 Q 03 1 20 Q 0 3 20 4 Q 0 1 20 4 Q 05 3 20 Q 0 1 20 5 Q 0 3 20 6 Q 06 1 20 Q 0 3 20 7 Q 07 1 20 Q 0 3 20 8 Q 08 1 20 Q 09 3 Q 1

4.8 4.4 4 3.6 3.2 2.8 2.4 2 1.6 1.2 0.8 0.4 0

Note: Seasonally adjusted quarter-to-quarter GDP data estimated by the State Information Centre.

Figure 5.1

Seasonally Adjusted Changes in GDP (%).

PPI continued its rise for the fifth consecutive month. It is predicted that the CPI year-on-year declining cycle will wind up by the end of this year. The rise in concatenated CPI and PPI shows that the package of policies for expanding domestic demand has improved the general supply and demand relationship, and curbed the deflationary trend, which will help enhance business and consumer confidence in future economic growth. D. The Economic Climate Recovered with Steady Steps The China Macro-economic Monitoring & Early Warning System developed by the State Information Centre shows that the coincidence composite index, in synchronised movement with industrial production, hit rock bottom in February 2009 and then experienced six consecutive months of recovery from March to August. It is therefore possible to assess that the momentum of China’s macro-economic decline has been curbed and a trend of stabilised recovery has been formed. The economic leading composite index, which leads industrial growth by approximately six months, bottomed out in November 2008 and recovered steadily over the nine consecutive months after this, indicating that industrial production will continue to recover over the next six months. The manufacturing PMI, reflecting national industrial business confidence, continued to rise for 7 months at a rate

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113.95 103.31

102.59 30.80

31.23 78.28 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Leading composite index Coincident composite index

Figure 5.2

China Macro-Economic Leading Composite Index and Coincidence Composite Index Chart.

higher than the critical point of 50 percent, reaching 54.3 percent in September 2009, 0.3 percentage points higher than the preceding month and marking a peak for the preceding 17 months, indicating that the manufacturing sector will continue to grow over the next 3–6 months. In September, the new export orders index increased sharply by 1.2 percentage points over the previous month, the employing index surged 1.8 percentage points over the previous month, both remaining above the critical point of 50 percent for the fifth and fourth consecutive months respectively, indicating that the export and employment sectors which were hardest affected by the international financial crisis have improved markedly. II. Prominent Contradictions and Issues Remaining in Economic Operations The Chinese economy has taken on a healthy trend of stabilised recovery, but we must remain aware that economic recovery is not firmly supported and balanced, a good number of new contradictions and issues have appeared in the course of development, and some have even worsened.

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A. Duplicate Construction May Exacerbate Overcapacity China is suffering from overcapacity extending to different degrees across the entire range of low-end to high-end industries, domestic demand and external demand, across conventional industries to emerging industries. Overcapacity has long been an issue in the iron and steel, nonferrous metals, building materials, chemicals and other conventional industries, but a considerable number of projects remain under construction or have begun operations. Statistics indicate that China’s crude steel production capacity stood at approximately 660 million tonnes at the end of 2008, but actual demand currently stands at an approximate 500 million tonnes, and approximately one quarter of steel materials and steel products are dependent on the international market. Crude steel projects under construction have a production capacity in excess of 58 million tonnes. Unless this is curbed in a timely manner, crude steel production capacity will soon exceed 700 million tonnes and the issues caused by overcapacity will aggravate. In 2008, total cement production capacity stood at 1.87 billion tonnes. There are now 418 cement production lines under construction with a production capacity of 620 million tonnes; a further 147 cement product lines with a production capacity of 210 million tonnes have been approved but have not yet begun operations. Once these production lines have been built, China’s cement production capacity will reach 2.7 billion tonnes. It is predicted that market demand will grow from the current 1.4 billion tonnes to 1.6 billion tonnes. Even if all of the existing backward production capacity of 500 million tonnes is eliminated, an overcapacity of 600 million tonnes will still remain. Overcapacity is also apparent in a number of emerging industries. Chinese emerging industry sectors such as new energies and new materials are still in their initial stages of development, and no sufficient market demand has been established. Against a background of current largescale investment stimulus, however overcapacity has emerged in a number of emerging sectors because of the rapid growth of new projects and the relative lag in product demand. The wind power industry has for example undergone rapid development in recent years. As of the end of 2008, gross installed capacity had reached 12.17 MKW; to date, China has over 80 wind turbine manufacturers. Numerous additional enterprises are preparing to enter the wind power equipment manufacturing sector. China’s wind power equipment manufacturing

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capacity will reach 20 MKW in 2010, but annual wind power installation capacity is only approximately 10 MKW. As a result, overcapacity will appear in short order. In addition, duplicated construction is a severe issue in the polysilicon, coal chemical, shipbuilding, and soybean crushing sectors. Against a background of severe overcapacity, strict control must be exercised over investment projects in manufacturing sectors suffering from duplicate construction and blind capacity expansion. Blind investment should never be relied upon to ease a crisis, as this will in future cause further problems. B. There Is No Strong Internal Momentum to Support Economic Growth In 2009, the Chinese economy developed severe imbalance characteristics due to growth through investment and investment by the government. Government capital, used to support large-scale government investment and loose monetary policy, has not only been applied in the construction of infrastructure and projects to improve people’s well-being, but has also made a large-scale entrance into the competitive sector, crowding out social investment. Furthermore, a status of “State sector advance and private sector retreat” has arisen, and government capital competes with private capital. For instance, a number of state-owned enterprises have become excessively active in the real estate sector. They have failed to become a leading force in the stabilisation of housing prices, and are instead driving up land prices by acting as “sky-high price bidders” in land auctions by abusing their policy advantages in terms of bank credit financing and “enclosure of money” due to their listing on the capital markets, which have had an extremely negative influence: COFCO bought out Mengniu, and the loss-making state-owned enterprise Shandong Iron & Steel bought profit-making private enterprise Rizhao Iron & Steel, while almost all private airlines have exited the air transportation sector. Affected by market confidence, external demand, financing constraints, market access restrictions, etc., social investment has become faced with difficult growth conditions. To date, no trend has yet emerged for a shift from government investment to private investment. Current consumption growth mainly relies on policy guidance and encouragement. Unless fundamental changes occur to the national income distribution mechanism, it will be difficult to form an internal mechanism to stabilise consumption growth. It is necessary to effectively encourage institutional

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innovations to foster internal momentum for economic growth and focus on encouraging private investment and individual consumption. C. Local Government Investment and Financing Platform Loans Contain Systemic Financial Risk In order to finance and guarantee the capital supply for infrastructure projects, local governments at all levels have established a range of investment and financing platforms to act as borrowers when applying for bank loans, which are then loaned onward to businesses or projects, thus turning debt into credit. The majority of new loans in 2009 have been channelled into local government financing platform companies. According to a People’s Bank of China survey, there were more than 3800 government investment and financing platforms across China by the end of May 2009, with total assets of nearly RMB 9 trillion, an average assets/liabilities ratio of approximately 60 percent, and an average rate of return on assets of less than 1.3 percent, with almost no profit being generated by county-level platforms in particular. Government investment and financing platforms as a whole are characterised by higher ratios of debt to net worth, lower profit generation capacity, lower transparency, the difficulty which banks face in making accurate evaluations of the overall obligation capability of these platforms and local governments, and the considerable difficulty facing the regulation of such credit funds. Local government investment and financing platform loans contain systemic financial and fiscal risks. If these are allowed to subsist without being reined in in an effective and timely manner, they will affect the overall situation of economic development. III. Forecast for China’s Economic Trend in 2010 Following the outbreak of the international financial crisis, numerous nations and international organisations implemented a range of economic stimulus policies. The world economy has seen positive changes and the financial markets have begun to stabilise since the second quarter of 2009. Major countries still however suffer from high rates of unemployment, and low rates of business operation. The world economy is lethargic, and faces difficulties in recovering. In July, the International Monetary Fund (IMF) forecasted that the

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world economy would shrink by 1.4 percent in 2009, and that it would grow by approximately 2.5 percent in 2010. The slow recovery of the global economy in 2010 will improve China’s external economy environment, and the country will see a certain improvement in the decline of its exports and outward capital investment. Against a background of an expected upturn in the international economic environment, China’s existing policy orientation will remain fundamentally stationary, there will be fewer new economic stimulus policies in 2010 than in 2009, and the internal economic growth impetus will not yet fully recover; we therefore initially forecast that the Chinese economy is expected to maintain a growth rate of approximately 8.5 percent in 2010. As China’s economic performance is lower than the long-term potential growth rate and supply as a whole exceeds demand, there will be no obvious inflationary pressure, and the CPI is predicted to grow by approximately 2.5 percent. Employment and the balance of payments will improve (For detailed prediction data, please see the appended table). A. Investment in Fixed Assets Maintains Rapid Growth The government’s RMB 4 trillion investment plan and the policy of adjusting the capital proportion of investment projects in a number of sectors, issued in 2009–2010, will generate results in 2010. Planned total gross investment in construction projects in January–August 2009 totalled RMB 33.9844 trillion, a year-on-year increase of 36.2 percent. Planned new gross investment in construction projects is RMB 9.6739 trillion, a year-on-year increase of 81.7 percent. There are numerous construction projects and new projects with a significant planned investment amount. Large amounts of capital are still required for the timely completion of projects under construction. There therefore remain relatively high levels of inertia in investment growth. In addition, expansionary fiscal and monetary policies have provided society as a whole with an abundance of capital. During the January–August period, investments in fixed assets totalling RMB 13.2007 trillion were put in place, a year-on-year increase of 39.1 percent. This is approximately RMB 2 trillion more than the actualised investment amount, yet only RMB 1 trillion more than the capital put in place over the same period of the previous year, and only RMB 800 billion more the actualised investment amount for the previous year. It is particularly gratifying that the accelerated real estate investment trend will

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continue as real estate prices enter a period of stable recovery, and the real estate stock has essentially run its course. The government has promulgated policies and plans for promoting private capital investment which will further optimise the private capital investment environment, expand investment horizons, reduce investment costs and thus make private capital investment grow more effectively than in the previous year. In 2010, however, government investment growth will slow, the increase in new credit will be lower than in 2009, and policies to fight excess production capacity and redundant construction will also depress investment growth. In light of all of these factors, we predict that total investment in fixed assets will record nominal growth of approximately 31 percent in 2010. Allowing for inflation factors, real investment growth will slow. B. Gross Retail Sales of Consumer Goods Maintain Steady Growth Numerous positive factors promote the steady growth of consumption. First, sustained income growth provides support for the expansion of consumption. Private urban and rural income grew by 11.2 percent and 8.5 percent in real terms in the first half of 2009 respectively, which is higher than the average growth rates over the last five years. With the improving employment situation, the return to work of increasing numbers of agricultural workers in urban areas, and rising agricultural product prices, individual urban and rural incomes will maintain rapid growth. Second, the construction of social security systems such as the new medical reform scheme, and complete endowment insurance coverage in rural areas will help to alleviate public anxiety over consumption and improve marginal propensity to consume. Thirdly, by the end of August 2009, urban and rural personal savings deposits had reached RMB 25 trillion. The savings consumption growth pattern has provided high levels of stability to China’s consumption. Fourthly, the gradual expansion of car consumption from large cities to smaller cities, the increased urbanisation rate and the rising demand for housing stimulated by the expectation of price rises will facilitate the relatively rapid growth of consumption of cars and housing. In the meanwhile, policies promulgated in 2009 to stimulate consumption, such as the policy to provide subsidies for home appliances sold in the rural areas and the policy to encourage consumers to trade in old motor vehicles and home appliances for new ones and to encourage rural residents to buy motor vehicles will have a decreasing effect in 2010, and the rise in

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prices will result in a decline in individuals’ real purchasing power. It is predicted that gross retail sales of consumer goods in China will achieve year-on-year growth of 18.5 percent and real growth of approximately 15.6 percent, slightly lower than the previous year. C. Foreign Trade Exports Are Expected to Grow by a Small Margin A fundamental factor in China’s export recovery is the shift of the world economy from sharp negative growth to minor positive growth. Quantitative analysis shows that China’s exports have an elasticity of 5.3 with the world economy as a whole, meaning that when the world economy grows or declines by a single percentage point, China’s exports will grow or decline by 5.3 percentage points. The recovery of international market prices and China’s increases share in the international market have helped to improve China’s export prices. In order to stabilise external demand, China in 2009 issued a relatively high number of foreign trade support policies governing export credit insurance, export taxes, trade financing, processing trade and clearing of unreasonable charges, and these policies will continue to apply in 2010. Following the outbreak of the financial crisis, however, the consumption patterns of developed countries have changed. The US personal savings ratio has recovered from a negative value to 5 percent, and the European household savings ratio has been also increasing, which will impair demand for China-made products. Trade protectionism is worsening. The US and E.U. have intensified anti-dumping and countervailing investigations against imported Chinese products, and trade friction has increased noticeably. Overall, the global economic recovery will help improve China’s export situation and strong domestic demand will accelerate demand for imports. It is predicted that Chinese exports will grow by approximately 6 percent in 2010, while imports will grow by approximately 11 percent; China is expected to record a foreign trade surplus of approximately USD 190 billion for the year. D. Industrial Production Growth Has Accelerated Slightly In the first half of 2009, China’s business enterprises achieved their goal of “shedding inventory”, and inventories of certain products were even lower than normal. The growth rate for the capital take up by finished goods declined by 11.7 percent, 4.2 percent and –0.8 percent

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in February, May and August respectively. In the next half of 2009, corporate demand to replenish these inventories will increase with the relative recovery of PPI, which will help accelerate industrial growth. Under the combined effect of numerous favourable factors including the continual effect of economic stimulus policies in a number of nations, the gentle recovery of international market demand and the sharp growth of domestic investment and consumption demand, the added value of industrial enterprises above a designated size is expected to rise by approximately 10.3 percent in 2010, slightly higher than in 2009, while heavy industry will grow by approximately 10.7 percent and light industry will grow by approximately 9.5 percent. Affected by the base number and the degressive policy effect, the economy may operate more effectively in the first half than in the second half of the year. The areas benefiting from the economic recovery will expand, and the operational effectiveness of industrial enterprises is expected to continue to improve. E. Price Levels Will Recover in a Gentle Manner In 2010, economic growth will remain lower than the potential growth rate, and total demand will remain insufficient; excess production capacity in certain sectors and a relatively abundant grain inventory will in particular affect the significant recovery of general market price levels. Domestic price inflation is mainly reflected in imported inflation due to the high prices of primary products on international markets. Government initiatives to adjust the prices of public products such as water and oil since the second half of 2009 will also increase the pressure for a rise in the CPI. The base figure for the CPI growth rate in the previous year will also affect price levels. Initial measurements show that this is approximately 1.2 percent due to the carry-over effect to CPI, and approximately 3.6 percent due to that to PPI in 2010. The CPI is predicted to grow by approximately 2.5 percent in 2010; the PPI is meanwhile predicted to grow by approximately 5 percent. IV. Macroeconomic Control Concepts and Relevant Recommendations In order to address the complex and changing domestic and external environments, the government should adhere to a basic policy orientation of stabilising economic growth, implementing structural adjust-

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ments, promoting reform and improving the people’s well-being in 2010; it should also continue to implement a proactive fiscal policy and a moderately loose monetary policy and integrate its goals of stabilising economic growth, adjusting structures and improving the people’s well-being with institutional reform as the major impetus, actively promote adjustments to the demand, industrial and ownership structures as well as structural and institutional adjustments, while stabilising economic growth so as to form a foundation for maintaining continued, stable economic development. A. Basic Policy Orientation Should Be to Stabilise Economic Growth, Adjust Structures, Promote Reform, and Improve the People’s Well-Being The stabilisation of economic growth is the priority target of current macro control initiatives. China’s economic growth remains lower than the long-term potential economic growth, and inflationary pressure is low, so a priority target for macro-economic control should still be to maintain stable, rapid economic growth. Shifting the emphasis from maintaining economic growth to stabilising economic growth is however based on the consideration that there remain numerous sources of instability at home and abroad, and it is necessary to maintain the continuity and stability of macro-economic policy to prevent sharp economic fluctuations. This requires avoid the excessive use of policy to maintain economic growth in the economic recovery process, which will result in excessive investment growth and currency inflation; on the other hand, a second economic decline caused by the lower strength and effectiveness of the policies stimulating economic growth must also be prevented. Structural adjustments are increasingly urgent. As the government investment effect wears off, it will be difficult to solve the issues of excess production capacity, redundant construction, and the advance of the state sector and the retreat of the private sector, as well as achieve a transfer of the growth impetus from policy-stimulated domestic demand growth to spontaneous domestic demand growth, and maintain sustained, stable and rapid macro-economic growth if no adjustments are made to the demand, industry and ownership structures in order to release spontaneous individual consumption and autonomous private investment. Promoting reform is the basic means of achieving restructuring. Current reforms should focus on aspects which encourage an expansion of consumption, industrial restructuring and private enterprise

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and SME development. Reform of resource and factor prices must be pushed forward in order to achieve economic restructuring; the income distribution system must be reformed and the social security system improved in order to expand individual consumption; reform of the management systems of monopoly industries, public services and social development sectors must be intensified in order to more effectively promote the development of private enterprises. Improving the people’s well-being is the fundamental goal of economic development. Macro-economic control policy should focus on improving the people’s well-being, and fiscal expenditure and credit provision should more effectively meet popular demand and increase employment so as to enable the population as a whole to truly enjoy the benefits of economic recovery. It is recommended that the goal of GDP growth be kept at approximately 8 percent in 2010. The CPI rate should be controlled at approximately 3 percent; the increase in the urban employment population should be 9 million, and the urban registered rate of unemployment should be approximately 4.5 percent; the balance of payments should continue to improve. B. Implementing Proactive Fiscal Policy Should Be a Sine Qua Non, and Support Should Be Increased for Improving People’s Livelihood and Adjusting Structures The proactive fiscal policy should be continued in 2010, and the fiscal deficit may still account for approximately 3 percent of the GDP. The increase in fiscal expenditure in 2010 should be lower than that in 2009. These fiscal policy arrangements are proactive and safe. Other than continuing to complete existing public investment projects, the increase in fiscal expenditure should more actively promote the restructuring and improvement of the people’s well-being. Firstly, personal income tax exemptions should be raised by a large margin, and the policies of selling household appliances, cars, and motorcycles to rural areas, providing energy-effective products, exchanging new cars and household appliances with old ones, and tax preferences for purchasing economy cars and purchasing first housing properties for residential use should be maintained; secondly, policies governing additional income tax deductions for research and development expenditure, etc. should be effectively implemented. It is also recommended that a 3–5 year corporate income tax rebate be awarded to small- and middle-sized technology enterprises; thirdly,

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measures such as additional deductions to pre-tax corporate income tax should be applied to corporate investment in energy and conservation and pollutant emissions reductions. The fiscal expenditure structure should be actively adjusted. Increased attention should be paid to restructuring and improving people’s wellbeing, the ongoing enhancement of investment in agriculture, rural workers and rural areas, industrial adjustments, independent innovation, energy conservation and pollutant emissions reductions, income distribution, low-rent housing, and social security. The various financial and taxation support policies determined in the industrial adjustment and revitalisation plan should be implemented, and investment in basic research, significant science and technology projects and key engineering laboratories should be increased. C. Continue to Implement a Moderately Loose Monetary Policy to Improve and Optimise the Credit Structure The monetary policy should be based on a principle of moderation in order to support and depress certain factors and optimise the credit structure, and provide a loose capital supply for continued economic recovery under the premise of providing loans to the real economy. In order to avoid an excessive provision of credit as occurred in the first half of 2009, we recommend that in 2010, the increase in new loans be controlled at approximately RMB 8 trillion, and M2 growth at approximately 19 percent. Bank credit flows should be regulated and certain policy loopholes should be closed so as to prevent banking funds and loans from flowing into the asset markets. Commercial bank loans should be encouraged to favour the real economy and mandatory requirements can be imposed on commercial banks in order to guarantee continued loose credit, and the flow of the majority of loans into the real economy. Commercial banks should be actively encouraged to undertake structural adjustments in terms of their credit provision. While maintaining the reasonable growth of loans for public investment projects, the need for economic recovery to be driven by autonomous market growth instead of government impetus must be resolved. Credit should be provided mostly to sectors that are able to push forward the consumption of private investment, housing and cars. More efforts must be made to provide loans to key regions and the support of regional economic growth points will be used to drive economic development.

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D. Push Forward Reform in Key Sectors in Order to Facilitate Restructuring and Improve the People’s Well-Being Resource pricing reform must be pushed forward. Pricing reform of significant energy resources such as water, electricity and product oils must be actively promoted, and resource pricing mechanism reform further improved to ensure that prices not only reflect market supply and demand for elements, but also the scarcity of resources and environmental protection costs; meanwhile, the fostering of resource market players and construction of a regulatory system must also be pushed forward. Monetary system reform must also move ahead. Firstly, private capital must be allowed to enter the money market in an appropriate manner so as to provide financial services, increase the popularisation of small-loan companies and appropriately increase the leverage percentage of private financial institutions. Secondly, marketisation reform of interest rates and exchange rates must be actively pushed forward. Thirdly, the capital market must be developed, and financing channels expanded. The optimal means of achieving this would be to establish a sound market exit system so as to alter the current counterproductive “entry only, no exit” situation and properly eliminate backward businesses. The market transaction system must be improved, a short-mechanism introduced as soon as possible, and stock index futures rolled out to reduce market risk. Reform of the income distribution mechanism must be accelerated. Firstly, the system of collective consultation for remuneration must be pushed forward, attempts must be made to improve worker compensation and allow national income distribution to favour Chinese citizens. Secondly, reform of pay for performance must be implemented in institutions. Thirdly, rural workers’ incomes must be increased, and reasonable prices of agricultural products maintained. The reform of market access for monopoly industries must be promoted. It is recommended that competition be introduced in monopoly industries such as railways, telecommunications, aviation, the petrochemical industry, public services and social development sectors, unreasonable restrictive industry access systems be removed as soon as possible, and private enterprises encouraged to enter these fields. State-owned capital should withdraw from competitive fields such as real estate.

analysis of china’s economic development trend Table 5.1

China’s Main Economic Indicators: Estimates for 2009–2010 01–08/2009

Indicator

GDP Primary industry Secondary industry Tertiary industry Added value of industrial enterprises above a designated size Light industry Heavy industry Total investment in fixed assets Urban investments in fixed assets Investments in real estate Gross retail sales of consumer goods Exports (USD billion) Imports (USD billon) Foreign trade surplus (USD billion) CPI FPI–industrial products Fiscal income Fiscal expenditure Fiscal deficit M0 (end of period value) M1 (end of period value) M2 (end of period value)

91

2009E

Absolute Growth value ( RMB rate (%) billion)

Absolute value ( RMB billion)

2010E

Growth rate (%)

Absolute value ( RMB billion)

Growth rate (%)

13986.2 1202.5 7007.0 5776.7 –

7.1 3.8 6.6 8.3 8.1

31648.1 3455.3 15089.5 13103.3 –

8.5 3.7 9.0 9.3 10.1

35635.8 3683.5 17285.8 14666.6 –

8.5 3.5 9.1 9.2 10.3

– – 9132.1

8.4 8.0 33.5

– – 22699.0

9.5 10.4 31.7

– – 29735.7

9.5 10.7 31.0

11298.5

33.0

19568.4

32.1

25732.4

31.5

2114.7

14.7

3608.4

18.0

4438.4

23.0

7876.3

15.1

12512.4

15.3

14827.2

18.5

730.7 607.9 122.8

–22.2 –22.7 –19.0

1166.2 9458 220.3

–18.4 –16.5 –25.4

1236.1 1049.9 186.3

6.0 11.0 –15.5

–0.7 –5.3

10.25 10.50

2.5 5.0

7.0 21.3

12.0 12.9

9.88 9.36

–1.2 –6.4

4590.9 3862.5

2.6 22.7

3440.0

9.93 9.47

11.5

6561.0 7571.0 1010.0 3838.1

12.2

7348.0 8548.0 1200.0 4249.5

20040.0

27.7

20590.1

23.9

24135.5

17.2

57670.0

28.5

59621.6

25.5

71024.2

19.1

10.7

Note: Data for GDP, added value for first, secondary and tertiary industries and investments in all sectors are for the first half of the year, whereas the remaining figures are for January–August. GDP and industrial added values are actual growth rates for comparable prices, while other figures are nominal growth rates.

ANALYSIS AND FORECAST OF CHINA’S ECONOMIC SITUATION, 2009–2010* Chen Lei and Li Ying Under the combined impact of the global financial crisis and the nation’s internal economic cycle mechanism, China’s economic growth declined sharply in 2008, and bottomed out in 2009. Important questions include whether the Chinese economy will emerge from recession early against a background of global economic depression, and start to grow in a new economic cycle? What economic trends can be expected in 2010? Will there be a “double dip”? Will the inflation rate return to its normal range? Will inflation appear? Should adjustments be made to the government’s economic stimulus policy orientation? In order to give a comparatively scientific and accurate reply to these major issues, we have performed an analysis and assessment of the current economic cycle trend and climate using the climate index established in the Macro-economic Climate Analytical System as well as dynamic monitoring results from the main economic indices in the Macro-economic Monitoring and Early Warning Signal System, and applied the leading index and a host of econometric models to forecast the country’s main economic indices such as economic growth and prices. Based on these, we put forward our policy recommendations for the government’s future macro-economic control initiatives. I. Assessment and Forecast of the Economic Cycle Trend A. Adjusting the Climate Index System In this article, the internationally popular climate index is used to analyse the economic climate and periodic operations of the economy (growth rate). To ensure that the climate index method reflects the economic climate in a timely and accurate fashion, we applied K–L information * This study has received funding from the Liaoning Province Plan for the Support of Excellence in Institutions of Higher Learning (Approval Number: 2007R17) and the National Social Science Foundation of China (Project Number: 06BJY012).

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content, time difference relevance, and the peak-trough correspondence method to carefully screen and continuously compare each index growth rate series on the basis of a number of macro and monthly industry economic indices.1 These were collected and processed, and the climate index system re-established (see Table 6.1) after making appropriate adjustments to the economic climate coincident index, leading index and lagging index according to the cycle stability of each index and the relative importance of each represented economic activity. Where no change occurred to the composition of the coincident climate index but the weighting of the growth rate of sales revenue (total ) of industrial enterprises was adjusted downwards appropriately as sales revenue was assessed by quarter as of 2007; this resulted in a relative reduction in data timeliness. In addition, although the fluctuation in the gross retail sales of consumer goods has lagged behind industrial added value to a certain extent since 2003, the index has remained a very stable coincident index for most of the time since the 1980s, and it reflects significant consumer market activities. To maintain the continuous comparability of the coincident composite index and its basic accuracy with regard to current economic operation trends, we have continued to use it as a component index of the coincident composite index, and actual results support the rationality of this choice. The leading climate index not only tracks steel production and fertiliser production, whose reserves have a relatively stable storage period and an extended advance period, but also includes two significant industrial production indices, i.e. cement production and vehicle production. Furthermore, the growth rate of stock turnover, which reflects changes in the securities market, has taken on relatively stable leading characteristics since 1998. With its leading characteristics, the index of total exports was somewhat affected by the global financial crisis, but it was retained for the sake of its significance. Besides the existing four relatively stable lagging indices, the lagging index set includes purchasing prices indices for raw materials, fuels and power. Every index is a year-on-year growth rate series, seasonally adjusted, from which irregularity factors have been eliminated. Using the

Source: Zhonggguo jingji xinxiwang hongguan yuedubiao 中国经济信息网宏观 月度库 [China Economic Information Network] (www.cei.gov.cn) monthly macroeconomic database, data current as of September 2009. 1

analysis and forecast of china’s economic situation Table 6.1

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Monthly Climate Index Sets of the Chinese Economy

Leading index set

Coincident index set

1. Growth rate of steel production 2. Growth rate of cement production

1. Growth rate of industrial added value 2. Growth rate of completed investment in fixed assets

3. Growth rate of vehicle production 4. Growth rate of fertiliser production 5. Export growth

3. Growth in sales revenue of industrial enterprises 4. Growth rate of narrow money supply M1 5. Growth rate of gross retail sales of consumer goods

6. Growth rate of stock turnover 7. Consumer price index (inverted)

Lagging index set 1. Growth rate of finished goods inventory 2. Growth rate of average balance of current assets of industrial enterprises 3. Consumer price index 4. Producer price index 5. Purchasing price index of raw materials, fuels, power

National Bureau of Economic Research (NBER) method, we set up respective coincident, leading and lagging composite indices (taking the average value of each index for the year 2000 as 100). B. Use of the Coincident Composite Index to Analyse the Economic Cycle As shown in Figure 6.1 (where shaded portions mark climate descent stages), the coincident composite index, which provides an overall image of economic operations, declined sharply, a rare event over the last two decades, after growing since 1996 and peaking in December 2007, thus ending the rising stage of the economic cycle and starting the descent stage. Following 14 months of consecutive decline, the index bottomed out in February–March 2009, with a trough value lower than the average value of 100 for the year 2000, and the gap between the peak and the trough exceeded 20 index points. The climate index recovered rapidly from April 2009 onwards, and remained in a rising stage in September 2009. Economic operations have thus formed a clear V-shape. Based on the criteria for determining economic cycle fluctuation turning points and the shape of the coincident composite index, we can determine that a short economic cycle emerged from May 2005 to February 2009, with a length of 46 months or almost 4 years in

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120

120 115 115 110 110 105

105

100

100

95

95 90

90

85 1997

1999

2001

2003

2005

2007

2009

Coincident composite index: solid line, left-hand side Lagging composite index: dotted line, right hand side

Figure 6.1

Forecasting the Economic Cycle: Coincident Composite Index and Lagging Composite Index.

length.2 At the same time, this further confirms our assessment made in the spring and autumn of 2008 that the peak which appeared in the fourth quarter of 2007 was not only the peak of this short cycle but also the peak turning point of the current intermediate economic cycle, which started in May 1998. One key question in the current assessment of the economic cycle trend is: Has the descent stage of the current economic cycle, which started in early 2008, wound up? In other words, did the trough turning point of the intermediate economic cycle appear in the first quarter of 2009? Our answer is yes, mainly on the basis of the following: 1. Although our proposed turning point judgment criterion for the descent stage of an intermediate economic cycle is usually no less than 18 months, only 14 months, a slightly insufficient duration, had 2 Based on wavelength and wave amplitude, we performed a definite division of economic fluctuation, short economic cycle and medium economic cycle from the perspective of empirical measurement. See 陈磊、孔宪丽Chen Lei, Kong Xianli, “Zhuanzhedian panbie yu jingji zhouqi podong taishi fenxi 转折点判别与经济周 期波动态势分析 [ Identification of Turning Points and Analysis of Economic Cycle Fluctuation Tendency]”, Shuliang jingji jishu jingji yanjiu 6, (2007).

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elapsed by the time that the current economic shrinkage emerged in February 2009. There were particular reasons for this truncated economic shrinkage period. On the one hand, the outbreak of a oneof-a-kind international financial crisis had a significant impact on China’s economy, and accelerated the economic decline that had been in internal periodic fallback since August 2008; on the other hand, the government’s timely response to the international financial crisis and its implementation of the extraordinary economic stimulus plans caused the descent stage to terminate prematurely. The two factors caused the climate shrinkage to become characterised by a large gap and short time span. 2. Quarterly GDP growth continued to decline for seven consecutive quarters after reaching a peak of 13.7 percent in the second quarter of 2007, dropping to 6.1 percent in the first quarter of 2009, the lowest single season growth rate since 1996, and the declining amplitude exceeded 55 percent. Therefore, the index measurement results prove that the descent situation of the intermediate economic cycle is worth examining. 3. Figure 6.1 shows that the lagging composite index has been developing improved lagging characteristics since 1997, both in terms of its cycle turning point and fluctuation spread. This index reached a peak since 1997 in June 2008, six months behind the coincident composite index. Thereafter, the index fell back sharply, offsetting growth since 1999 in less than one year. By September 2009, the index was lower than the trough of 1999, forming a more evident intermediate cycle shape than the coincident index. The index then started to decelerate its decline from July onwards. In fact, the CPI, PPI, and the growth rate of the average balance of current assets of industrial enterprises stabilised in August and September. The index will probably bottom out in August–September. We can thus further confirm that the trough turning point of the intermediate economic cycle has appeared. 4. If the climate decline has yet to finish, this means that economic growth will reverse, to decline to a trough turning point in the next one-two years. As a result of the government’s extraordinary policy of expansion and the forceful trend of economic recovery, however, it is unlikely that a second, deeper bottom will occur, and the government is equally unwilling to witness such a situation. China has seen two 8–9 year intermediate economic cycles since the start of the reform and opening up process to 1999, measured either in terms of annual economic growth or monthly climate

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fluctuation.3 According to the above assessment of the economic cycle trend, the third intermediate economic cycle since the start of reform and opening up, started in May 1998 and ended in February 2009, lasting 130 months or almost 11 years. This cycle is obviously longer than the previous two intermediate economic cycles, and its rising period recorded a record high of 116 months. The intermediate economic cycle as a whole contains three differently shaped short cycles 43 months, 41 months and 46 months long respectively, which all conform to the features of the Kitchin cycle. The international financial crisis resulted in a sharp decline during the contraction stage of this intermediate cycle. As a result of the impact of the government’s timely economic stimulus plan package, the contraction trough of this cycle was higher than those in 1998 and 2001, thus preventing the huge losses caused by a sharp economic decline. The Chinese economy started to enter the expansion period of a new economic cycle in the second quarter of 2009. C. Forecasting the Economic Operations Trend by Using the Leading Composite Index and the Diffusion Index Figure 6.2 shows that the leading composite index that reflects climate trends in advance has better leading features as a whole, but its leading time for cycle turning points is relatively unstable. After nearly two years of straight-line, sharp decline, the index bottomed out in October–November 2008, the deepest trough since 1996, four months ahead of the trough turning point of the coincident composite index, thus forming an intermediate cycle of almost 11 years. The leading composite index embanked on the forceful rising stage of a new cycle in December 2008, exceeded the index axis line in June 2009, and has since started an accelerating climb. By September, it had recovered to the average level for 2006 before the sharp decline. It therefore only took ten months to almost recover fully. We also used the indices in Table 6.1 to establish the coincident diffusion index and the leading diffusion index (see Figure 6.3). The coincident diffusion index (diffusion index, or DI for short) is the number For specific measurement results, see 陈磊 Chen Lei, Zhongguo jingji zhouqi podongde ceding he lilun yanjiu 中国经济周期波动的测定和理论研究 [Measuring and Theoretical Research of Periodic Fluctuations of Chinese Economy], Dongbei Caijing Daxue chubanshe (October 2005). 3

analysis and forecast of china’s economic situation 120

99 112

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110 104 105 100 100 96

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90

1997

1999

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2009

Coincident composite index: solid line, left-hand side Lagging composite index: dotted line, right-hand side

Figure 6.2 Forecasting the Economic Operations Trend: Leading Composite Index and Diffusion Index.

of expansionary indices to the number of all indices of the index set. If the index value is higher than 50 percent, this means that the recovery of economic activities is represented by over half of the indices. An index rise above the 50 percent figure means that the economy has bottomed out, and the economic cycle will start an ascent stage. According to the climate analysis theory and the results of actual longterm surveys, the diffusion index is usually approximately half a year ahead of the corresponding composite index. Figure 6.3 (the indices in the Figure are a series of five items after weighted moving averaging) shows that the coincident diffusion index rose through the 50 percent line in April 2009, and reached 80 percent in August–September, indicating a coincident index in the ascent stage and a climate in the expansion stage after bottoming out in March– April. The leading diffusion index after moving averaging climbed to a peak in May 2009 and started to decline in June after a rise period of approximately one year. We can therefore infer that the leading composite index may complete its uptrend in the fourth quarter of 2009 and begin a descent stage. The climate expansion indicated by the coincident composite index may then end in the first half of 2010.

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60 50% 40

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0 1997

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Coincident diffusion index: solid line; Leading diffusion index: dotted line

Figure 6.3 Forecasting the Economic Operations Trend: Coincident Diffusion Index and Leading Diffusion Index.

A further review of the changes in the leading index shows that there is a certain differentiation in the trends of the seven indices in the second half of 2009. Under the influence of the government’s active economic policy, the growth of the upstream product yield of steel and cement continued a strong recovery starting in the fourth quarter of 2008. Excluding seasonal and irregular factors, cement production growth even registered a new record high since 1996 in September 2009. The car market began to warm up again at the start of 2009 and became active in the mid-year. By August 2009, year-on-year growth in vehicle production reached as high as 90 percent, a record high, but this growth rate then fell back to 79 percent in September. After a sharp recovery, however, the growth in fertiliser production appeared to drop in the second half of 2009. Furthermore, China’s exports continued to see negative growth from the fourth quarter of 2008 onwards due to the impact of the international financial crisis, but appeared to stop declining and stabilise. The government has recently promulgated measures to control the overall production of the high energy consumption and polluting industries such as iron and steel and cement, as well as to inhibit overcapacity. If we add the impact of market constraints and changes in the base figures for the preceding year, we believe that the growth in upstream product yield and vehicle production will turn to decline at the start of 2010 at the latest.

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II. Analysis of Current Climate Conditions Long-term experience has proven that the Macro-economic Monitoring and Early Warning System, comprising ten warning indices (see Figure 6.5 for a list of index names) is an effective tool for assessing and analysing the economic climate.4 Figure 6.4 shows that the warning composite index and coincident composite index have similar trends. These indices took on a sharp decline trend in 2008, and entered the “cooling” light blue lamp section in October of that year. Timely government measures to maintain economic growth prevented the economy from declining further and entering the “cold” blue lamp section. The warning index recovered sharply from May 2009 onwards, and returned to the green lamp section in July. This reached 55 in September in the centre of the green lamp section, indicating a remarkable improvement in the economic climate, and the macro economy has since returned to an area of moderate operation. The impact of the international financial crisis and macro-control measures timely promulgated by the government created a number of special features in the decline and recovery of this economic climate, and several major warning indices recorded very different trends. We used the warning index sign figure (see Figure 6.5) to analyse the changing features and trends of the major climate indices. A. Industrial Production Emerged Rapidly from a “Cold” Winter to Enter the “Normal” Area After recording the sharpest decline for which statistical data are available in 2008, the growth rate of industrial added value bottomed out in January-February 2009, entering the “cold” climate section with the natural winter. Industrial production took on a relatively strong recovering trend in March 2009 and exited the “cold” section in May to issue a “normal” green lamp sign, indicating that industrial production had shaken loose the adverse impact of the financial crisis and entered a section of moderate growth. Another significant climate index—the power output growth rate— saw a similar trend to the growth rate of industrial added value. This

4 According to the changes and development trend of the growth of gross retail sales of consumer goods, we properly adjust up the warning limit of this index in different climate sections.

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100

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0 Note:

1996

1998

Overheating

Figure 6.4

2000 Warming

2002

2004 Normal

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Cooling

Cold

Monthly Climate Trend Composite Index.

started to recover rapidly in the second quarter, and took only two months (August–September 2009) to return from the “cold” section to the “normal” section. The growth rate of industrial enterprise sales revenue (excluding seasonal and irregular factors) recorded a “cold” blue lamp signal in February 2009 after a sharp decline to a record low since 1996. With the recovery of industrial production, however, this index bottomed out in May and returned to positive growth in August. This index includes cumulative growth statistics, meaning that its growth rate is relatively slow, and it is predicted to exit the “cold” section in the fourth quarter. B. “Overheating” Re-Emerges in Investment in Fixed Assets In contrast to the industrial production trend, the growth rate of urban investment in fixed assets remained around 27 percent in 2008. Affected by the government’s active fiscal policy, this index started to rise in March 2009 and issued a red early warning signal in May after excluding seasonal and irregular factors, indicating a new “overheating” state in investment, but this then slowed down in the third quarter.

analysis and forecast of china’s economic situation 2008 10 11 12 1

Indices

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1. Growth rate of outstanding loans and financial institutions 2. Growth of power generation—current month 3. Growth rate of completed investment in fixed assets—total 4. Growth rate of industrial added value—current month 5. Growth rate of fiscal revenue 6. CPI (last year = 100) 7. Growth rate of imports and exports (excl. Spring Festival) 8. Growth rate of gross retail sales of consumer goods 9. Growth in product sales revenue of industrial enterprises 10. Growth rate of M1 supply Overall evaluation 34 33 36 33 30 30 28 35 39 45 47 55 Note:

Figure 6.5

Overheating

Warming

Normal

Cooling

Early Warning System Symbols.

C. The Consumer Market Maintains Moderate, Stable Growth after Cooling Affected by price drops and the international financial crisis, growth in retail sales of consumer goods declined sharply from October 2008 onwards, from “overheating” to “normal”. By 2009, this fluctuated smoothly at approximately 15 percent in the upper segment of the green lamp section. Government policy of promoting domestic demand and maintaining economic growth had increased consumer confidence to a certain extent, and promoted steady consumption growth. D. Foreign Trade Tends to Rise in the “Cold” Section after Being Deeply Affected As China is highly dependent on foreign trade, the international financial crisis had an imposed unprecedented impact on the country’s import and export trade. China’s import and export growth entered negative growth, registering “cold” signal as of November 2008, forming a trough with the lowest growth rate since 1996. By 2009, growth in total imports and exports stabilised at its bottom range and tended to recover in the second half of the year, with more obvious evidence of recovery in imports. E. The Money Supply and Loans Grow Excessively, both “Overheating” M1 supply growth, reflecting the operating liveliness of enterprises (excluding seasonal and irregular factors) entered the “cold” blue lamp

Cold

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section in September 2008 after a year’s sharp decline, and registered a new post-1996 low. Thereafter, the index entered a new rising cycle in 2009, as we forecasted in the autumn of 2006, rising sharply under the influence of the loose monetary policy from “cold” at the beginning of the year to “overheating” in June. M1 growth reached 29.5 percent at the end of September 2009, an increase of 22.8 percentage points over the figure at the end of January, the highest rate since 1996. Broad money M2 also entered a rapidly rising cycle in 2009 with a rate of 29.3 percent in September, boasting record levels since 1996. It should be noted that M1 exceeded M2 in year-on-year growth in September, forming a “scissor difference”, indicating that the economy is now fully active. In a similar way to the money supply, financial institutions’ RMB credit experienced extraordinarily rapid growth in 2009 and entered the “overheating” red-lamp section in January under the influence of the government’s expansionary fiscal policy and monetary policy. This recorded growth rates of approximately 34 percent from June to September, far higher than the peak values of the economic cycles in 1996 and 2003, but this loan growth trend has since slowed slightly. F. Growth in Fiscal Revenue Recovered Rapidly, Passing through the “Normal” Section to “Overheating” Driven by the recovery of the economic climate, national fiscal revenue (excluding seasonal and irregular factors), following an unusually sharp decline, recovered in 2009 by returning to the “normal” section in July–August, and even triggering a red lamp signal when it entered the “overheating” section in September. It is not hard to discern from the above measurement and analysis results that the extraordinary fluctuations in industrial production, exports and money supply growth were the major factors accounting for the rapid decline and recovery of the climate since 2008, while investment growth and consumption growth, which exhibited relatively fewer fluctuations, to a certain extent protected the economy from sharp fluctuations. With the recovery in the sales revenue of manufactured products, CPI and total imports and exports, it is forecast that the early warning composite index will probable continue its uptrend and flatten in the green lamp section, and the economy will hopefully remain in the “normal” section in the fourth quarter of 2009 and the first half of 2010.

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III. Forecast of Main Macro-Economic Indices We used a number of econometric models to forecast the changing trend in the major macro-economic indices so as to gain an understanding of the economic growth trend and provide reference information to assist the government in its implementation of macro control initiatives. The various index forecasts are listed in Table 6.1. A. Industrial Production Growth May End Its Recovery Trend in the First Quarter of 2010 According to the model predictions, the recovery trend of industrial production growth will hopefully last until the first quarter of 2010, and may then start or enter a declining corrective phase in the second quarter of 2010. It is predicted that the growth rate of industries above a designated size will be approximately 10.6 percent in 2009, a fall of 2.3 percentage points or 18 percent over the previous year. Annual growth for 2010 will hopefully reach approximately 14 percent, taking on a rapid recovery trend. Table 6.2

Forecast of Major Macro-Economic Indices

Index (Unit: %) GDP growth rate (comparable price) Growth rate of the industrial added value (comparable price) Growth rate of urban investments in fixed assets Growth rate of retail sales of consumer goods Growth rate of total exports Growth rate of total imports Growth rate of M1 Growth rate of M2 Growth rate of gross loans in RMB from financial institutions CPI growth rate PPI growth rate Note: All data are year-on-year growth rates.

Q4/ 2009

Full Year 2009

Q1/ 2010

Q2/ 2010

Full Year 2010

10.4 15.4

8.5 10.6

10.7 16

9.7 14.5

9.8 14

32.5

32.5

30

29

27

16.2

15.5

17.5

18.3

18.5

–4 20 29.6 27.8 33

–17 –11 29.6 27.8 33

24 55 26.5 25.5 28

27 31 22 22.3 24

22 29 16 17 19

0.3 –4

–0.7 –5.9

1.6 –0.5

2.6 1.8

2.9 2.5

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B. Investment in Fixed Assets Will Maintain High Speed Growth, but the Growth Rate Will Tend to Decline in a Steady Manner at a High Level Driven by the government’s policy of maintaining economic growth, investment in fixed assets will maintain a higher growth rate following its relatively rapid recovery. Urban investment in fixed assets and total investment in fixed assets throughout 2009 will both reach a figure of approximately 32.5 percent, an increase of 6.4 percentage points and 7 percentage points over the previous year respectively, exceeding the peak value for the last investment cycle of 27.7 percent in 2003. In terms of quarterly trends, investment growth may fall back gradually from the fourth quarter of 2009 onwards into 2010 because of the end of the government-led investment peak and the high base numbers of 2009. It is predicted that urban investment in fixed assets throughout 2010 will grow by approximately 27 percent. Due to a possible recovery in investment goods prices in 2010, real investment growth may fall back more sharply. Since the second quarter of 2009, the real estate market has rapidly shaken off the recession rapidly, with real estate development investment increasing by 12.5 percent and 30.5 percent in the second and third quarters respectively. Real estate development investment growth has entered a new rising cycle, which will push forward the growth of private investment to a certain extent. C. Nominal Consumption is Growing in a Stable Manner and Actual Consumption Will Further Facilitate Economic Growth With the further inclination of the policy of maintaining economic growth and promoting domestic demand to expand consumption and the gradual recovery of price levels, growth in the retail sales of consumer goods will recover slowly from its basic stable status in the first three quarters of 2009. It is predicted that retail sales of consumer goods will grow by approximately 15.5 percent in 2009, a fall of 6.1 percentage points over 2008, while nominal growth will decline remarkably. Allowing for price rises, real growth will hopefully reach approximately 16.9 percent, a rise of 2.1 percentage points over 2008, reflecting the increased boost effect of consumption on the economy. Growth in retail sales of consumer goods will continue to recover in 2010, with an annual nominal growth rate of approximately 18.5 percent and real annual growth at almost the same level as that for 2009.

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D. Reinvigorated Foreign Trade Growth Will Rebound and the Total Foreign Trade Volume Will Return to the “Normal” Section in 2010 Severely affected by the global financial crisis, exports for 2009 as a whole are predicted to be approximately USD 1.1860 trillion, a fall of 17 percent over the previous year, marking the lowest growth since the start of reform and opening up. The growth rate will drop by 34.3 percentage points over 2008, an almosts two-fold reduction. In the third quarter of 2009, the global economy seemed to recover. In August, the leading index of the Organisation of Economic Cooperation and Development (OECD) rose by 1.5 percentage points over July, marking a recovery of six consecutive months. If the global economy has embarked on recovery and growth, China’s reinvigorated foreign trade export growth will rebound significantly from the fourth quarter of 2009 onwards, and the amplitude of decline will hopefully shrink in the fourth quarter. Affected by the previous year’s relatively low base number, China’s export growth in the first half of 2010 may rebound strongly to 26 percent and then decline to approximately 19 percent in the second half, with annual growth of approximately 22 percent or USD 1.4450 trillion. Driven by the strong recovery in domestic demand, import growth started to rebound strongly after bottoming out in the first quarter of 2009. Affected by the preceding year’s relatively low base number, import growth will hopefully turn positive in the fourth quarter of 2009, and reach approximately 20 percent. Annual imports for 2009 were however a mere USD 1 trillion, a fall of approximately 12 percent over the preceding year, its lowest level since 1983; the growth rate in 2009 will be 30.5 percentage points lower than that in 2008, a fall of nearly 165 percent. It is predicted that import growth may recover to a peak of 55 percent in the first quarter of 2010 and then decline over the quarter; annual import will be approximately USD 1.2870 trillion, growing by approximately 29 percent. According to the predictions above, the growth in the total import and export volume will return to the “normal” green lamp section in 2010; the growth rate will be relatively moderate, but the year will still see significant fluctuations. The foreign trade surplus in 2009 will be USD 186 billion, a decrease of almost USD 110 billion or 37 percent over 2008. The foreign trade surplus in 2010 will be USD 158 billion, a decrease of USD 28 billion or 15 percent over 2009.

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E. The Money Supply and Credit Supply Will Turn to Decline in 2010 after Extraordinary Growth, but the Capital Environment Will Remain Moderately Loose According to predictions, money supply M1 will end its growth uptrend in the fourth quarter of 2009 and climb to a peak of 29.6 percent by year-end, registering the highest growth since 1996; the growth rate will be 20.5 percentage points, or three times higher than that for 2008. This index will enter a periodic contraction phase in 2010 or fall back sharply as currency liquidity wears off. It may decline to approximately 22 percent by the end of June and hopefully enter the “normal” green lamp section in the end of the third quarter, and then grow by approximately 16 percent by the end of the year, positioned in the moderate segment of the green lamp section. Broad money M2 growth will enter the descent stage of this money cycle in the fourth quarter of 2009, with year-end growth reaching approximately 27.8 percent, an increase of 10 percentage points over the previous year, marking the highest growth amplitude since 1996. M2 growth will fall by the quarter in 2010. This may decline to approximately 22.3 percent by the end of June and annual growth may be 17 percent, slightly higher than M1 growth. The money aggregate will be higher than the sum of the economic growth rate and CPI growth rate, indicating that the money supply remains in a moderately loose range, albeit somewhat tighter than the preceding year. Similar with broad money M2, total credit growth wandered for four-five months at an unusual historical high level and turned with the contraction phase of the credit cycle in the fourth quarter of 2009. It is predicted that outstanding RMB loans of financial institutions will reach RMB 40.3400 trillion by the end of 2009, increasing by approximately 33 percent, marking the highest growth since 1986, an increase of 14.2 percentage points or 75 percent over the last year. New loans for the year will be approximately RMB 10 trillion, an all-time record. Loan growth will fall back rapidly in 2010, and will hopefully leave the “overheating” section in the fourth quarter. By year-end, this will reach approximately 19 percent, and the balance will exceed RMB 48 trillion, remaining in the “warming” section. Annual new loans will reach approximately RMB 7.6650 trillion, a drop of approximately 23 percent over 2009.

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F. The Economic Growth Rate Will Be Approximately 8.5 Percent in 2009 and 9.8 Percent in 2010 The GDP quarterly growth rate will take on a continual and rapid recovering trend after bottoming out at 6.1 percent in the first quarter of 2009. This reached 8.9 percent in the third quarter, approaching pre-financial crisis levels, thus forming a relatively obvious V-shape. It is predicted that GDP growth will be approximately 10.4 percent in the fourth quarter and 8.5 percent for 2009 as a whole, which is almost equivalent to the figure for the year 2000, 0.5 percentage points lower than that for 2008, but higher than the basis line target for maintaining economic growth. Measured in terms of annual growth rate, the years 2008–2009 marked the contraction period of the economic cycle which got underway in 2000; following the decline in these two years, the GDP growth rate is 4.5 percentage points lower than the peak value of 13 percent in 2007, a rate of decline of 35 percent. Combining the analysis of economic operation trends, predictions for industrial added value and other indices, economic growth will continue into at least the first quarter of 2010 in the new economic cycle, and may then decline by a small margin; this may be initially higher and lower at later stages throughout 2010, but this will be an undulating rise instead of a double-dip. GDP growth will hopefully reach 9.8 percent in 2010, more than one percentage point higher than that for 2009, starting the expansion stage of a new economic cycle at a relatively high speed. IV. Analysis and Forecast of Price Tendency A. CPI Will Eliminate Negative Growth in the Fourth Quarter and Start to Rise in a New Cycle The consumer price index (CPI) started a downward phase after reaching a peak of 8.7 percent in February 2008. After a sharp decline over twelve months, it entered negative growth in February 2009. Excluding quarterly and irregular factors, this index issued “cooling” and “cold” signals in February and April respectively, indicating the appearance of China’s second deflationary period in the 21st century.

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2009

Notes: Coincident composite index: solid line, left-hand side; CPI: short dashed line, right-hand side, seasonally adjusted; PPI: long dashed line, right-hand side, seasonally adjusted.

Figure 6.6

Price Tendency: Comparison of Coincident Composite Index, CPI, and PPI.

Five months before the CPI began to decline, PPI had started to fall back and took the lead to turn negative in December 2008; its year-onyear negative gap continued to expand in the subsequent nine months; PPI decreased by 8.2 percent year-on-year in July 2009, marking the lowest monthly growth since 1991. The PPI year-on-year rate of decline shrank between August and September, indicating a recovery trend. As the price index lags behind the climate coincident composite index steadily by approximately half a year (see Figure 6.6), and the coincident composite index bottomed out in February 2009, together with the weakening of the negative “carryover” factor, and the impetus of the price rises in housing and petroleum, the CPI will hopefully exit this contraction phase and turn positive in the fourth quarter of 2009, thus starting the rising phase of a new price inflation cycle. The annual CPI rate is predicted to be –0.7 percent in 2009, a sharp drop of 6.6 percentage points over the preceding year. Prices are predicted to rise in 2010 at a rate of almost 4 percent in the fourth quarter and an annual rate of approximately 2.9 percent, which is a moderate figure. There is unlikely to be obvious inflation, but inflationary pressure will increase remarkably.

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24

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20 16

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12

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8 4

0 0 –4

–10

–8 1997

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2009

Figure 6.7 Comparison of CPI (solid line) and Food CPI (dotted line).

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2009

Figure 6.8 Comparison of CPI (solid line) and Urban Grain Retail Price Index (dotted line).

With the economic recovery and increasing domestic and external demand, the PPI is predicted to bottom out in the fourth quarter of 2009. Due to the slowing growth of government-led investment in fixed assets, weak increase in private investment, no fundamental change in the sharp recession in upstream demand in foreign trade, and overcapacity in certain sectors, PPI recovery may be slower than that in previous cycles, and a return to positive levels will be difficult in the short term. The PPI rate is predicted to be –5.9 percent in 2009 before turning positive in the first quarter of 2010, with annual growth of approximately 2.5 percent. This is a significant rise but overall growth will remain moderate. B. Food and Grain Prices Will Not Impose Obvious Pressure on Inflation over the Short Term, but Their Long-Term Effect Deserves Attention Food commodities have a maximum weighting in China’s CPI commodity composition, accounting for approximately one-third of the total. In the foods category, pork accounts for a significant percentage. In the second half of 2009, food prices tended to rise while the economy started to show evidence of recovery, which even triggered popular concern over a second bout of inflation. Figure 6.7 shows that CPI changes are closely related to food prices. Since 1996, food consumption prices have changed more sharply than CPI, and these generally lead CPI in intersecting with the 0 line. Care must however be taken, as the contraction degree of food

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prices was weaker than CPI with a relatively stable change in 2009, indicating that this inflation may not be caused by food price fluctuations. Affected by seasonal factors, meat and egg prices rose during July– September, which can be regulated automatically through market supply and demand. Another cause for the relative rise in pork prices is that China has implemented pork purchase and storage measures to protect agricultural workers’ interests, but these measures have had limited effect, and year-on-year prices of meat and poultry products remain in negative growth. Changes in meat and egg prices are not the result of unbalanced supply and demand, and will not generate short-term inflationary pressure. Figure 6.8 shows that all previous sharp inflationary spikes were coupled with rises in grain prices, and that the fluctuation spread of grain prices far exceeds CPI fluctuations. Increases in grain prices are directly conducted to CPI via the commodity markets, as well as to other agricultural production areas through agricultural production material prices such as feed prices, and eventually have an effect on the consumer market. Furthermore, with the development of regenerative energy, grain prices will affect the prices of upstream raw materials, and be conducted via the industry chain to the prices of final consumer goods. Grain prices have therefore become another focal point. It is worth mentioning that urban grain retail prices did not display the usual severe fluctuations during this price decline, reflecting a steady price growth trend. Certain areas of China suffered from drought in 2009, but increased grain harvests maintained a good trend, and yields will hopefully increase for the sixth consecutive year. China’s grain market now has a basic balance of supply and demand. Even where there are partial and transitory rises in grain prices, no inflation will appear so long as the rising amplitude is within acceptable levels, and this will make it easier to guarantee increases in agricultural workers’ income. Food and grain prices will not generate inflationary pressure over the short term, but their long-term effect still requires close scrutiny by the government and society as China is confronting another birth peak, an increase in global climate disasters and aggravated price fluctuations of grain on the international markets. C. VAR Model Analysis of Economic Climate and Price Fluctuations To analyse the effect of economic climate change on prices, we established a vector auto-regression (VAR) model comprising three

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.6

1.6 1.2

.4

0.8 .2 0.4 0.0

.0

–0.4 –.2 –0.8 –.4

–1.2 5

10

15

20

25

30

Figure 6.9a PPI Impulse Response Function to Economic Climate Impact.

5

10

15

20

25

Figure 6.9b CPI Impulse Response Function to Economic Climate Impact.

variables—the coincident composite index, CPI and PPI—and used a specimen interval of January 2000 to August 2009.5 The ADF and PP tests proved that the three variants are all single-order integration series. The Johansen test showed that there are notable cointegration relationships among the three variants, allowing us to establish the VAR model. According to the information criterion, we selected a four-phase model lag time. The characteristic roots of this equation are all in a unit circle, and residual values are all stationary series free of unit roots, all of which have passed LM tests and residual value normality tests, indicating that the equation is stable and conforms to the requirements for economic measurement, so that it can be adopted for analysis and forecasting. The generalised impulse response function was used in this paper to analyse the dynamic effect of the macro economy on price trends. Impulse response function (Figures 9a and 9b) shows that the economic climate has a relatively long-term positive shock effect, but the degrees of its effect are different. Specifically, seven phases of unit impact on the climate index will lead to a change of approximately 0.6 units of PPI, changes of this kind basically being restricted to the 14th phase, and this then declines gradually until it turns negative in the 25th phase. The effect of the climate index on CPI, however, is less than half of its effect on PPI. This leads to a change of approximately 0.15 units of PPI after seven phases, and this change reaches a peak of about 0.29 in the 12th phase, and then declines slowly, always retaining 5

30

CPI and PPI series use TC series excluding seasonal and irregular factors.

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a positive value in the observed 30 phases. This reflects the conduction of prices via economic operations to a certain degree, namely, domestic demand incurred by economic growth firstly leads to a considerable rise in PPI and then extends to the lagging and slight rise of CPI, while CPI needs a longer time to offset this effect than PPI. The short-term price forecast results concluded via the VAR model is in substantial agreement with the previous forecast results. IV. Final Conclusion and Policy Recommendations The preceding analysis and forecast results show that the third intermediate economic cycle since the start of the reform and opening up period ended in the first quarter of 2009 after an unusually rapid and severe contraction. Affected by the government’s extraordinary expansion policy, the Chinese economy began the expansion phase of a new economic cycle in the second quarter of 2009, thus forming a V-shape economic operation trend. GDP growth will return to a moderate growth range of 9–10 percent in the second half of 2009 and reach an annual rate of 8.5 percent, thus achieving the predetermined target of maintaining economic growth. Economic growth may reach 9.8 percent for 2010 as a whole, with a relatively strong annual recovery trend, but quarterly GDP growth may fall back gradually, forming a trend of low growth after high growth. The economic growth rate for 2011 may be lower than that for 2010, but there is little possibility of this falling back to levels lower than 8.5 percent to form a second bottom. CPI left the deflation section in the fourth quarter of 2009 and started to rise in a new inflation cycle. CPI growth is predicted to reach 2.9 percent in 2010, a moderate figure; there will be no obvious inflation, but inflationary pressure will increase markedly. Based on the aforementioned economic and price trend predictions, and taking into account the long-term objective of maintaining economic development in a harmonious and sustainable manner, we advise the government to enhance its policy of promoting domestic demand and structural adjustments in order to accelerate the transition of development patterns and restructuring, and improve sustainable development capacity while achieving the goal of maintaining economic growth. While maintaining policy continuity, the government should pay attention to increasing the predictability and flexibility of macro-economic control, consider moderating its expansionary

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economic policy and fine-tune policy at appropriate times; inflation should be prevented while maintaining rapid economic growth, and steady economic growth within a moderate range should be aimed for. A. Monetary Policy Should Be Flexible and Moderate to Strengthen Credit Guidance and Prevent Bad Loans Economic growth has recovered forcefully, but its dominant impetus comes from inventory adjustments as well as government economic stimulus policies, due to insufficient social investment. SMEs and private enterprises remain in troubled waters, and there is no solid internal impetus for economic growth. Expansionary monetary policy and fiscal policy should therefore be maintained in order to stabilise the basis for economic recovery. The extraordinary loose monetary policy over the past year has however resulted in excessively rapid credit and money supply, and a high number of loans have passed into the real estate and stock markets. The real economy, particularly SMEs, have not reaped the full benefits of these. The central bank should therefore make fine adjustments to the policy at appropriate times in order to control the money and total credit growth rates in an effort to ensure that monetary policy remains “moderate” in the truest sense. Furthermore, marketisation means should be employed to promote moderate, balanced credit growth, urge banks to issue credit to industries and sectors, particularly SMEs, in an effort to expand domestic demand, and improve economic growth quality and structural optimisation. Financial regulation should additionally be further enhanced to prevent bad loans. B. Standardised Institutional Reform of the Real Estate Market Must Be Strengthened to Prevent a Re-Emergence of Real Estate Bubbles. The Bursting of the US Real Estate Bubble, Which Is Closely Connected to the Global Financial Crisis, Has Provided a Further Warning The bursting of the US real estate bubble, which is closely connected to the global financial crisis, has provided us with a further warning. The marketisation China’s housing is a good choice, but high housing prices incurred by excessive housing marketisation not only result in an excessively rapid rise in individual housing expenditure, thus squeezing their other consumption items, which leads to a decreasing share of consumption in economic growth and an increasingly unbalanced

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economic structure, as well as to an imbalance of benefits related to wealth distribution, which is related to the well-being of the man on the street. The government should pay close attention to the extensive issues which exist in the development of the real estate market, ensure that they have a full understanding that “housing prices established on the basis of their affordability to the vast majority of the population is the only foundation for the continued, stable development of China’s real estate market, and start to adjust and reform existing housing policies and systems.6 The government should adopt effective measures for the timely regulation of the real estate market in order to prevent housing prices from soaring and the danger of bubbles in the market so as to maintain stable economic development. C. Reform of the Income Distribution System Must Be Furthered in Order to Increase People’s Income and Raise the Percentage of Consumption in Domestic Demand The key to expanding domestic demand is to stimulate consumption, and increases in popular income will essentially provide the driving force for consumption. The international financial crisis has had a critical impact on China’s employment and income growth. With rising price inflation, the issue of how to increase popular income will see marked development. The government must accelerate its reform of the income distribution system so as to increase the percentage of labour remuneration in primary distribution. In particular, a wide range of methods should be adopted to increase the income of urban low-income individuals and agricultural workers so as to reduce the income differential of different groups. This will not only facilitate the expansion of individual consumption, but also increase the percentage of consumption in domestic demand. This is furthermore related to the nation’s basic goals of social stability and national development. Meanwhile, the government should continue to strengthen the reform of basic social security systems covering medical treatment and insurance so as to eliminate popular concern over the uncertainty of future income, thus forming a consumption-led economic growth pattern.

6 易宪容 Yi Xianrong: “Fangdichan shichang huojinru xinde shousuo zhouqi 房地 产市场或进入新的收缩周期 [The Real Estate Market May Enter a New Contraction Cycle]”, www.drcnet.com.cn, October 12, 2009.

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D. Policy Support for Foreign Trade Enterprises Should Continue in Order to Promote An Improvement in Export Conditions Over one-third of the driving force driving the high-speed growth of China’s economy in the past few years came from exports, particularly exports to western developed countries, and exports remain a key factor promoting economic growth. Affected by the international financial crisis, the annual export rate is predicted to fall by approximately 17 percent in 2009. The world’s major economies have shown evidence of recovery, but major uncertainty still exits in the external economic environment. The government should therefore provide more vigorous policy support for foreign trade enterprises in order to properly promote exports. On the other hand, the government should also attempt to avoid trade friction such as the Tyre Special Protection Case causing a chain reaction in the world’s major economies. China should also support export-oriented enterprises to transform into internal-oriented businesses, seeking and exploiting domestic market demand, and reduce the excessive dependence of our country’s economic growth pattern on external demand. E. The “Low Carbon Economy” Development Trend Should Be Sustained So As to Continually Push Forward Energy Conservation and Pollutant Emission Reductions In the summer World Economy Forum convened in Dalian in September 2009, the low carbon economy was a major discussion topic, and should receive a strong government emphasis. Against a background of severe fluctuations in international energy prices due to the influence of a wide range of uncertain factors, improving China’s energy self-sufficiency and utilisation rate, reducing energy consumption per unit of GDP, and reducing pollutant emissions can not only help to avoid the impact of international energy price fluctuations on China’s energy, but also promote the continuation of the low carbon economy development trend and promote the green and sustainable development of the Chinese economy.

CURRENT ECONOMIC TRENDS AND MACRO CONTROL POLICY ORIENTATION FOR 2010 Zheng Xinli In 2009, China’s economy took the lead in recovering from the global financial crisis, and the nation’s macro-economic control system underwent a critical test. Against a background of a sharp decline in exports, the implementation of the economic stimulus policy to expand domestic demand achieved month-on-month economic recovery. Annual GDP growth is predicted to exceed 8 percent, thus ensuring that the macro-economic control target determined at the beginning of the year is achieved. Exports for January–September declined by 21.3 percent compared to the preceding year. Compared with the annual rate of approximately 20 percent achieved over recent years, the export fluctuation spread exceeded 40 percent. The effect of the sharp decline in exports on total demand is equivalent to approximately 13 percent of total GDP. In order to address the harsh economic situation, the government increased financial investment to drive a substantial increase in bank loans, which facilitated the stabilisation of the national economy, thus achieving the goals of maintaining economic growth, popular well-being and social stability. A summary of this year’s economic operation and macro control achievements will include two areas of particular value. The first is that China’s effective ability to respond to international risks has been fully proven, while the second is these achievements reflect well on the Chinese government’s ability to regulate the macro economy and organise the implementation of the necessary measures, something which any other country has found it hard to achieve. Meanwhile, it should be noted that the substantial growth in investment has resulted in an obvious negative effect and caused a degree of structural deterioration in certain areas. The first is the structural deterioration of consumption and investment. Due to the requirement to change the development mode, the role of consumption in driving economic growth will be altered, the investment rate reduced and the consumption rate increased appropriately. This year, total investment in fixed assets may grow by

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31 percent, with the total amount exceeding RMB 22 trillion and the investment rate reaching 51 percent, a record high since the foundation of the People’s Republic in 1949. Second, the contradictions of overcapacity have become more noticeable. High energy consumption and high pollution industries in particular grew excessively rapidly due to the impact of investment in infrastructure and real estate. Crude steel production reached 50 million tonnes in August, a year-on-year increase of 15 percent, accounting for 49.1 percent of global crude steel output. Cement production also increased substantially, and may account for over 50 percent of global output. Third, non-government investment grew at a slower rate than government investment. The non-government investment rate declined over two percentage points compared to the same period for the preceding year. The substantial increase in total social investment has mainly been promoted by government investment. These deterioration phenomena in the economic structure are necessary, and are the costs of addressing the economic crisis and offset the decline in export growth. The major issue in current economic operations remains the sharp decline in exports. Annual export growth is predicted to decline by approximately 20 percent compared to the preceding year. Looking forward to the global economic trend over the coming year and the next three years, advanced economies will continue to record low growth, and it will be impossible to increase market demand in any obvious manner. Export prospects are therefore not optimistic. Regardless of the major effective measures which are adopted, exports will be the major factor restricting stable, rapid economic growth over the next year. Taking each of these aspects into account, we provide the following recommendations for macro control policy for the coming year: I. Adhere to the Policy of Expanding Domestic Demand and Continue to Implement an Active Fiscal Policy and a Moderately Loose Monetary Policy China’s current economic recovery trend suffers from fragility, instability and a lack of harmony. Consumption has grown rapidly but this is insufficient to offset the decline in exports. As social investment has not demonstrated any obvious recovery, and export growth has

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not bottomed out, a decrease in fiscal policy support for economic growth may result in a downturn in the economic recovery, and would then require the re-initiation of policy intervention, with the additional costs involved. Only once the economy achieves steady growth relying on its internal mechanism can the fiscal stimulus policy be withdrawn. Fiscal, taxation and financial policies for the coming year should not however be a simple repetition of this year’s policies. Fiscal policy implementation should not continue to emphasise the number of key construction projects launched through fiscal investment, but instead focus on four aspects of economic promotion so as to optimise the use of leverage. The first is to promote individual consumption; the second is to promote private investment; the third is to promote the optimisation of the bank loan structure; and the fourth is to promote exports. Fiscal funds should be applied by means of loan subsidies, capital subsidies, and tax adjustments to promote structural optimisation. Monetary policy should enable adjustments to the credit supply according to the practical situation at appropriate times. This year, new loans will exceed the RMB 10 trillion threshold, over twice the expected loan scale. Loans over the coming year should if possible be controlled within RMB 8 trillion. Meanwhile, no effort should be spared to adjust the loan structure, establish a financial service system to serve small and mini-economic subjects, and ease difficulties faced by small enterprises, individual households and agricultural workers in obtaining loans. Greater effort must be made to support individual popular initiatives to start businesses. In accordance with the requirements of the Third Plenary Session of the 17th CPC Central Committee on establishing a modern financial system, the development of a wide range of finance companies, rural banks, regional financial institutions and shareholding financial institutions should be enforced in order to push forward the reform of rural credit cooperatives. Social fund policy should be relaxed in order to allow these to enter the financial sector. The regulation of small and mini financial service systems should be improved accordingly. Local government responsibility for regulation should be increased under the guidance of the China Banking Regulatory Commission. This reform should act as a breakthrough to push forward various reforms and develop the tertiary industry as well as expand employment over the coming year.

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II. Efforts Should Be Made to Make Substantial Progress in the Development Mode The 17th National Congress of the Communist Party of China set out three tasks to change the development mode. These set out the direction to be taken to achieve structural optimisation and industrial upgrading—by adjusting the demand structure, supply structure, and element structure. This is a significant strategic task in China’s nearterm economic development, as well as a fundamental measure in the implementation of the scientific outlook on development. The impact of last year’s financial crisis has increased the urgency of altering the development mode. Successfully altering the development mode will turn the financial crisis into an opportunity and turn the pressure of a decline in exports into the impetus for structural optimisation. Prominence should be given to key foci for altering the development mode and propose appropriate policy measures to achieve in development mode initiatives. First, a breakthrough is required in the Two Improvements, namely, improving the percentage of individual income in national income, and improving the individual consumption rate. A period of approximately three years should be devoted to improving the percentage of individual income in GDP from its current 45 percent level to 55 percent, a return to the levels of a decade ago. Major efforts must be made to increase medium and low-income earners’ incomes, and agricultural workers’ incomes in particular. In the primary distribution of national income, the percentage of labour remuneration should be increased appropriately; this redistribution should preferably reduce the percentages attributed to the nation and enterprises, and increase the percentage of individual incomes in an appropriate manner. The income distribution structure should be adjusted so as to enhance individuals’ broad ability to pay. In the meanwhile, individuals’ consumption rate should be raised from 35 percent to 50 percent within three years, although this is still two percentage points lower than the figure of 52 percent in 1985. When the Two Improvements have been achieved and wealth distribution as a whole favours individuals, the annual increase in expenditure will reach approximately RMB 5 trillion, and total retail sales of consumer goods may increase by 40–50 percent, thus generating an upturn in the socially beneficial economy. It is vital to implement a humanistic approach to the scientific outlook on development. The successful achievement of the aims of the Two Improvements will required the optimal implementation of the scientific outlook on development. We recommend that the relevant

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department of the State Council study and propose an integrated plan for the Two Improvements in combination with the draft macroeconomic control plan for the coming year as well as for the 12th Five-Year Plan. Second, the service industry must be vigorously developed in order to shift from the current excessive dependence of economic growth on the secondary industry. China laid out a strategy to emphasise the development of the tertiary industry as early as the mid-1990s, but this was relatively ineffective. To date, the added value of the tertiary industry accounts for 39 percent of the GDP, tertiary industry employees only account for 34 percent of total employment, which is not only far below the figure of 70 percent in developed countries but also remarkably lower than the average level for other developing countries. Even in India, whose development level is lower than China’s, the percentages for output value and employment both approach 50 percent. As to the primary causes for the laggard development of the tertiary industry, the first is the heavy tax burden, which exceeds the industry’s tolerance. Second, a wide range of administrative charges also restrict the development of the tertiary industry. Third, there is a shortage of services. There are plenty of small and household enterprises in the tertiary industry, but there is a lack of suppliers for the small-scale loans which they require for operations. Modern production support services and community services are two major weak links where China’s tertiary industry lags behind developed countries. Effective policies should be adopted to encourage the development of modern service sectors covering logistics, finance, insurance, consultation, accounting, audits, law and technology. Communities must be established and improved, and the development of community services vigorously encouraged. In developed countries, community services account employees for 30–40 percent of all employees across all sectors of society. China’s community service industry is still in its initial stages, and great efforts should be expended to develop this in order to expand employment capacity. Third, an incentive mechanism should be established for stateowned enterprises to develop independent innovation capacity. This should be used as a focus to improve enterprises’ independent capacity for innovation and accelerate the development of national innovation. Shenzhen Huawei invested RMB 7 billion in research and development last year, and applied for over 1,600 international patents, ranking first among global enterprises. Huawei’s success provides a clear illustration of the way forward. One way forward is to benefit from investing in independent innovation. State-owned enterprises have not

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however established an incentive mechanism for independent innovation, and activities to maintain and add to the value of national assets only involve tangible assets, not intangible assets. An enterprise’s research and development (R&D) investment and the technological achievements that these create are not fully integrated into the scope of review, and this is the primary cause for the low levels of stateowned enterprise R&D investment. Various policies should be implemented to support the medium- and long-term science and technology planning outlines, and encourage enterprises to invest more in R&D income. The current opportunity, in which numbers of foreign businesses face difficulties due to the financial crisis, should be used in order to improve independent innovation capacity through international mergers and acquisitions, and the use of the science and technology resources in international markets. Experience in the use of intellectual abilities to generate innovation should be disseminated, and foreign science and technology talent should be attracted to work toward technology innovation. Governments at all levels should provide financial support for enterprises to engage in international mergers and acquisitions, and to introduce knowledge resources for innovation. III. The Urbanisation Drive Should Be Pushed Forward in a Positive, Steady Manner China’s urbanisation rate reached 45.6 percent in 2008. In the ten years from 1997 to 2007, China’s urbanisation rate increased by 14 percentage points, an annual average growth of 1.4 percentage points, and the urban population increased by 200 million, registering annual average growth of 20 million people. The steady growth of the urbanisation rate has generated huge demand and labour supply for the last decade’s stable, rapid economic growth. Impacted by last year’s financial crisis, the urbanisation rate increased by only 0.8 percentage points, a fall of 0.6 percentage points over the average for the previous ten years. Next year, effective policies will be adopted to return to urbanisation growth of 1.4 percentage points. The government will encourage cities of a wide range of sizes (other than oversized cities) as well as towns to further improve their population intake and absorption capacity, and provide greater job opportunities by developing the secondary and tertiary industries. In areas where conditions permit, low-rent housing construction for rural migrant workers should be brought under the control of urban guaranteed housing.

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The government shall establish systems to integrate urban and rural areas, promote the two-way free flow of production factors between rural and urban areas, and place further urbanisation as an optimal potential and policy application focus for promoting stable, rapid economic development. IV. Export Demand Should Be Energetically Generated China currently has sufficient foreign exchange reserves and a wealth of industrial processing capacity. These two aspects are individually burdens on exports, but become an advantage when combined, by using the export of capital to drive the export of goods and labour services. The decline in exports should be alleviated as soon as possible and the bottleneck of energy resources and technology for longterm economic development eliminated. Outward overseas investment should therefore be enhanced in five different areas in order to generate export demand: First, overseas mergers and acquisitions should be encouraged; second, overseas investment in energy resources should be encouraged; third, overseas processing trade should be encouraged; fourth, buyer credits for exports of electrical and mechanical products should be expanded; fifth, currency swaps to enhance foreign parties’ ability to import Chinese goods should also be expanded. It is also recommended that the State Council organise a cross-departmental coordination body to push forward these initiatives. V. The Restricted, Stable Development of the Housing, Car, and Stock Markets Should Be Maintained Improving living and transportation conditions is a short-term consumption concern and economic growth point, and policies to promote this should be implemented in order to expand housing and vehicle consumption. The government should stabilise urban real estate prices, increase the responsibilities of local governments for stabilising housing prices in order to control the housing price-income ratio at approximately six, encourage an increase in guaranteed housing and prohibit state-owned industrial enterprises from entering the real estate industry. The policies of the State Council on encouraging car consumption should be implemented so as to encourage the development of electric vehicles, hybrid cars and economy cars. Car consumption

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loans should be expanded—China’s car consumption loans currently only account for 8 percent of car sales, while this figure is approximately 80 percent in developed countries. A personal credit information system, GPS positioning and other modern means to guarantee security of car consumption loans should be established, and a healthy environment should be created in which banks can expand consumer loans. Macro-economic regulation of the stock market should be enhanced to prevent sharp fluctuations in the stock market. The supply can be increased during stock market surges, and conversely, demand can be appropriately increased during stock market tumbles in order to maintain the general stability and healthy development of the stock market. Presently, the government should prevent bank loans from flowing into the stock market, beef up the firewall between banks and the stock market, prevent financial fluctuations caused by stock market fluctuations, and avoid financial risk. The stock market should be developed in a stable and health manner to support the continuous prosperity of the real estate and car markets, and establish the real estate and car industries as permanent mainstay industries to support stable, rapid economic development. VI. The Various Reform Items Should Be Energetically Pushed Forward Over the coming year, reform should be applied in order to resolve the issues encountered in economic development and promote structural optimisation as well as the transition of the development mode. Firstly, the reform of monopoly industries must be accelerated, access thresholds to these reduced, and entry barriers broken down, and competition in these industries increased to reduce costs through the use of social funding. Second, the reform of the monetary system should be actively pushed forward, focusing on establishing a financial system to provide services for small and mini-type economic subjects. Third, the reform of the income distribution system should be accelerated, and a scheme for the structural adjustment of income distribution established and implemented. Fourth, the establishment of an urban and rural integrated development system should be accelerated. Urban and rural development should be planned integrally in order to unleash the huge potential in rural economic development and close the urban and rural development gap.

CHINA’S ECONOMY: ADVANCING STABLY AGAINST THE WIND—A REVIEW OF 2009 AND OUTLOOK FOR 2010 Zheng Jingping I. Review of the Chinese Economy in 2009 2009 has been a highly unusual year for China’s economy. Under the impact of a vicious international financial crisis, the external development environment of the Chinese economy deteriorated sharply. The turmoil in the international financial markets and the panic among the various financial institutions to “deleverage” caused the international capital markets and money markets to shrink significantly, and the country’s real economy suffered its first recession in almost five decades, while the world economy shrank by over 1.0 percent compared to the previous year. As a large country which has rapidly opened up to the outside world and a foreign trade equivalent to approximately 60 percent of its gross domestic product, China suffered badly, and its economy is now advancing against the wind. Following the central government’s implementation of a package of macro-economic control policies in the fourth quarter of 2008 and wide-ranging efforts, however, the national economy will grow by approximately 8 percent in 2009 as a whole, advancing steadily against the global winds of recession (see Figure 7.1 and Table 7.1 respectively). The Chinese economy has been able to make headway against contrary economic winds with a world-leading growth rate due to the following major causes: First, the international economic environment was better than expected at the beginning of the year, with no secondary crisis in the financial sector or a double-dip of the real economy. Global economists and international bodies expressed great concern over the evolution of the international financial crisis and the outlook of the world economy in 2009, with relatively pessimistic forecasts at the end of 2008 and the beginning of 2009. For instance, a number of economists forecast that the world economy might shrink by over 2 percent in 2009; developed economies such as the United States, the Euro area

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% 16 14 12 10 8 6 4 2

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Figure 7.1

Annual Rate of Chinese Economic Growth.

and Japan would only recover in 2011. Similar forecasts were made by the International Monetary Fund. Stimulated by a range of unprecedented economic policies implemented by governments around the world, financial risk has however been brought under control. The most difficult period has passed, and the probability of a secondary crisis is decreasing. The world economy is actually performing better than the expected, moving out of the trough to start a slight recovery. The United States economy may start positive growth at the end of the third quarter or at the beginning of the fourth quarter of 2009; the Euro area and United Kingdom economies have tended to recover; and Japan’s economy has grown. The rate of shrinkage of world trade volumes was also lower than expected. Second, the Chinese central government’s well-organised implementation of its package plan was an effective response to the international financial crisis. The government implemented an active fiscal policy and a moderately loose monetary policy on the basis of the national situation from the second half of 2008 onwards, and in the fourth quarter in particular. A RMB 4 trillion plan covering investment in fixed assets, structural tax cuts, a “home appliances for the

china’s economy: advancing stably against the wind Table 7.1

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IMF World Economic Forecast for 2009 and 2010 (Unit: %) Estimate—April 2009 2009e 2010e

World GDP growth Developed countries USA Euro area Germany France Italy Spain Japan United Kingdom Canada Emerging and developing countries Russia China India Brazil Mexico Growth rate of world trade volume Commodity prices (in dollars) Crude oil Non-fuel goods Consumer prices Developed countries Emerging and developing countries

Estimate—July Estimate—October 2009 2009 2009e 2010e 2009e 2010e

–1.3 –3.8 –2.8 –4.2 –5.6 –3 –4.4 –3 –6.2 –4.1 –2.5 1.6

1.9 0 0 –0.4 –1 0.4 –0.4 –0.7 0.5 –0.4 1.2 4

–1.4 –3.8 –2.6 –4.8 –6.2 –3 –5.1 –4 –6 –4.2 –2.3 1.5

2.5 0.6 0.8 –0.3 –0.6 0.4 –0.1 –0.8 1.7 0.2 1.6 4.7

–1.1 –3.4 –2.7 –4.2 –5.3 –2.4 –5.1 –3.8 –5.4 –4.4 –2.5 1.7

3.1 1.3 1.5 0.3 0.3 0.9 0.2 –0.7 1.7 0.9 2.1 5.1

–6 6.5 4.5 –1.3 –3.7 –11

0.5 7.5 5.6 2.2 1 0.6

–6.5 7.5 5.4 –1.3 –7.3 –12.2

1.5 8.5 6.5 2.5 3 1

–7.5 8.5 5.4 –0.7 –7.3 –11.9

1.5 9 6.4 3.5 3.3 2.5

–46.4 –27.9

20.2 4.4

–37.6 –23.8

23.1 2.2

–36.6 –20.3

24.3 2.4

–0.2 5.7

0.3 4.7

0.1 5.3

0.9 4.6

0.1 5.5

1.1 4.9

countryside” initiative, and policies expanding investment and stimulating vehicle consumption and the replacement of old household appliances; export, credit insurance and export taxation policies were improved, and policies for the stabilisation of exports were carefully adjusted, including adjusting the export rebate rate; the Ten Industries adjustment and revitalisation plan, significant national science and technology projects, and policies for developing high-tech industry clusters, as well as intensifying the technological transformation of enterprises to adjust and optimise the economic structure were all

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Figure 7.2

4 5 6 7 8 Growth rate of urban investment in fixed assets

Urban Investment in Fixed Assets and Car Sales, January–August 2009.

unveiled. Agricultural development was stabilised, a promotion initiative to increase agricultural workers income, stabilise and expand employment, increase retirement pensions, and raise the minimum security level and minimum wage standard to improve popular wellbeing were also launched. Urban investment in fixed assets during the January–August 2009 period increased by 33 percent compared to the same period of the preceding year; car sales increased by 29.2 percent over the same period of the preceding year (see Figure 7.2). Third, a number of significant events such as planning for the Shanghai World Exhibition and celebrations for the 60th Anniversary of the People’s Republic of China also provided an impetus for investment and consumption. Fourth, the Chinese economy still retains strong internal growth momentum. This is reflected in three kinds of inertia: Growth inertia, institutional inertia and development stage inertia. Growth inertia refers to the internal inertia of investment in fixed assets and consumption. Once an investment project in fixed assets is initiated, it is not normally suspended unless the outlook is bad. Other behaviour such as individual consumption also performs similarly, particularly so in the case of developing countries with higher Engel coefficients. Socalled institutional inertia refers to the immanent investment impulse of

%

Unit 10,000

100

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China’s existing administrative management system. As the economic development competition pattern among county and township governments has not collapsed, local governments still retain a high level of enthusiasm for economic growth. When the Central government launched its RMB 1.18 trillion investment plan, local governments very actively sought support for investment projects. Development stage inertia refers to the lack of change in China’s development stage. China is in a rapid development stage of industrialisation, urbanisation, informatisation, marketisation and internationalisation. General external forces will not affect development trends of this kind. The experience of developed countries indicates that the industrialisation, urbanisation, informatisation, marketisation and internationalisation phase provides a powerful impetus to economic growth. Of course, it is also important to understand that the Chinese economy has made considerable achievements in terms of its development rate, the central government has focused on and implemented a series of measures to adjust the economic structure and improve independent innovation capacity, and these have improved to a certain extent. For instance, affected by the international environment, external demand (net exports) contributed –41 percent to economic growth in the first half of 2009, a drop from positive values in previous years (approximately 20 percent on average since 2005, with 24.1 percent for 2005, 19.3 percent for 2006, 19.7 percent for 2007, and 9.2 percent for 2008, when the impact of the financial crisis began to make itself felt). But due to growth inertia and institutional inertia, numerous structural issues remain effectively unresolved, and should be adjusted and improved in the coming year. For instance, investment in fixed assets still accounts for a high percentage of GDP; economic development still very much relies on credit provision. By the end of August, new loans from financial institutions had reached RMB 8.15 trillion; foreign exchange reserves are still significant, reaching USD 2.13 trillion by the end of June; and so on. Furthermore, potential inflationary pressure continues to accumulate. The prices of assets such as real estate continue to rise at high levels. In the coming year, the government will need to prioritise adjusting the economic structure, and pay increasing attention to the use of domestic demand, particularly final consumption, to boost economic growth; deepening reform and opening up should provide the basic impetus, with increasing attention being paid to the development of more vigorous systems and mechanisms; technological innovation should be used as an important support, with

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increasing attention paid to supporting the development of strategic growth industries; the integrated, coordinated development of urban and rural areas and the promotion of urbanisation will be strategic foci, with increasing attention paid to extending development space; guaranteeing and improving popular well-being will become a basis as well as an objective, with increasing attention paid to improving the social security system and developing social initiatives; finally, the balance and coordination of the relation between promoting economic growth and preventing accelerated accumulation of inflation factors will also be improved. II. China’s Economic Outlook in 2010 As there is still limited improvement in the international economic environment, the Chinese economy will continue to advance into the wind in 2010. Stable development should be—and already is—the core focus, for the following main reasons: First, the international economic environment will improve, but no immediate fundamental change will occur. On the basis of its current development trend, the international economic environment will improve in 2010 compared to 2009. Other than the financial crisis, however, the major causes of the global recession are the imbalances in the internal structures of the world’s major economies, and the imbalance in the economic structures of developed countries and developing countries. The financial crisis is being felt in term of both liquidity and solvency. The losses of financial institutions will be borne by society as a whole, initially on government balance sheets, and then passed on to enterprises and individuals. Therefore with the gradual deleveraging of financial institutions, government sectors, enterprises and individuals, financial institutions will slow down lending; the investment capacity of government sectors and enterprises will decline, and individual consumption power will also decline. Furthermore, structural adjustments are invariably long and painful, and cannot be accomplished in a single move. The high unemployment rate of approximately 10 percent in European countries and the United States (see Figure 7.3) has a negative impact on both individual demand and financial institutions, and also damages long-term economic development factors such as workers’ skills (a key factor of labour productivity). Governments’

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0

Unemployment Rate in the USA and Eurozone.

unprecedented economic stimulus policies have also generated high deficit levels, and latent inflation has become a constraint blocking continued expansion. The withdrawal of these is merely a matter of time and skill, as these form a sword of Damocles over the heads of investors and consumers, and extreme care is required. The recovery and normal operation of the international financial order will take time to achieve. Finally, effectively controlling the global spread of H1N1 flu remains a difficult task. Due to the aforementioned negative factors alone, there is no cause for over-optimism in terms of the recovery of the global economy. According to International Monetary Fund forecasts, the global economic growth may only reach approximately 3 percent in 2010, which is still relatively lower than the average growth rate of 4.5 percent over recent years. In addition, protectionism is increasing as economic recovery proceeds. As a major country highly dependent on exports, China remains positioned in a relatively poor international environment and China’s export commodities face an increasing number of anti-dumping cases. The Chinese economy continues to advance into the wind. Second, the problems incurred by growth inertia and institutional inertia do not permit excessively rapid growth of the Chinese economy. As previously mentioned, the Chinese economy faces structural as well as institutional issues, which need to be considered from a long-term, continual and scientific development prospective and effectively resolved. This makes a rapid recovery of the Chinese economy neither appropriate, nor easy. Growth should most appropriately be

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0/

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Figure 7.4

PMI Changes in China’s Manufacturing (Unit: %).

controlled within a 8–9 percent range. Restricted by external demand, China’s economic growth is mainly reliant on domestic investment and consumption. As consumption is subject to restrictions such as income, confidence, the consumption environment, expectations, and the social security system, accelerated economic growth is difficult to achieve under existing conditions. Therefore, it is therefore necessary to resort to investment to improve the growth rate. This must however be controlled within an appropriate range, as China’s production capacity is significant, yet the country’s investment and consumption structure remains relatively ill-structured. The reform of the financial system, taxation system, and enterprise governing structure also requires smooth economic development to guarantee its success. Third, from a perspective of supply and demand, China’s economy will probably achieve growth of 8–9 percent in 2010. A number of leading composite indices provide pleasant forecasts for China’s economic growth. The manufacturing procurement manager index (PMI) exceeded 50 percent for seven consecutive months, and reached 54.3 percent in September (see Figure 7.4). The business confidence index and consumer confidence index showed a similar trend. As the leading index of investment in fixed assets, total planned investment for new urban projects in January– August 2009 increased by 81.7 percent over the same period for the

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preceding year, indicating booming growth in investment in fixed assets. In terms of supply capacity, this is plentiful, and able to support a growth rate of 8–9 percent as certain raw materials are subject to import constraints. There is in fact a certain degree of worry about overcapacity in industries such as iron and steel, cement, sheet glass and traditional coal chemicals, as well as growth industries such as polysilicon and wind power equipment. In terms of demand, export demand remains subject to weak external demand. As world trade volumes have stabilised at low levels (see Figure 7.5), however, this will change from last year’s shrinkage of 11.9 percent to growth of 2.5 percent in 2010, according to International Monetary Fund forecasts. China’s exports have also been shrinking since November 2008. Total exports for the first eight months of 2009 were USD 730.7 billion, a decrease of 22.2 percent. The comparative base number will therefore be relatively low in 2010, and is thus less likely to decline continuously (see Figure 7.6). In terms of investment demand in fixed assets, 2010 will be the final year covered by the government’s RMB 4 trillion investment plan, which will continue to exert a stimulant function. Private investment will pick up against a background of improvements in the international and domestic economies, proven by the substantial growth in total planned investment in new projects. In terms of consumption demand, this will grow slightly faster in 2010 than in 2009 due to the rigid, continuous and rapid growth of individual incomes, the government’s series of policies to improve popular well-being and the consumption environment, and to stimulate consumption since 2009. Demand will therefore probably support a growth rate of 8–9 percent. Above all, the international economic situation will retain a degree of uncertainty in 2010. The international environment will remain unfavourable to China. The international financial crisis has had a far-reaching impact on the world economy, and responding to this will be a tough, long-term task. China also faces pressure from structural adjustment and system and mechanism reform. In order to promote beneficial aspects and eliminate harmful aspects and allow the Chinese economy to advance steadily, it is recommended that macro-economic control should focus on both near-term and longterm development. Economic restructuring should be emphasised, and

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125 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2005

Figure 7.5

2006

2007

2008

2009

Changes in World Trade Volume (Year 2000=100).

40 30 20 10 0 –10 –20

Ja

n0 Fe 8 bM 08 ar Ap 0 8 r-0 M 8 ay Ju 08 n0 Ju 8 l-0 Au 8 gSe 08 pO 08 ct N 08 ov D 08 ec Ja 08 nFe 09 bM 09 ar Ap 0 9 r-0 M 9 ay -0 Ju 9 n0 Ju 9 l-0 Au 9 g09

–30

Figure 7.6

China’s Year-on-Year Export Growth Rate (Unit: %).

domestic demand—and consumption demand in particular—should be used to promote economic growth. An emphasis should be placed on deepening reform and opening up, and system and mechanism issues should be resolved on an ongoing basis. Emphasis should be laid on improving and guaranteeing popular well-being, accelerating the establishment and improvement of the social security system and promoting employment. Specifically:

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First, monitoring of the changes in the international economy and China’s economic operation should be intensified, and countermeasures adjusted as the situation changes. Second, consumption demand should be stimulated and expanded. Appropriate tax and charge policies should be adopted to reduce the burden on enterprises, particularly small and medium-sized enterprises. Measures should be taken to expand employment and develop agricultural production so as to increase individual incomes. The social security system should be established and improved in order to promote social consumption. The consumption environment should be optimised in order to increase individuals’ will to consume. Third, the supply structure should be optimised. The work of breaking up industry monopolies should continue, the fundamental role of the market in the allocation of resources should be increased, and the income distribution mechanism optimised in order to increase the percentages of individuals and enterprises in national income. Fourth, reform must continuously be pushed forward, the interest relations adjusted between the central and local governments, the government and enterprises, and the economy should be encouraged to return to a track of scientific development so as to provide a foundation for its long-term, stable and sustainable development. References International Monetary Fund (IMF), World Economic Outlook, October, 2009, www. imf.org. National Bureau of Statistics, Zhongguo tongji nianlan 2009 中国统计年鉴 2009 [China Statistical Yearbook, 2009], Zhongguo tonji chubanshe, Sept. 2009.

CHINA’S MACRO-ECONOMIC SITUATION AND POLICIES, 2009–20101 School of Economics of Renmin University of China I. Forecast of China’s Macro-Economic Indicators The Chinese economy underwent a complete trough-trough cycle between 2002 and 2007, developing a favourable operation pattern of high economic growth and low inflation. It completed the transition from depression to prosperity in 2005 and climbed to a peak in 2007. As of the second half of 2007, the combined effect of the intrinsic shrinkage of China’s economic cycle and the external contraction effect of the US subprime crisis resulted in the Chinese economy entering a downtrend. In 2008, the US subprime crisis severely impaired China’s export demand, and China’s economic growth declined sharply season by season. In the same year that its economic cycle entered a contraction phase, the Chinese economy saw a complete switch of economic cycle phases from prosperity to depression, and reached the trough of the economic cycle. The expansionary demand management policy applied to the Chinese economy was effective in 2009. The proactive fiscal policy and moderately loose monetary policy promoted the strong growth of domestic demand to offset the sharp reduction in external demand, effectively reversing the pessimistic economic expectations, and the economy grew rapidly by quarter. The Chinese economy remains in a deflationary state in 2009, but may achieve real GDP growth of over 9 percent, meaning that the economy is performing better in 2009 than in 2008. The Chinese economy began the expansionary phase of a new economic cycle in 2009, the starting point of which was in the economic trough year of 2008. In 2010, China should continue to implement its proactive fiscal policy and a moderately loose monetary policy, maintain the continuity

1 This is a Renmin University of China Macro-economic Analysis and Forecast Center research project. Contributors: Hu Naiwu, Huang Taiyan, Bao Minghua, Fang Fang, Zou Zhengfang, Huang Jun, Wang Jinfeng; Writer: Zheng Chaoyu.

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and stability of its demand expansion management policy, embark on the balanced promotion of domestic and external demand, investment demand and consumption demand, private investment demand and government investment demand in China’s economic growth so as to maintain the stable recovery of the economy and complete the transition from recession to prosperity. On the basis that China’s real GDP growth rate is lower than the latent GDP growth rate, and real GDP will be lower than latent GDP in 2009, this will enable China’s real GDP growth rate in 2010 to approach and even exceed the latent GDP growth rate, thus promoting the return of China’s real GDP to latent GDP levels in 2010. China’s macro-economic operation situations in 2009 and 2010 were forecast using the China Macro-economic Analysis and Forecast Model (CMAFM) of Renmin University of China, and major results are shown in Table 8.1. Forecasts for China’s macro-economic indicators in 2010 are mainly based on the following macro-economic policy hypotheses: 1. In 2010, the central budget deficit will be RMB 625 billion; 2. In 2010, the average RMB-USD exchange rate will be 6.60:1. Table 8.1

Forecast of China’s Macro-Economic Indicators in 2009 and 2010

Forecast indicator

2009

2010

1. Growth Rate of GDP (%) 9.04 Of which: 5.2 Added Value of Primary Industry Added Value of Secondary Industry 9.8 Added Value of Tertiary Industry 9.2 2. Gross Investment In Fixed Assets (RMB billion) 23087.0 Gross Retail Sales of Consumer Goods 12530.0 (RMB billion) 3. Exports (USD billion) 1224.0 Imports (USD billion) 4. Growth Rate of Narrow Money Supply (M1) (%) Growth Rate of Broad Money Supply (M2) (%) 5. Growth Rate of CPI (%) Growth rate of GDP Deflator (%)

10.07 4.8

Forecast date: October 2009.

11.1 10.3 29228.0 14861.0 1377.0

china’s macro-economic situation and policies, 2009–2010 141 II. Analysis of China’s Macro-Economic Situation .

A. Economic Cycle Phase and Economic Recovery Process Due to its dualistic structure, the Chinese economy has investmentdriven endogenous growth characteristics similar to the AK model. It latent national income growth process Yt = ∏ki=1 {(Yt-i•(1 + δ)i) w(i)} accommodates hysteresis. The Juglar half-cycle length lag order k = 5 is selected then the OLS method is used to establish a single log-linear autoregressive equation lnYt = Σki = 1 (w (i) • (lnYt-i + i • ln (1 + δ))) conforming to China’s real GDP for the period of 1983– 2008, where geometric progression distribution probability w (i) = qi and cosine function distribution probability w (i) = cos ((i-1) • (π/2k)) respectively. China’s potential national income natural growth rate δ = 10.0980 percent in geometric weight and δ = 10.0524 percent in the case of cosine weighting function. Statistical and dynamic forecasts were performed using China’s real GDP indicator, and China’s potential national income time series for 1983–2010 were established respectively. On the basis of the real GDP indicator for 1983–2008 and the forecast GDP growth rate for 2009–2010, we calculated the absolute gap and relative gap of China’s national income over the 1983–2010 period, and this is shown in Figure 8.1.

12

8000

8

4000

4

????

12000

0%

0

–4000

–4

–8000

–8

–12000

–12 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Relative gap / geometric progression Absolute gap / geometric progression Absolute gap / cosine function Relative gap / cosine function

Figure 8.1a

Absolute Gap and Relative Gap of China’s National Income—Static Forecast.

school of economics of renmin university of china 12

8000

8

4000

4

0

0

????

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–4000

–4

–8000

–8

–12000

%

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–12 1983 1985 1987 1989 19911993 1995 1997 1999 2001 2003 2005 2007 2009 Relative gap / geometric progression Absolute gap / geometric progression Absolute gap / cosine function Relative gap / cosine function

Figure 8.1b

Absolute Gap and Relative Gap of China’s National Income—Dynamic Forecast.

As the distribution probability of geometric progression is more closely inclined to the recent period than the distribution probability of cosine function, the national income natural growth rate, whose geometric progression exceeds the cosine function, indicates the accelerated growth trend of the Chinese economy; because the dynamic forecast method retains the historic inertia of 1978–1982 and neglects the actual situation of 1983–2008, the economic cycle phase in the dynamic forecast lags behind that of the static forecast. China’s relative income gap in 2007 didn’t indicate the danger of severe economic overheating in 2007, nor did it deviate excessively from the zero reference line in 2008. The pessimistic economic expectations in 2008 may be the result of the sharp decline in China’s economic climate from it peak in 2007, and its nearinstantaneous switch from prosperity to recession. China’s growth-oriented economic cycle also contains economic contraction processes during periods of economic prosperity, as well as an economic expansion process during periods of economic depression. As shown in Figure 8.2, the Chinese economy entered depression when ln(Y/Y*) dropped to a negative value, and it will rise during its recovery process through: 1. First turning point tp1, d(∆lnY)/dt = 0, where the economic growth rate will bottom out;

china’s macro-economic situation and policies, 2009–2010 143 2. Second turning point tp2, d(ln(Y/Y*))/dt = 0, where the national income gap will begin to close; 3. Third turning point tp3, ln(Y/Y*) = 0, where the national income (deflation) gap will disappear and the economy will return to prosperity. In 2009, the Chinese economy is in its early recovery phase, between the first and second turning points, with an increasingly wide real national income gap. The Chinese economy will pass the second turning point and enter its later recovery phase between the second and third turning points in 2010 where the real national income gap will narrow. As the second turning point corresponds to the economic trough with a maximum national income gap, resource utilisation remains insufficient, while the real economic growth rate has regressed to the latent economic growth rate, thus potentially easily creating a paradox whereby macro-economic performance is improving but micro-economic performance is deteriorating, or where economic growth comes hand in hand with a lack of improvement in the employment situation. B. Economic Growth Outlook Based on an overall consideration of the growth phases and political economic cycle features of the Chinese economy, we have divided the forecast period for Chinese economic growth for 2009–2032 into a five-year short-term phase of 2008–2012 and a 20–year long-term phase of 2013–2038, using 2010 as the separating margin when the 18th CPC National Congress will be held. The forecast study scheme in Figure 8.3 includes a mild recovery and shallow expansion state (S-shape) starting from 2009, a slow recovery but strong expansion ( J-shape), and a strong recovery and rapid decline (inverted U-shape), which were used to forecast the growth rate of the Chinese economy between 2009 and 2012. The remaining time period is subdivided into first and second decades, 2013–2022 and 2023–2032 respectively. We have thus forecasted the historical trend of the annual average growth rate of the Chinese economy (T) and the upper boundary (max) and lower boundary (min) of its confidence interval. The forecast results are shown in Table 8.2.

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ln(Y/Y*)

t

tp3

0

ΔlnY* tp2 ΔlnY

tp1

0

t

Figure 8.2

Recovery Process of the Chinese Economy.

lnY J S

max

U

T

max

min

T min

O

2008

2012

2013

2022

2023

2032

t

Figure 8.3 China’s Economic Fluctuations and Economic Growth Patterns.

Aggregate production function Y = A•Kα•L1–α was used to calculate the contribution of different elements to China’s economic growth. Based on the hypothesis of accelerated technological progress, decreasing parameter α was assigned to reflect the historical trend of intensive growth of the Chinese economy, as shown in Table 8.3. Meanwhile, the national income industrial classification method into primary, secondary and tertiary industries was used to analyse the structure of supply factors in China’s economic growth; the national income expenditure classification method for consumption, investment and net exports was used to analyse the structure of demand factors in China’s economic growth. We then broke down China’s real GDP

china’s macro-economic situation and policies, 2009–2010 145 Table 8.2

China’s Real GDP Growth Rate Forecast (%) Years 2008–2012

Fluctuation patterns S-shape J-shape Inverted U-shape

2009 9.04 8.50 9.50

2010 10.07 9.52 10.87

2011 10.14 10.20 9.54

2012 10.18 10.51 9.26

2008–2012 9.68 9.54 9.63

Years 2013–2032 Confidence interval Upper boundary (max) Trend (T) Lower boundary (min)

2013–2022 8.82 8.54 8.26

2023–2032 7.65 7.48 7.31

growth rate for the 2008–2032 period from the supply and demand factors, as shown in Figure 8.4. C. Price Formation Mechanism and Cost-Push Inflation In line with the marketisation of China’s economic system, China’s inflation system experienced a three-stage structural evolution before completing the historic transition from high core inflation rate to low core inflation rate, as shown in Table 8.4. We established China’s price formation model according to the hypotheses in Table 8.4 and used these to forecast the stationary inflation rate of China’s industrial sector. The control theory figure of China’s price formation mode is shown in Figure 8.5. This is composed of a wage adjustment equation W = W(C, ρ, y), a cost contact equation C = C (P, t), and an income distribution coefficient definitional equation ρ = W/(P•y), in which money wage rate (W) is adjusted for cost of living (C), the redistribution of income distribution coefficient (ρ) or the production of labour productivity (y), and product price (P) is a component of the cost of living (C). The OLS method was used to directly match the price determination equation P = (ρ•y)•W(C, ρ, y) and cost contact equation C = C(P, t) of China’s industrial sector for the 1985–2007 period, thus obtaining a computable format for the price formation model of China’s industrial sector.

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Table 8.3 Scenario

Accounting of Elements in China’s Economic Growth (%)

S-shape/Trend T Growth Contribution rate rate

Factor GDP Labour Capital Technology

9.68 1.22 11.07 2.55

100.00 5.04 68.62 26.34

GDP Labour Capital Technology

8.82 1.02 10.36 2.85

100.00 5.97 60.66 33.37

GDP Labour Capital Technology

7.48 0.92 9.45 3.15

100.00 7.38 50.52 42.10

Table 8.4

J-shape/ upper boundary (max)

Inverted U-shape/ lower boundary (min)

Growth rate

Growth Contribution rate rate

Contribution rate

Years 2008–2012 9.54 1.10 11.02 2.49 Years 2013–2022 8.54 1.05 10.51 3.04 Years 2023–2032 7.65 0.94 9.62 3.24

100.00 4.61 69.29 26.10

9.63 1.15 11.10 2.51

100.00 4.78 69.16 26.06

100.00 5.95 59.58 34.47

8.26 1.00 10.12 2.70

100.00 6.05 61.26 32.69

100.00 7.37 50.29 42.34

7.31 0.91 9.27 3.06

100.00 7.46 50.70 41.84

Evolutionary History of China’s Inflation Phase I: Mid-late 1980s

1. Historical characteristics High inflation 2. Action mechanism Driving force Price liberalisation Manifestations Making hidden inflation public 3. Institutional basis Reform in the product market

Phase II: Early-mid 1990s

Phase III: Since late 1990s

High inflation

Low inflation

Completion of wage system Monetising wages in kind Reform in the labour market

Market competition Technical progress Formation of the market economy framework

Driven by the labour productivity time trend y = y(t) and distribution coefficient time trend ρ = ρ(t), extrapolation was used to forecast the GDP deflator of China’s industry for the 2008–2012 period, which is shown in Table 8.5. As the Chinese price formation model only uses the time variable in the price equation C = C (P, t) to imply the possible cost-push effect of grain, energy and raw material prices,

china’s macro-economic situation and policies, 2009–2010 147 10.0 4.00

3.98

3.96

7.2

3.72

3.59

3.47

3.48

3.36

3.29

4.01

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3.87

0.16 23–32 (max)

0.15 0.16 23–32 23–32 (min) (T)

5.0 2.5 0.0

5.27

5.14

5.26

4.83

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0.42

0.41

0.27

0.26

0.26

08–12 (S)

08–12 (J)

08–12 (U)

13–22 (max)

13–22 (T)

13–22 (min)

4.69

Agriculture (%)

Figure 8.4a

10.0

0.97

The Supply Structure of China’s Economic Growth.

7.5 4.75

4.82

4.60

5.0 2.5

Services (%)

Industry (%)

0.91

0.95

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0.88

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0.57

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3.31

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3.99

3.91

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3.71

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13–22 (max)

13–22 (T)

13–22 (min)

23–32 (max)

23–32 (T)

23–32 (min)

0.0

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Figure 8.4b Table 8.5 Year GDP Deflator

Investment (%)

Net exports (%)

The Demand Structure of China’s Economic Growth.

Stationary Inflation Rate (%) of China’s Industrial Sector 2008

2009

2010

2011

2012

0.5969

1.5662

5.1861

7.7207

7.7172

its projected monotone convergence industrial GDP deflator inflation rate within five years may be similarly equal to the stationary inflation rate of China’s industrial sector under the condition that there is no external disturbance to supply and demand.

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P

C = C(P,t)

p=W/(P.γ)

C t

y = y(ρt)

ρ = ρ(t)

Figure 8.5

γ

W = W(C, ρ, y)

W

ρ

China’s Price Formation Model.

III. Comments on China’s Macro-Economic Policy A. High Savings—High Investment—High Growth Pattern The high savings trend of China’s national income can be easily explained by the country’s high growth and young population life cycle model. In the face of a national income distribution pattern with a high savings trend, China’s macro-economic policy design should follow Keynesian principles, and establish an active demand management policy system centred around promoting domestic investment demand in order to achieve an effective transition from high savings to high investment. During this period of economic structural reform and economic climate change, policy guidance for the highest sustained growth rate (HSGR) should be established to ensure demand management. This uses a fine-tapping (not fine-trimming) demand management operation pattern to track the potential aggregate supply boundaries of continued expansion, which are unknown in real time, through increasing aggregate demand intermittently. As capital marginal income does not decrease in a dualistic structure, the Chinese economy must necessarily take on capital deepening features as part of the growth process. This will employ capital accumulation means to resolve classical unemployment issues and support the oncoming aging of society. The structural development change of the Chinese economy is based on the premise of non-uniform growth rates of different sectors of the economy. The difference between the growth rates of different sectors of the economy conforms to the economic cycle. There is no Chinese Phillips Curve in which the economic growth rate and economic structure are coordinated and substituted.

china’s macro-economic situation and policies, 2009–2010 149 A macro-economic policy in response to the crisis that harkens back to Keynesianism should actively explore the historic experience of the Great Depression and Keynesian revolution, and develop an operable problem-oriented macro-economic research programme. Although the school of unbalanced development will not make a comeback with the revival of the Keynesian school, the BGM (Barro-GrossmanMalinvaud) model typology of non-Walrasian equilibrium still has major significance for understanding the structural and cyclical nature of the Chinese economy, as shown in Table 8.6. At the structural level of China’s economic equilibrium, a dualistic structure entails a long-term excess labour supply and excessive capital demand. Classical unemployment integrating the agricultural sector and non-agricultural sectors is a structural equilibrium state which has no relation to the economic system or climate. At the cyclical level of China’s economic equilibrium, the reform of price liberalisation uses open inflation to release the excess purchasing power of forced savings under the planned economy system so as to exit the repressed inflation equilibrium state. A Keynesian unemployment and under-consumption equilibrium applies to the non-agricultural sectors of the Chinese economy. Excess supply and excess demand in the labour market are mainly reflected in the outward migration and return flows of rural surplus labour or the different speeds of rural surplus labour transfers. Domestic overproduction may be mapped to excessive savings and insufficient domestic investment or to the trade surplus and international investment By using to the two-gap equation for national income accounting, Table 8.6

China’s Non-Walrasian Equilibrium Economic Characteristics

Equilibrium Level Periodic

Market Economy System Depression Overheating Stage Stage Keynesian unemployment

Structural

Insufficient consumption

Planned Economy System Repressed inflation

Classical unemployment

Type of non-Walrasian equilibrium

Product Market Labour Market

Keynesian Unemployment Under-consumption Classical Unemployment Repressed Inflation

YD < YS YD < YS YD < YS YD < YS

LD < LS LD < LS LD < LS LD < LS

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S – I = X – M. An excess supply of products in an under-consumption equilibrium state merely reflects that product manufacturing in non-agricultural sectors exceeds domestic demand, but undersupply occurs when international demand is contained, thus leading to excess demand for labour when over-production appears on the domestic market. B. Money Supply Policy Rules and the Core Inflation Target A monetary policy role system including the monetarism rules gMMonetarism = π* + gY* – gV*, Lucas neutral rules gMLocus = πE + gY* – gVE and Keynesian rules gMKeynesism = πT + gYT – gV* was established to calculate China’s M1 and M2 supply growth rate targets for 1992–2008, as shown in Figure 8.6. In these, China’s potential GDP growth rate is the arithmetic average value of the national income natural growth rate in the states of geometric progression and cosine function, cointegration ∆ln(GDPPI) – 1.2211455266•∆ln(CPI) was used to translate the CPI inflation rate target of the Taylor rule to the Chinese economy’s GDP deflator inflation rate target of 2.4423 percent, and the tendency growth rate of Chinese currency circulation gV1* = –3.0450 percent, and gV2* = –4.3644 percent. An entirely rational expectations hypothesis was used, and it is assumed that Keynesian monetary policy adopts a more gradual two-year counter-cyclical mode of operations, i.e., YT = gY-λ • (gY – gY*), πT = π–λ • (π – π*) where λ = 0.5. The monetarism single rule can be used as the long-term reference framework for money supply management. Its reference function is forward-facing and does not record money supply history. China’s real M1 and M2 supply growth rates in 2008 approached those in monetarism rules and Lucas neutral rules, but were lower than those in Keynesian rules. The percentage point distance indicator in which the money supply growth rate exceeds the sum of economic growth rate and inflation rate (gM–gY–π) is only a post factum measurement of the money velocity descent rate. The real percentage point gap enlargement may indicate excess money supply and excess liquidity in the banking system, or insufficient money supply and a real economic depression. The high-speed growth of China’s money supply and credit scale in 2009 reflects the successive advance of China’s expansionary monetary policy from a quantity easing (QE) phase to credit easing (CE) phase. This is necessary to prevent economic depression and

china’s macro-economic situation and policies, 2009–2010 151 40

Real money supply

30

Monetarist rules Lucas-neutral rules

20

Keynesian rules

10 1992 1994 1996 1998 2000 2002 2004 2006 2008

Figure 8.6a

China’s M1 Supply Growth Rate.

40

30

Real money supply Monetarist rules Lucas-neutral rules

20

Keynesian rules 10 1992 1994 1996 1998 2000 2002 2004 2006 2008

Figure 8.6b

China’s M2 Supply Growth Rate.

contains no risk of currency inflation as long as the national income (deflation) gap continues to widen. A price stability goal measured using the CPI core inflation rate ought to be established for China’s monetary policy. While this contains a structural rise in grain prices, the indicator should differentiate random fluctuations in grain prices in order to avoid excessive policy response. In the general CPI accounting equation P = α•PF + (1 – α)•PC, where the non-food core price index minor adjustment equation PCt – PCt-1 = β•(Pt – PCt-1) is assumed, then Pt = α•PFt –α•(1 – β)•PFt-1 + (1 – αβ)•Pt – 1. Using the OLS method to simulate the general CPI equation Pt = α•PFt – α•(1 – β)•PFt – 1 + (1 – αβ)•Pt – 1 for the 1996–2008 period, we can identify CPI food price weight α and core price equilibrium adjusting speed β.

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1.00

1.00

0.75

0.75

0.50

0.50

General CPI/temporary impact Core CPI/temporary impact Core CPI/lasting impact

0.25

0.25

0.00

Core CPI/lasting impact

0.00 1

2

5

7

9

11

13

i

Figure 8.7

Dynamic Effect of China’s Food Prices.

Due to the random properties of food prices, the core price index cannot be calculated using equation P = α•PF + (1 – α)•PC. The general CPI equation Pt = α•PFt – α•(1 – β)•PFt – 1 + (1 – αβ)•Pt – 1 and core price index price equation PCt = (αβ)•PFt-1 + (1 – αβ)•PCt – 1 are used to establish a recursive system to stimulate the dynamic response processes of the general price index and core price index to the impact of food price inflation, as shown in Figure 8.7. During the 13–year simulation period, the dynamic effect of a food price temporary inflation rate of 1 percent wears off and almost disappears at the end of the period. The dynamic effect of a food price permanent inflation rate of 1 percent is accumulated and approaches to full conveyance.

ANALYSIS OF UNCERTAINTIES INVOLVED IN CHINA’S ECONOMIC RECOVERY IN 2010 Qin Wanshun and Qian Shichun I. Review of China’s Macro-Economic Growth Situation in 2008–2009 A. Exports Declined and the Economic Growth Rate Dropped Sharply Affected by the international economy, financial crisis, and exchange rate policy, the Chinese economy started to decelerate in 2008 and continued its declining trend in the first half of 2009. The GDP growth rate in the first quarter of 2009 was only 6.1 percent, a new low since these figures were first included in statistics in 1992; GDP growth in the first half was 7.1 percent, a drop of 3.3 percentage points over the same period of the preceding year, and a drop of 6.3 percentage points over the peak value in 2007. In terms of the “Three Supports” driving economic growth, the consumption growth rate declined from a high level, total exports dropped sharply, and only investment in fixed assets took on a trend of accelerated growth. Total urban investment in fixed assets over the January–August 2009 period increased by 33 percent, an increase of 5.6 percentage points over the same period of the preceding year, the highest growth recorded other than that in the period of economic overheating in 2004. Gross retail sales of consumer goods increased by 15.4 percent, a drop of 9.8 percentage points over the same period of the preceding year. Exports turned from year-on-year growth of 21.1 percent to a year-on-year decrease of 23.4 percent, a drop of 44.5 percentage points, becoming the major factor holding back economic growth (for details, see Figure 9.1). B. The Economic Stimulus Policies Put Forward Have Curbed the Momentum of Economic Decline To reduce the negative impact of the international economic and financial crisis on China’s economy and maintain orderly macroeconomic operations, China’s government rapidly boosted the stimulus

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qin wanshun and qian shichun 25

60 50

%

% 20

40 30

15

20 10 2009–07

2009–05

2009–03

2009–01

2008–09

2008–11

2008–07

2008–05

2008–03

2008–01

2007–11

2007–08

2007–07

2007–05

2007–03

2007–01

2006–11

2006–09

2006–07

2006–05

2006–03

2006–01

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2005–09

2005–07

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2004–11

2004–08

2004–07

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2004–03

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2003–07

2003–05

2003–03

–10

10 2003–01

0

5

–20 –30

0 Growth rate of urban investment in fixed assets Growth rate of exports Growth rate of gross retail sales of consumer goods (RHS)

Source: National Bureau of Statistics.

Figure 9.1

Changes in China’s Investment, Consumption, and Export Growth Rates ( January 2003–August 2009).

provided by fiscal policy and monetary policy by promulgating a range of consumer stimulus policies including a RMB 4 trillion investment plan, “home appliances for the countryside” and “new cars for clunkers” initiatives, as well as a series of export incentive policies such as tax refunds for exports, export enterprise tax rebates, export enterprise financing, and investment in fixed assets has accelerated, greatly easing the economic downtrend brought about by the sharp decline in external demand. The trend of continual economic decline has been curbed, and GDP grew faster in the second quarter of 2009 than in the first quarter. The latest leading indices such as gross industrial production, PMI and power consumption for August 2009 all indicate that the macro economy has bottomed out. II. Uncertainties Facing China’s Economic Recovery in 2010 When the economy bottoms out, the main issue facing the macro economy will be how to recover, and the strength and continuity of the recovery. Looking forward to macro-economic operations in 2010, we believe that the following issues require particular care:

china’s economic recovery in 2010

155

A. Uncertainties in the External Economy Will Increase Greatly Due to the features of China’s economic structure, external demand remains one of the main factors which will affect the country’s macroeconomic fluctuations over the next few years. First, let’s view the overall economic recovery in developed nations. Major economies such as the United States, Europe and Japan have demonstrated bottoming-out characteristics, and have little probability of continuous deterioration. They still however suffer from high rates of unemployment, an increase in individual desire to save, a rise in the corporate default rate, and a real estate market far from recovery. We believe it relatively improbable that the major advanced economies will recover rapidly in the short term, and economic recovery will be a slow and repeated rebound process. Figure 9.2 shows the remarkable positive correlation between China’s export growth and the GDP growth of the United States, Japan and Europe. China’s exports will therefore experience a long recovery process. Furthermore, as these countries implement loan deleveraging and their consumption habits change, it will be difficult for China’s export growth to recover to 2004 levels. Second, with regard to the implementation of each country’s stimulus policies, various economic stimulus policies will enter sensitive periods with relatively high levels of uncertainty in terms of their strength, continuity and phasing out, and these policies will have different effects, including negative aspects which may appear such as inflation expectation or excess liquidity, which will result in huge fluctuations in the prices of metals, raw materials, energy, as well as exchange rates in international markets. This will increase the risk faced by Chinese export businesses. Third, from the perspective of changes in economic patterns, the global economic recovery process is also a process of adjustment for global economic patterns. Economic crisis and changes in individual consumption behaviour have made domestic demand growth potential a scare resource. One of the primary issues facing every nation will be the need to consider the best way to work towards an international environment which substantially benefits their own rapid economic recovery. As part of this process, the counter-balancing of various forces, different kinds of protectionism, and beggar-thy-neighbour policies will also continue to appear, and these will directly interfere with China’s exports. Overall, road to recover for China’s exports will not be a smooth one.

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qin wanshun and qian shichun 40

6 Japan

Europe

USA

China’s exports (RHS)

35

4

30 25

2

20 0 2003

yr

2004

2005

2006

2007

2008

2009

2010

2011

2012

15

yr

10

–2

5 –4

0 –5

–6

–10 –8

–15

Source: Datastream. Data for 2009 and later are predictions.

Figure 9.2 Forecast Relations between GDP Growth Rates for the United States, Japan, and Europe, and China’s Export Growth Rate (2003–2012).

B. The Sustainability and Benefits of High Speed Investment Growth Deserve Attention Since the beginning of 2009, macro-economic policy has been mainly dependent on vigorously pushing forward the rapid growth of investment in fixed assets in order to alleviate the economic downturn. First, it remains vital to maintain a certain level of investment growth in fixed assets to push forward economic growth when exports are facing a recession and consumption is unable to provide the major impetus for economic growth, but the current rate of 33 percent is close to a historic high, and the sustainability of such high rates deserves close attention. Once the investment rate declines, an alternative economic means must be considered to maintain the orderly operation of the macro economy. Second, in terms of company registration type, state-owned enterprises have broken with history, where their investment growth in fixed assets was always lower than that of private enterprises, with the growth rate soaring from approximately 20 percent to approximately 50 percent (see Figure 9.3). This means that high investment growth since the beginning of the year is being mainly driven by government projects, and the benefits of these deserve attention. In addition, it is worth noting that investment growth in fixed private economy assets has been on a downtrend since 2004.

china’s economic recovery in 2010 120

%

State-owned enterprises

Limited liability companies

157

Private-owned

100 80 60 40

0

2004–02 2004–04 2004–06 2004–08 2004–10 2004–12 2005–02 2005–04 2005–06 2005–08 2005–10 2005–12 2006–02 2006–04 2006–06 2006–08 2006–10 2006–12 2007–02 2007–04 2007–06 2007–08 2007–10 2007–12 2008–02 2008–04 2008–06 2008–08 2008–10 2008–12 2009–02 2009–04 2009–06 2009–04

20

Source: Datastream.

Figure 9.3

Growth Rates of Investment in Fixed Assets for Different Types of Enterprises ( February 2004–August 2009).

Third, in terms of investment consequence, if consumption is unable to keep pace with the rapid growth of investment in fixed assets, the imbalance between investment and consumption will deteriorate further, and result in overcapacity—a problem which has already appeared in certain sectors. According to the 2009 nian Zhongguo gongye jingji yunxing xiaji baogao 2009 年中国工业经济运行夏季报告 [Summer Report on China’s Industrial Economy Operations in 2009] issued by the Ministry of Industry and Information Industry in August 2009, severe overcapacity exists in the iron and steel, cement and alumina sectors; limited overcapacity has also appeared in the shipbuilding, chemical, sheet glass, solar energy and wind energy sectors. C. The Sharp Increase in Loans Has Generated Inflationary Pressure With the rapid growth of investment in fixed assets has come a jump in credit funding. By the end of August 2009, the RMB credit balance had grown by 34.11 percent, or an increase of 19.82 percentage points over the preceding year; M2 grew by 28.53 percent or an increase of 12.53 percentage points over the same period of the preceding year, a record high (see Figure 9.4). While successfully curbing the economic downtrend and preventing deflation, the rapid monetary expansion has laid seeds of future inflation risk. The CPI in August 2009 declined

158 40

qin wanshun and qian shichun 10

%

M2

Balance of Loans

CPI (RHS)

% 8

35

6

30

4 25 2 20

0 –2

10

–4 1998–01 1998–05 1998–09 1999–01 1999–05 1999–09 2000–01 2000–05 2000–09 2001–01 2001–05 2001–09 2002–01 2002–05 2002–09 2003–01 2003–05 2003–09 2004–01 2004–05 2004–09 2005–01 2005–05 2005–09 2006–01 2006–05 2006–09 2007–01 2007–05 2007–09 2008–01 2008–05 2008–09 2009–01 2009–05

15

Source: Datastream.

Figure 9.4

Relations between M2, Credit Balance Growth Rate, and CPI ( January 1998 to August 2009).

by 1.2 percent compared to the preceding year, but concatenated data had switched from negative to positive, and CPI grew compared to the preceding month. Furthermore, inflation has generally taken on a greater hysteresis quality than monetary expansion. Based on the experience of previous inflation cycles, the inflation peak usually appears 12 months after the peak of monetary expansion, and within these 12 months, the inflation rate always remains in the ascent stage. Bearing in mind the rate of current monetary expansion, the possibility that prices will soar in the short term and malignant inflation may appear cannot be excluded. Additionally, the rapid expansion of the money supply has caused China’s M2/GDP to rise on an ongoing basis, greatly increasing the probability of sharp price fluctuations of certain products, out-of-control capital flows and continuously increasing difficulty in maintaining macro-economic control. III. Policy Recommendations The above analysis shows that China’s economic growth over the coming year will be a slow recovery process as the existence of domestic and external uncertainties affecting China’s macro-economic growth weakens the foundations of the economic upturn. It is therefore necessary to maintain the stability and continuity of existing policies in

china’s economic recovery in 2010

159

2010. Other than the intermittent reinforcement of the strategy to develop domestic demand and the policy of economic restructuring, we also offer the following recommendations: A. The Opportunity to Actively Promote Outward Investment and the “Go Global” Development Strategy Should Be Seized The economic gains over the past three decades indicate that China can make progress simply by relying on reform and opening up. Opening-up means more than allowing foreign business in, it also includes expanding domestic business globally. As economic globalisation proceeds, China should become increasingly active and open in the global economy, and export increasing amounts of capital instead of products. The international economic and financial crisis and known economic troughs provide unparalleled opportunities for Chinese enterprises to expand globally and participate in the world economy. In terms of national policy, relevant systems and support policies should be formulated to work to develop opportunities in a sensible, effective manner and actively promote enterprises—and private enterprises in particular—to become players in the international market; the country should provide assistance in terms of personnel, capital and materials and assist companies to resolve the issues they encounter in the internationalisation process. From a long-term point of view, this is also a solution to avoid trade barriers, transform passive situations into positive ones, and decrease China’s excessive dependence on exports. B. The Investment Structure Should Be Optimised and Investor Diversification Further Promoted To prevent the uncontrolled overcapacity in certain sectors, it is vital to optimise the investment structure. Other than investment sectors promoting the expansion of domestic demand, economic restructuring, and enhancing ongoing economic development such as popular well-being, engineering, infrastructure and ecological environment construction projects, it is recommended that investment be increased in education, research and development, and hi-tech industries. In addition, it is worth noting that current economic stimulus policies place particular emphasis on administrative means and employ stateowned enterprise investment to achieve the short-term curbing of the

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continuing decline of the economy, but private capital has not been widely tapped, and private investment growth has been on a continuous downtrend since 2004. It is recommended that investment relations be clarified, the investment environment improved, and a stimulus mechanism and institutional arrangement developed to promote overall enthusiasm, encourage private capital to participate in the construction of investment projects in various sectors, promote investor diversification, and intensify profitability self-restraint mechanisms to ensure the vitality and beneficial nature of investment. C. Total Credit Should Be Controlled and SMEs’ Financing Channels Further Widened Alleviating inflationary pressure, controlling latent financial risk and maintaining normal financial order on the one hand requires control of total credit and the optimisation of the credit structure. On the other, we also notice that interest rates for private loans are continuously reaching new highs while total credit is expanding sharply. In combination with the “sky-high prices paid by state-owned enterprises” phenomenon in land auctions, this indicates that the financing demands of non-governmental enterprises, and SMEs in particular, are not being met. As the main source of labour force employment, SMEs play a significant role in maintaining social stability during China’s economic adjustment phase. During the economic recovery phase, SMEs can rapidly identify opportunities due to their flexible operations, thus promoting the “survival of the fittest”. They also play an important role in promoting economic growth, and the significance of SMEs should thus also be understood from the strategic view. While working to control total credit, the government should make an effort to expand SME financing channels, increase support for SMEs and promote their growth to ensure economic vitality.

ANALYSIS AND FORECAST OF CHINA’S CAPITAL MARKET IN 2009–2010 Wang Guogang and Zhang Yuewen Institute of Finance and Banking, CASS In 2009, China’s capital market has responded in an active and timely manner to changes in economic conditions at home and abroad, as well as to adjustments to China’s macro-economic policy. China’s stock market maintained an uptrend in the first half of the year. In July, however, it suffered considerable fluctuations, but the general uptrend remained, albeit with fluctuations, which is in substantial agreement with our forecast at the beginning of the year (in which we forecast that the Shanghai Composite Index would break the 3000– point threshold in 2009). The bond market has seen steady growth both in terms of issues and trading volumes, and the market index has been regulated downward. In 2010, it is predicted that the effects of the financial crisis and other international factors on China’s capital market operations will weaken, and macro-economic policy may once again need to be regulated; domestic economic trends may thus drive the capital market into enter a new period of correction. I. Analysis of Stock Market Operations According to data issued by the China Securities Regulatory Commission, as of the end of August 2009, 1638 companies were listed on China’s stock markets, with a total of 2.5 trillion shares issued and a total market value of RMB 18.7 trillion, of which circulation market value comprised RMB 9.5 trillion. In the first eight months of 2009, stock market operations displayed the following characteristics: A. The Stock Market Maintained a Generally Upward Trend Primary market IPOs have recovered and refinancing amounts for listed companies have increased by the month; the secondary market has seen a sharp rise in trading volumes, and the stock index has

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risen in fluctuations. The stock market as a whole has taken on an uptrend. In the primary market, the regulatory authority suspended IPOs in the first half of the year to reduce their impact on the market but maintained the secondary offering channel for listed companies. IPOs recovered in July and this month alone, IPO financing from the A-share market reached RMB 54.4 billion. Table 10.1 shows that as of the end of September, a total of RMB 255.86 billion had been financed on securities markets within Chinese territory, equivalent to 72.4 percent of the financing amount for the whole of 2008. Of this, RMB 160.57 billion was raised through secondary offering, which became the primary channel for raising finance on the stock market. A-share market IPOs raised total financing of RMB 91.62 billion. In the secondary market, as the Chinese economy returned to recover under the encouragement of macro-control policies expanding domestic demand and stimulating the economy, the stock market has taken on an uptrend since November 2008, and this trend continued in the first seven months of 2009. It can be observed in Figure 10.1 that the Shanghai Composite Index rose to approximately 2200 points, its level at the end of September 2008, in the first trading week following the 2009 Spring Festival. Thereafter, the stock index has climbed in fluctuations, with a round of rapid rises occurring in June and July. The stock index even exceeded 3400 points at the end of July. A market correction then began: as of October 9, 2009, the Shanghai Composite Index closed at 2911.72 points. The stock index, which was rising in fluctuations, was coupled with increased trading volumes. As can be seen in Table 10.2, 21.5 billion shares were traded per day on average in the 162 trading days in the first eight months of 2009, an increase of 136 percent over the same period in 2008; the average daily turnover was RMB 211.9 billion, a year-on-year increase of 70 percent. The months of July and August recorded the highest trading volume, with 618.6 billion shares and 434.9 billion shares being traded respectively, increases of 279 percent and 220 percent over the same period in 2008 respectively; turnover totalled RMB 7 trillion and RMB 5 trillion, year-on-year growth of 205 percent and 328 percent respectively.

3852.2 86.7 112.3 67.3 230.8 213.7 203.9 930.0 484.0 598.8 2927.3

Total financing at home and abroad

3535.0 86.7 91.6 67.3 230.8 213.7 188.5 853.7 476.7 349.7 2558.6

Total domestic financing

1034.4 0.0 0.0 0.0 0.0 0.0 0.0 544.3 146.1 225.8 916.2

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

38.0 0.0 0.0 0.0 0.0 0.0 0.0 8.8 0.0 36.5 45.3

A Shares B Shares H Shares

IPO

2271.8 86.7 91.6 67.3 230.8 213.7 188.5 309.5 319.4 98.3 1605.7

Secondary offering 151.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 11.2 4.4 15.6

Share allotment

A Shares

77.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 21.2 21.2

Convertible bonds

Refinancing

Financing from Securities Markets over January–September 2009 (RMB 100m)

Source: China Securities Regulatory Commission website.

2008 total Jan. 2009 Feb. 2009 Mar. 2009 Apr. 2009 May 2009 Jun. 2009 Jul. 2009 Aug. 2009 Sep. 2009 2009 total

Date

Table 10.1

7.5 0.0 3.0 0.0 0.0 0.0 2.3 2.3 1.1 0.0 8.7

H Shares

analysis and forecast of china’s capital market in 2009–2010 163

246 15 20 22 21 18 22 23 21 22 184

Trading days

267112.6 14916.8 40390.0 37554.8 45740.1 37075.8 46178.8 70896.2 50537.5 44198.0 387488.2

Turnover ( RMB 100m)

–42.0 –67.9 91.3 31.6 70.0 25.8 173.9 204.8 328.0 282.9 79.4

YoY (%)

Stock turnover

1085.8 994.5 2019.5 1707.0 2178.1 2059.8 2099.0 3082.4 2406.6 2009.0 2105.9

Turnover (RMB 100m)

–43.0 –53.0 53.1 25.6 70.0 39.8 149.0 204.8 328.0 230.7 78.4

YoY (%)

Average daily turnover

24131.4 2042.1 4960.3 4301.7 4818.4 3776.3 4454.2 6186.4 4349.4 3919.4 38808.1

Trading volume (100m shares) –33.7 –22.8 294.3 130.5 144.7 78.5 193.8 279.2 220.8 158.0 135.7

YoY (%)

Trading volume

Stock Market Trading, January–September 2009

Source: China Securities Regulatory Commission website.

2008 total Jan. 2009 Feb. 2009 Mar. 2009 Apr. 2009 May 2009 Jun. 2009 Jul. 2009 Aug. 2009 Sep. 2009 2009 total

Date

Table 10.2

98.1 136.1 248.0 195.5 229.5 209.8 202.5 269.0 269.0 178.2 210.9

Trading volume (100m shares)

–34.8 13.2 215.4 120.0 144.6 98.3 167.1 279.2 316.6 122.8 134.5

YoY (%)

Average daily trading volume

164 wang guogang and zhang yuewen

analysis and forecast of china’s capital market in 2009–2010 165 Table 10.3

Global Stock Market Growth Rankings, January–July 2009 (%)

Ranking

Stock index

1 2 3 4 5 6

Shenzhen Component Index Shanghai Composite Index BSE Index RTS Index Bovespa Index Hang Seng Index

Growth

Ranking

Stock index

Growth

110.7

7

NASDAQ Composite

25.4

87.4

8

Nikkei 225 Index

16.9

62.4 61 45.8

9 10 11

10.8 6.5 4.5

43

12

DAX CAC 40 Dow Jones Industrial Average FTSE 100

3.9

Source: Beijing Qingnianbao, August 4, 2009.

China’s stock market proceeded rapidly upward in January–July 2009, while the global economy exhibited a downturn. As shown in Table 10.3, China’s stock market suffered a depression in 2008 with a declining amplitude ranking it second among major worldwide stock markets, but it ranked first or second worldwide due to its uptrend in the first seven months of 2009. This proves that the decline of China’s stock market in 2008 was not the result of the floating of “large and small-sized non-tradable shares” (because the floating of “non-tradable shares” continued in 2009 and the cumulative amount in 2009 is noticeably higher than that in 2008), but due to the performance of the national economy and listed companies. B. A Recovery Trend Has Appeared in the Performance of Listed Companies The overall performance of listed companies has declined since the third quarter of 2008, due to the impact of the financial crisis. The data in Table 10.4 show that operating profits of listed companies totalled RMB 244 billion in the third quarter of 2008, a year-on-year drop of 0.18 percent; this then dropped to RMB 177.6 billion in the fourth quarter, a year-on-year drop of nearly 11 percent. In 2009, the operating profit listed companies continue to record negative growth, but the rate of decline has narrowed. Operating income totalled RMB 2.4 trillion in the first quarter, a year-on-year drop of 10.1 percent; in

166 Table 10.4 Period

wang guogang and zhang yuewen Key Performance Indicators of Listed Companies for 2008–2009

Prime operating income Prime operating cost Total Growth Total Growth

Q1 2008 26151.4 Q2 2008 29993.5 H1 2008 56144.9 Q3 2008 29112.3 Q4 2008 31192.8 2008 116450 Q1 2009 23515.8 Q2 2009 29065.9 H1 2009 52581.7

59.78% 57.55% 58.58% 44.95% 37.04% 48.82% –10.08% –3.09% –6.35%

17282.5 20752.3 38034.8 20466.4 36235.7 94736.9 17777.3 22732.4 40509.7

54.54% 57.98% 56.40% 51.05% 131.91% 77.10% 2.86% 9.54% 6.51%

Operating profit Total Growth

Total profit Total Growth

3028.2 45.97% 3600.9 2540.9 3.95% 3742.5 5569.1 23.24% 7343.4 2440.1 –0.18% 3052.1 1776.3 –10.97% 453 9785.5 9.23% 10848.5 2717.2 –10.27% 2799 3722.3 46.50% 3823.8 6439.5 15.63% 6622.8

70.05% 48.42% 58.29% 5.30% –83.78% 5.01% –22.27% 2.17% –9.81%

Source: Calculated according to Wind Info data. Unit: RMB 100m.

the second quarter, the figure was RMB 2.9 trillion, a year-on-year drop of 3.1 percent. During this quarter, listed companies generally reversed the downtrend, recording operating profits of RMB 372.2 billion, or positive growth of 46.5 percent compared to the first quarter. Gross profits realised positive growth of 2.17 percent, totalling RMB 382.4 billion. In the first half of 2009, the operating profits of listed companies totalled RMB 634 billion, a year-on-year increase of 15.6 percent; affected by the depreciation of assets and other factors, however, gross profit totalled RMB 662.28 billion, a year-on-year drop of 9.8 percent. As the stock market has warmed up and listed company performance is expected to improve, stocks in the A-share market have enjoyed rising valuations. As shown in Figure 10.2, the average static price-earnings ratio of the A-share market rose from 15.5 at the end of 2008 to 34.6 at the end of July 2009, before then dropping somewhat. As of October 9, the average static price-earnings ratio of the stock market was 30, equivalent to the level in mid May 2008. C. Investor Confidence Has Improved Investor confidence has improved with the rise of the stock index and the swift growth in trading volumes. Except for January, the number of accounts taking positions in the A-share market has grown by the month. The number increased by 1.50 million accounts in August alone, becoming the month with the single sharpest increase in position-

analysis and forecast of china’s capital market in 2009–2010 167 holding accounts since December 2007. By the end of September, the figure stood at 50.83 million accounts holding A-share positions, a record high, reflecting increased market confidence from investors, and retail investors in particular. Another figure worthy of note is the net decrease in the balance of total savings deposits of urban and rural residents over July–August 2009—this dropped by RMB 43.665 billion in July and RMB 43.986 billion in August. It appears that we will see another trend similar to that in which urban and rural household savings deposits continued to decrease over a period of seven months from March 2007, while the A-share market maintained an upward trend. It must however be noted that the number of position-holding accounts still makes up only a low percentage of the total accounts: only 37.8 percent at the end of June, 2009, still below the average 2008 level. There was a sharp decline in total effective A-share accounts of 14 percent in July, and the relative increase in position-holding accounts in August then pushed up this percentage to 44.8 percent; the balance of total savings deposits of urban and rural residents rose from RMB 24.850288 trillion in August to RMB 25.5885 trillion in September, an increment of over RMB 730 billion, indicating that investors have once shifted to a prudent investment strategy. Current investor confidence should not therefore be a source of excessive optimism, especially as there has been a sharp decline in the stock market since October 16, 2007. II. Analysis of Bond Market Operations As of the end of September 2009, there were 1552 bonds of different types on China’s bond market, with a total face value of RMB 16.5 trillion. As shown in Figure 10.4, government bonds (34.3 percent), financial bonds (28.6 percent) and central bank bills (24.4 percent) accounted for a significant share of these. Non-financing corporate debt-financing instruments including corporate bonds, short-term financing bills and medium-term notes accounted for 12.4 percent of the total. The bond market has taken on the following major characteristics in the first three quarters of 2009:

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106 105 104 103 102 101 100 99 98 97 96 2008–01–02

2008–05–28

2008–10–22

2009–03–17

2009–08–07

Source: China Government Securities Depository Trust & Clearing Co., Ltd.

Figure 10.1

CSI Enterprise Bond Composite Index (net price).

A. The Market Index Was Corrected Figure 10.1 shows the CSI enterprise bond composite index trend since 2008. It can be observed that CSI enterprise bond composite index reached a high spot of 105.15 points following its rapid rise in the second half of 2008. A market correction occurred in 2009, with the index generally remaining above 103 points in January–February. This then dropped to over 102 points in March–June, and continued in downtrend in July, reaching 101.27 points on October 12. This market correction is mainly attributable to five aspects: First, the bond market rose considerably in the second half of 2008, meaning that a technical correction was required; Second, there was a significant increment in bank credit provisions as the government implemented a series of economic stimulus policies to address the negative impact of the financial crisis; depository financial institutions were therefore required to convert bond assets into credit assets and guarantee their capital adequacy ratio; Third, with economic recovery, investors became increasingly worried about inflation and the fine-tuning of monetary policy, and a number of institutions started to ease up or monitor proceedings; Fourth, the regulatory authority started to regulate commercial banks’ capital supplementation mechanisms, and require commercial banks to fully deduct regulation capital instruments such as subordinated debt and hybrid capital bonds from other banks from their

analysis and forecast of china’s capital market in 2009–2010 169 210

35000 Issue amount

No. of issues

30000

180

25000

150

20000

120

15000

90

10000

60

5000

30 0

0

Government bonds Financial bonds Short-term financing bills Corporate bonds Central bank bills Medium-term notes Source: China Government Securities Depository Trust & Clearing Co., Ltd.

Figure 10.2

Wide Range of Bonds Issued, January–September 2009.

supplementary capital; this to some extent weakened the enthusiasm of commercial banks to continue to hold this type of bonds. Fifth, the re-launch of IPOs in June led to the return of capital to the primary stock market. The primary bond market saw 694 issues of a wide range of bonds with a total issue amount of RMB 6.3 trillion in the first nine months of 2009, an increase of 47.7 percent and 9.7 percent respectively over the same period of 2008. Of these, 232 issues were government bonds, central bank bills and financial bonds for a total amount of RMB 5.2 trillion, accounting for 82.5 percent of the total issue amount of bonds. There were a total of 462 issues of corporate bonds, medium-term notes and short-term financing bills, accounting for 66.6 percent of the total issue quantity, but their issue amount accounted for a mere 18.2 percent of the total. Single non-financial corporate debt-financing instrument issues remained relatively small in scale, and the share of the primary market of this type of financing instrument still requires improvement. Figure 10.2 shows the wide range of bond issues. Figure 10.3 shows that government bond issues increased by RMB 876.2 billion to reach RMB 5.7 trillion compared to the same period of 2008, becoming the largest bond type in terms of increase as well as amount; this was followed by financial bonds, with an increment of RMB 871.9 billion and a total amount of RMB 4.7 trillion; mediumterm notes increased by RMB 668.6 billion over the past one year, with a growth amplitude exceeding 90 percent, marking the sharpest

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35000 September 2009

September 2008

30000 25000 20000 15000 10000 0 Government bonds Financial bonds Short-term financing bills Corporate bonds Central bank bills Medium-term notes

Source: China Government Securities Depository Trust & Clearing Co., Ltd.

Figure 10.3

Changes in the Types of Bonds on the Bond Market.

growth rate; the People’s bank of China reduced its central bank bill issues in order to implement a moderately loose monetary policy. As a result, the managed capacity of central bank bills saw a yearon-year drop of almost RMB 800 billion, and now stands at RMB 4 trillion. B. Financial Bond Spot Transactions Increased Significantly There were a total of 169,000 spot transactions in the interbank bond market in the first three quarters of 2009 with a trading volume of RMB 37.7 trillion, an increase of 37.1 percent and 30.1 percent respectively. Of these, financial bonds performed most distinctly. The number of transactions and the trading turnover of financial bonds rose from 25,000 and RMB 5.2 trillion in the first three quarters of 2008 to 47,000 and RMB 13.3 trillion for the same period in 2009, increases of 84.3 percent and 155.1 percent respectively, while the outright delivery volume of financial bonds accounted for 35.25 percent of the total, almost two-fold the figure for the previous year. Outright transactions of medium-term notes also increased considerably, with an outright delivery volume of RMB 4.8 trillion and market share of 12.7 percent, far higher than the figure of 1.45 percent for the same period of the previous year. Due to a drop in market stock, central bank bills saw a significant reduction in spot trading volumes as well as a substantial decline in market share, but they still accounted for over

analysis and forecast of china’s capital market in 2009–2010 171 30 percent of the total. Other bond types all saw stable increases in their spot trading volumes, but little change in their market shares. The increment in the volume of financial bond transactions is firstly attributable to a substantial increase in their issue quantity since the beginning of the year. This bond type is always characterised by its high liquidity and the increase in stock obviously promoted trading volumes on the secondary market. Secondly, the new regulatory provisions relating to commercial banks’ holdings of financial bonds encouraged a number of commercial banks to adjust the varieties of bonds held, and reduce the percentage of financial bonds to appropriate levels. Thirdly, as the market index was corrected downward, a number of investment institutions reduced their holdings of higher liquidity bonds to avoid risk, thus increasing the trading volume of financial bonds. C. Investment Institutions Reduced Their Holdings of Bond Assets As part of the general corrective trend of the bond market, non-banking financial institutions, securities companies, insurance agencies, investment funds and non-financial institutions all reduced their holdings of bonds to a greater or lesser degree, except for certain institutions such as commercial banks and credit unions, which increased their bond holdings by a small margin. In the first three quarters of 2009, securities companies completed net bond sales of RMB 366.4 billion, investment funds RMB 259.6 billion, insurance company RMB 151.7 billion, while non-bank financial institutions and non-financial enterprises also recorded small net sales amounts. Funds managed by securities companies, investment institutions and insurance agencies are mainly investment funds pursuing a return, and these institutions adjust their positions significantly to avoid losses during market corrections. More importantly, the stock and bond markets have formed relatively close connections. Cross-market arbitrage has become a significant investment strategy for a number of investment institutions. When the stock market fluctuated upward and IPOs were re-launched, investment institutions were therefore sure to increase their investment in the stock market. Insurance companies and other relatively moderate investors may also increase their investment purchases of new shares and stock-type funds. The primary stock market has in fact become an important investment field for conservative institutional investors in recent years. The

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capital scale participating in new share subscriptions has been increasing, and this even has a direct influence on the steady run of the bond and money markets. China State Construction Engineering Corporation ranked first in terms of individual IPO completed during the JulySeptember 2009 period, when it issued 12 billion shares to generate funds of RMB 50 billion, although almost RMB 1 trillion in subscription capital was received; this was followed by Metallurgical Co. of China Ltd., whose subscription capital exceeded RMB 560 billion, Everbright Securities Co., Ltd. with more than RMB 460 billion, and China Travel Service Head Office and Sichuan Expressway Co. Ltd. with subscriptions of RMB 200 billion respectively. Research shows that a large proportion of this large-scale subscription capital came from the bond and money markets. Intensive issues of new shares are usually marked by an outflow of funds from the bond market. III. Outlook for the Capital Market in 2010 Looking forward to 2010, the financial crisis and other external economic factors will have a decreasing impact on China’s capital market against the background of the recovery of the global economy. Factors such as domestic economy and policy adjustments will have an increasing impact on the capital market.

38 35 32 29 26 23 20 February

March

April

May 2008

June

July

August September

2009

Source: National Bureau of Statistics.

Figure 10.4

Monthly Growth Rate (%) of Urban Investment in Fixed Assets, 2008–2009.

analysis and forecast of china’s capital market in 2009–2010 173 A. Domestic Macro-Economic Trend The domestic economic situation is becoming the dominant factor affecting China’s capital market trends. The domestic economy started to shake off the impact of the financial crisis in the beginning of 2009, and has grown rapidly quarter by quarter. GDP grew by 6.1 percent in the first quarter, 7.9 percent in the second quarter, 8.9 percent in the third quarter, and this is expected to grow by over 10 percent in the fourth quarter; annual economic growth is expected to remain at approximately 8.3 percent. Encouraged by a series of economic stimulus policies, investment in fixed assets has grown substantially and has become the most important factor driving economic growth. In the first three quarters, investment in fixed assets totalled RMB 15.5057 trillion, marking year-on-year growth of 33.4 percent or 6.4 percentage points. Of this, urban investment in fixed assets made up RMB 13.3177 trillion, or year-on-year growth of 33.3 percent or 5.7 percentage points. As Figure 10.4 shows, in terms of the single-month fulfilled investment amount, the growth rate of investment in fixed assets for each month was far higher than one year before; investment in fixed assets in the fourth quarter is expected to continue this higher growth rate.

26 23 20 17 14 11 8 5 February

March

April

May 2008

June

July

August

September

2009

Source: National Bureau of Statistics.

Figure 10.5

Monthly YoY Growth Rates (%) of Total Retail Sales of Consumer Goods, 2008–2009.

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10 8 6 4 2 0 –2 –4 January February March

April

May

2008

June

July

August

September

2009

Source: The National Bureau of Statistics.

Figure 10.6

CPI Monthly YoY Changes, 2008–2009 (%).

In terms of domestic consumption demand, as shown in Figure 10.5, gross retail sales of consumer goods totalled RMB 8.9676 trillion in the first nine months of 2009, year-on-year growth of 15.1 percent; this grew by 17.0 percent in real terms, a year-on-year increase of 2.8 percentage points. Nonetheless, the monthly growth rates of gross retail sales of consumer goods for the January–September 2009 period were all lower than those for the same period of 2008. The domestic consumption growth trend is unlikely to reverse in 2009. In foreign trade, exports were most affected by the financial crisis and the international economic recession. China’s total exports reached RMB 846.65 billion in the first three quarters of 2009, a year-on-year drop of 21.3 percent. China’s main trading partner nations and regions are in recession, and economic regulation and trade protectionism has worsened, increasing the number of trade disputes and frictions involving China. Such circumstances make it hard to reverse China’s current export growth trend. Annual total exports are expected to drop by approximately 20 percent compared to the year before, and this downtrend may extend to the first quarter of 2010. Figures 10.6 and 10.7 have been drawn up based on data from the National Bureau of Statistics. The two figures show that the CPI dropped by 1.2 percent in August compared to the preceding year, but increased by 0.5 percent compared to the preceding month, the first time that the CPI link relative ratio registered positive growth in 2009.

analysis and forecast of china’s capital market in 2009–2010 175 20 15 10 5 0 –5 –10 –15 January February March

April 2008

May

June

July

August

September

2009

Source: National Bureau of Statistics.

Figure 10.7

Monthly YoY Change Trend of the Raw Materials, Fuels, Power Purchasing Price Index.

In September, CPI increased by 0.4 percent compared to August. Inflationary expectation has increased. In our opinion, inflation has little chance of becoming a major issue affecting economic growth in the remaining months of 2009. This is due to the following reasons: First, monthly CPI year-on-year growth has generally remained in the –0.8 to –1.8 percent range over the January–September period, except for January. GDP link relative ratio growth in August and September took on certain tendency features, but the relatively small amplitude is not significant. This situation still however needs attention. Secondly, CPI changes during the year do not have the structural features that these exhibited during the preceding year, and no extreme contrast has occurred in changes in the price of goods and services. Excluding structural rises, even though CPI may achieve positive growth in 2009, its overall rise is unlikely to reach 4 percent, the upper limit of the government’s regulation goal, except in the event of the occurrence of another unusual event. Thirdly, as CPI rose substantially over the same period of 2008, the year-on-year mild drop of this index in 2009 is significant in terms of mean reversion; as long no fundamental change occurs to the domestic supply and demand situation of goods and services, there is little possibility of substantial inflation developing in the fourth quarter of 2009 and the first quarter of 2010.

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Fourthly, the raw materials, fuels and power purchasing price index, which represents the price of production means, has declined sharply since the beginning of the year, and its year-on-year declining amplitude at the end of September remained at –10.1 percent. Even allowing for the hysteresis quality of the adjustment to fuel and power prices, it is still impossible to identify any evidence which foretell the future appearance of economic overheating. In summary, it is a foregone conclusion that China will maintain an economic growth rate in excess of 8 percent this year. Investment-driven growth will become even more noticeable, the domestic consumption contribution rate will remain insufficient and the drop in exports will become the major negative factor against economic growth. CPI may turn positive in the fourth quarter of 2009, but substantial inflation is less likely to appear before the second quarter of 2010. The good short-term economic situation provides a certain foundation for the stable operation of the capital markets, but the contradictions of the real economy in terms of economic growth patterns, industrial structure and regional structure are still noticeable, and anxiety is increasing over economic overheating and inflation. All of these negative factors will affect the uptrend of the capital market. 1. Trend of Financial Operations Guided by the government’s moderately loose monetary policy, financial institutions have spared no effort in providing new loans, and this increased substantially in 2009. As of the end of September, financial institutions had provided new loans of RMB 39.04 trillion, an yearon-year increase of 34.16 percent or an increase of 15.43 percentage points over the end of 2008; financial institutions’ domestic and foreign currency loan balance stood at RMB 41.39 trillion, with a total increment during the first three quarters of RMB 9.4 trillion, an increase of 33.8 percent or RMB 5.6 trillion over the same period of the preceding year. The monthly growth rate of loans has risen month by month in 2009 (see Figure 10.8), and the growth amplitude since March has been noticeably higher than that for the same period of 2008. The increased loan limit has not only provided support for the real economy to develop, but has also enabled enterprises to use temporarily idle credit funds to make short-term investments in the capital market through various channels, thus providing a certain level of liquidity to the capital market.

analysis and forecast of china’s capital market in 2009–2010 177 40% 35% 30% 25% 20% 15% 10% 5% 0% January February March

April 2008

May

June

July

August

September

2009

Source: People’s Bank of China.

Figure 10.8

Monthly Growth Rates of Financial Institution Domestic and Foreign Currency Loans.

Coupled with the increase in credit provision, enterprise profits and individual incomes generated a remarkable increase in corporate deposits with financial institutions. As of end-September, financial institutions’ outstanding various deposits in all currencies stood at RMB 59.8 trillion, of which RMB 11.8 trillion comprised the increase in the first three quarters of 2009, marking year-on-year growth of 27.8 percent or RMB 5.1 trillion. Figure 10.9 shows that the increase in corporate deposits is apparently higher than the increment in personal savings deposits. March and June were the months with the highest increases in enterprise deposits, reaching RMB 1.4 trillion and RMB 1.1 trillion respectively. Those two months also saw the sharpest increases in credit of the first three quarters. Financial institutions’ domestic currency credit and foreign currency credit increased by RMB 1.9 trillion and RMB 1.8 trillion respectively, indicating that the incremental change in enterprise deposits mainly came from the incremental change in credit. Personal savings deposits recorded negative growth in July and August, which is most probably related to the re-launch of IPOs. Inflows of bank deposits create the financial conditions for enterprises and individuals to invest in the capital market. When a bullish capital market is forecast, investment in it increases accordingly.

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16000 14000 12000 10000 8000 6000 4000 2000 0 –2000 February

March

April

May

Monthly increase in enterprise deposits

June

July

August

September

Monthly increase in personal deposits

Source: People’s Bank of China.

Figure 10.9

Increase in Deposits by Month in 2009 (RMB 100 million).

As shown in Figure 10.10, the interbank market interest rate remained relatively low in the first half of 2009 due to the impact of the loose monetary policy and low inflation expectation. The overnight call rate remained in the 0.81–0.87 percent range before rising in the second half of 2009. The weighted average monthly interbank rate was 1.27 percent in September, an increase of 0.06 percent over August. The rise in the interest rate indicates that the banking system saw a certain level of demand for liquidity following a substantial increase in credit provision over the preceding half-year, and expectations of a tightening in credit policy and inflation have increased. The credit increment will be the major factor affecting liquidity in 2009 and 2010. The expansion of credit has been restricted by the bank capital adequacy ratio requirement, the increasing risk for potential bad loans, and insufficient projects in the real economy for which to provide credit, all of which made the expansion of credit provision difficult to maintain in the first half of 2009. Therefore, incremental loans will become characterised by their high growth rate as well as a sharp decline in their absolute amount. Bearing in mind the huge amount of new loans and growth amplitude in 2009, credit growth can be expected to slow noticeably, and the capital market will become relatively tight in 2010.

analysis and forecast of china’s capital market in 2009–2010 179 2.00 1.50

1.00

0.50

0.00 January February March

April

1-day weighted average interest (%)

May

June

July

August

September

7-day weighted average interest (%)

Source: People’s Bank of China.

Figure 10.10

Inter-Bank Lending Rate by Month.

2. Policy Factors Maintaining economic growth, promoting popular well-being and maintaining social stability are the main government objectives in 2009. The promulgation and regulation of macro-economic regulatory policies must consider whether these will facilitate these goals to be reached. The proactive fiscal policy and the moderately loose monetary policy adopted to fend off the impact of the international financial crisis have had a positive effect since the second quarter of 2009, with a recovery of the economy and the improvement of the major economic indices. It should however be noted that the foundations for long-term sustained, stable economic growth remain relatively weak, particularly the structural contradictions in the economy which cannot be resolved through short-term fiscal and monetary policy; it will be necessary to generate institutional innovation and identify new economic growth hubs and area for development. We therefore believe that no significant changes will be made to the existing policy framework before mid-2010. It however remains likely that a certain amount of finetuning will be made to macro-economic policy in terms of its strength, structure and priorities depending on economic operations, so as to embody decision-makers’ intention to transform total growth to incorporate both volume and quality, and thus achieve stable, rapid economic development.

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If GDP growth reaches a rate in excess of 10 percent in the fourth quarter of 2009, the GDP growth rate in the first half of 2010 will remain at a level in excess of 10 percent. Against this background, if fixed asset investment and incremental loan growth rates remain at high levels, CPI and foreign trade growth turn positive, and stock market and housing market prices continue to rise, the Chinese economy in the first half of 2010 may develop similar trends to that before October 2007. Macro-economic policy may therefore enter a sensitive regulation period. Preventing a hard landing and protecting the achieved policy results requires making a practical assessment of the economic trend since 2003 and avoiding simply calling it “overheated”. D. Possible Capital Market Trends As the CPI may turn positive and water, electricity, gas, transport and agricultural product prices may rise in 2010, the central bank may adjust the deposit and loan interest rates upward; the capital supply in 2010 may not be as loose as in 2009, and the development of the bond and stock markets may thus be restricted. With regard to the bond market, corporate and other bonds issued by operating institutions may increase in amount terms, but the current pattern in which government bonds are dominant will be difficult to change, and the interbank market will remain the major exchange site for bonds; against a background of rising deposit and loan interest rates, the bond interest rate may increase, leading to a decline in the trading prices of bonds issued in 2009; furthermore, bond market trading volumes will continually enlarge as the bond issue scale grows (including central bank bills), but the bond market will also see increasing fluctuations in terms of prices and trading volumes; finally, innovation in terms of bond issuing modes, varieties and trading will continue, but promoting bond futures trading will remain a tough job. With regard to the stock market, it is unlikely that the market in 2010 will be able to maintain the sharp rise (in excess of 60 percent) seen in the first half of 2009. Favourable factors include the efficient operation of the macro economy, the improvement in listed companies’ performance, the fairly tight but still adequate market capital, the introduction of stock index futures and innovation in the GEM market, among others. There however also remain numerous unfavourable factors including a declining new loan growth rate, inflation, expanding IPO size and increased issue density, as well as increasing

analysis and forecast of china’s capital market in 2009–2010 181 pressure for the floating of large and small-sized non-tradable shares. Under the combined effect of these factors, the stock market has little space to grow in 2010; trading volumes may expand, but fluctuation spreads will expand accordingly. Overall, the stock market is likely to display an upward trend with increasing amplitude. In this context, single shares will develop different price trends. Preventing and eliminating investment risk will depend on investors’ abilities to consider the situation as well as their skill.

REVIEW OF FINANCIAL AND ECONOMIC SITUATION IN 2009 AND OUTLOOK FOR 2010 Ma Shuanyou I. Review of Financial and Economic Situation in 2009 China’s economy saw active changes with the implementation of a proactive fiscal policy and moderately loose monetary policy in 2009. As a whole, the national economy in the fourth quarter of 2008 reversed the trend of sharp decline in the growth rate. Preliminary estimates show that GDP grew by 7.1 percent in the first half of 2009, a year-onyear drop of 3.3 percentage points but an increase of 1.0 percentage point over the first quarter. By quarter, GDP grew by 6.1 percent in the first quarter and 7.9 percent in the second quarter. In the third quarter, numerous indices continued their rapid growth, while economic growth stabilised and tended to recover, showing that China’s package plan to address the international financial crisis and maintain stable, rapid economic development has produced results. A. The General Production Situation Is Improving 1. Summer grain crops achieved an increase in yield for the straight sixth year. China’s summer grain output was 123.35 million tonnes, an increase of 2.2 percent over 2008, breaking the five-year periodic cycle (two good harvest years, two ordinary harvest years and one bad harvest year) of the last hundred years. Livestock and poultry production in the first half of 2009 totalled 35.8 million tonnes, an increase of 6.3 percent. 2. Industrial production saw accelerated growth. The added value of industrial enterprises above a designated size for the January–August period grew by 8.1 percent compared to the same period of 2008, and increased by 1.1 percentage points compared to the first half of 2009. The product sales rate of industrial enterprises was 97.4 percent, an increase of 0.2 percentage point over the first half of 2009. The power and transportation indices reflecting industrial operation conditions all moved upward. During the January-August period, total power

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consumption saw cumulative positive growth of 0.36 percent; social traffic growth accelerated from May onwards, with year-on-year growth of 12.6 percent in August. 3. The tertiary industry maintained a steady, rapid growth trend. In the first half of 2009, the added value of the tertiary industry saw yearon-year growth of 8.3 percent, and contributed to economic growth by 47.4 percent, a year-on-year increase of 6.2 percentage points. B. Domestic Demand Maintained Rapid Growth 1. Investment grew rapidly. Over the January–August period, urban investment in fixed assets saw year-on-year growth of 33.0 percent or 5.6 percentage points. Real estate development investment grew by 14.7 percent, an increase of 4.8 percentage points compared to the first half of 2009. 2. Consumption growth is stable. Over the January–August period, gross retail sales of consumer goods saw year-on-year growth of 15.1 percent and real growth of 17.0 percent, or year-on-year growth of 3.2 percentage points. Of this, gross retail sales of consumer goods at the county level and below grew 1.5 percentage points faster than in cities. The upgrading of the urban and rural personal consumption structure accelerated, and domestic passenger vehicle sales rose by 45.5 percent year-on-year; commercial housing sales by surface increased by 44.5 percent, and commercial housing sales by revenue increased by 74.6 percent year-on-year. C. The Foreign Trade Situation Remained Harsh From January to August, China’s imports and exports totalled USD 1.3387 trillion, a year-on-year drop of 22.4 percent. Of this, export comprised USD 730.7 billion, a year-on-year drop of 22.2 percent; imports made up USD 607.9 billion, a year-on-year drop of 22.7 percent. The trade surplus stood at USD 122.82 billion, a year-on-year drop of 19.2 percent. The amount of foreign direct investment actually used was USD 55.86 billion, a year-on-year drop of 17.5 percent. D. The CPI Year-On-Year Rate of Decline Shrank, but the CPI Link Relative Ratio Became a Positive Number 1. The CPI year-on-year rate of decline shrank, but the CPI link relative ratio rose. From January to August, the CPI saw a year-on-year

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drop of 1.2 percent, it dropped by 1.2 percent year-on-year in August, but rose by 0.5 percent compared to July, the first link relative ratio rise in 2009. 2. The PPI year-on-year rate of decline shrank, but the PPI link relative ratio continued to rise. From January to August, the PPI dropped by 6.4 percent year-on-year; it dropped by 7.9 percent year-on-year in August, but rose by 0.8 percent compared to July, causing the link relative ratio to rise for the fifth straight month. 3. Housing prices saw a year-on-year rise. In August, housing sale prices in 70 large and medium-sized cities saw year-on-year growth of 2.0 percent, a growth amplitude 1.0 percentage points higher than July. The link relative ratio rose by 0.9 percent, marking the sixth month that the link relative ratio rose. E. Economic Growth Quality Improved 1. Generally stable employment. From January to August, the urban new employment population was 7.57 million, or 84 percent of the annual target; a total of 3.57 million laid-off workers were reemployed, or 71 percent of the annual target; 1.07 million people with employment difficulties found employment, or 107 percent of the annual target. By the end of August, the national urban registered unemployment rate was 4.3 percent. 2. Rapid growth of personal income. In the first half of 2009, urban household per capita disposable income stood at RMB 8856, a yearon-year increase of 9.8 percent or real growth of 11.2 percent. Per capita rural personal cash income was RMB 2733, a year-on-year real increase of 8.1 percent. 3. Narrowing decline in industrial profits. From January to August, national industrial enterprises above a designated size achieved profits of RMB 1.6747 trillion, a year-on-year drop of 10.6 percent; the rate of decrease was 12.3 percentage points lower than in the first five months; the revenue performance of the power, iron and steel, and non-ferrous metal sectors improved remarkably. F. Monetary Credit Operated Steadily As a Whole At the end of August, monetary credit continued swift growth, with M2 growth of 28.5 percent, M1 growth of 27.7 percent and RMB loan growth of 34.1 percent, increases of 0.1, 1.3 and 0.2 percentage points over the preceding month respectively. From January to August, the

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new loan amount was RMB 8.15 trillion, a year-on-year increase of RMB 5.04 trillion. New loans in August totalled RMB 410.4 billion, a year-on-year increase of RMB 138.8 billion. The majority of loans were medium or long-term. Progress in credit provision in July and August was slower than that in the first half of 2009, but allowing for note financing, ordinary loans grew by 29.6 percent in August, showing that credit growth remained forceful. In August, the growth in SME loans reached 30.8 percent, an increase of five percentage points over the growth rate of loans for all kinds of enterprises; outstanding SME loans accounted for 54.4 percent of all outstanding business loans. G. Fiscal Revenue Continued to Rebound From January to August, China’s fiscal revenue was RMB 4.5910 trillion, a year-on-year increase of 2.6 percent, the first positive growth this year, while the growth amplitude was 5.0 percentage points higher than that for the first half of 2009. Whereas central revenue saw a year-on-year decline of 1.6 percent, local revenue saw a year-on-year increase of 8 percent. National fiscal revenue maintained positive growth for four consecutive months from May onwards, rising month by month. Of this, fiscal revenue in August grew by 36.1 percent, which was related to the lower base number last year as well as certain lumpsum new income factors this year. Allowing for these special lump-sum new income factors, national fiscal revenue grew by approximately 17 percent. If transfer income generated by product oil tax reform is also allowed for, national fiscal revenue grew by approximately 10 percent. Meanwhile, fiscal expenditure maintained rapid growth. From January to August, fiscal expenditure was RMB 3.8625 trillion, a year-onyear increase of 22.7 percent; central and local expenditure increased by 19.2 percent and 23.7 percent respectively, reflecting the steady implementation of the proactive fiscal policy. Looking forward to 2009 as a whole, bearing in mind that the economic stimulus policy package will have further effects, that business self-regulation will gradually take effect, as well as the lower economic growth base number in the fourth quarter of last year, it is expected that economic growth will accelerate in the next few months, enabling annual GDP growth to achieve the goal of approximately 8 percent; commodities prices may rise before and after November, and the annual CPI growth rate will be within 1 percent; fiscal revenue will maintain positive growth but its annual growth rate is expected to

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be lower than GDP growth, meaning that the contradiction between financial revenue and expenditure will remain very noticeable. II. Major Issues in the Current Economy China has effectively fended off the major impact of the international financial crisis, stabilised confidence in all areas in a short time, and curbed the economic growth downtrend, but a sober assessment must be made that the business upturn trend is still neither stable, firm nor balanced, and economic development remains peppered with difficulties and challenges. A. The External Economic Environment Remains Harsh The global economy has issued a certain number of positive indicators and the recession has slowed, but the road to recovery may be long and tortuous, and bring with it many challenges. 1. The current global economic pickup is to a large extent attributable to the economic stimulus policies implemented by a number of nations, but the internal impetus for economic growth will require a long time to recover. The current international financial crisis has had a broad and deep impact, and the recession in asset prices and credit shrinkage will affect investment growth; personal wealth has shrunk (according to Merrill Lynch estimates, the total loss in US household wealth was USD 12.9 trillion, equivalent to a 20% reduction in household wealth from its peak in 2007, or to 93 percent of US GDP in 2007); the unemployment rate remained high (in August, the US unemployment rate remained as high as 9.7 percent, the highest since June 1983), and all of these factors will restrict the growth of private consumption. 2. Certain policy risks have piled up while the crisis was being addressed. For instance, the loose monetary policies adopted in many nations have injected significant liquidity into the global economy, and the major reserve currency, the US dollar, is facing increasing depreciation pressure. The US dollar index recently reached a historical low, bulk commodity prices face rising pressure, and expectation of international inflation has risen. 3. The losses and risks in the financial system have not been fully cleared, the United States has started to adjust its growth pattern of

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consumption by credit, and various forms of protectionism have arisen; all of these are likely to delay the global economic recovery process. 4. The main economies have been advocated to maintain a loose monetary policy over the long term, but opinions differ over the period and degree of implementation; when and how to implement an exit strategy has become a new variable affecting the ongoing recovery of the world economy. China’s economy therefore still faces the adverse impact of declining external demand. The government’s policies to stabilise external demand have achieved a certain degree of success, and China’s exports account for an increasing share of the world market, but the drop in China’s imports and exports continues to grow. B. The Internal Impetus and Vitality for Economic Growth Remain Insufficient Currently, investment growth is mainly reliant on government infrastructure investment, and manufacturing investment growth has slowed; consumption growth is mainly derived from car sales, etc., and a considerable number of commodities are still characterised by slow consumption growth; the pickup of prices is mainly attributable to a rise in food prices. Against a background of severe overcapacity, it is possible that deflation in the prices of general goods may appear. For instance, iron and steel prices fell significantly with the recovery of productive capacity in August. Private investment has not kept up sufficiently rapidly. In the first 8 months of the year, urban non-state investment rose by 28.3 percent, 11.6 percentage points lower than state-owned investment. Urban investment in fixed assets in budgetary funding sources increased by 82.7 percent, and their proportion of total investment capital rose from 2.8 percent in the first quarter of 2007 to 5.3 percent, almost double, indicating that independent economic growth momentum remains relatively weak. C. Structural Contradictions Are Worsening 1. The imbalance of investment and consumption has worsened. In the first half of 2009, gross investment in fixed assets accounted for 65.3 percent of GDP, while investment contributed to 87.3 percent of GDP growth, which was 2.4 percentage points higher than the contribution rate of consumption to economic growth. 2. Overcapacity has worsened. As there was a certain level of recovery in demand, a segment of backward production capacity resumed

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production. New projects have also run into trouble due to their concentration in limited industrial sectors, similar technologies and products. In some regions, local governments are continuing to draw up new projects and plan capacity expansion in industries already suffering from overcapacity or overheated investment, all in the name of structural adjustment and elimination of backward capacity. 3. Mergers and restructuring, particularly across provinces and cities, remained subject to quite a number of restrictions, and energy conservation and emission reduction initiatives appeared to weaken in some areas. D. It Is Difficult for Agriculture to Develop Steadily and for Agricultural Workers to Increase Their Income Quite a number of agricultural products currently face price decline pressure and decreasing production benefits. The sown area of cotton, soybean and sugar crops has decreased compared to the preceding year, there is considerable uncertainty over whether annual grain harvests can be achieved, and the flood and animal epidemic prevention situation is grim. Rural migrant workers’ incomes have also been severely affected by enterprises’ under-capacity and staff and salary cutbacks. In such circumstances, it is therefore very difficult for agricultural workers to increase their incomes. Agricultural households’ operating income is expected to increase, but the growth increase will be lower than in previous years; growth in the wage income of agricultural workers may turn negative; agricultural workers’ transfer income will continue to increase, but the growth rate will weaken; agricultural workers’ property income will increase but its contribution to agricultural workers’ income growth is limited. According to the estimates of a number of departments, agricultural workers’ per capita net income growth in 2009 will decline by approximately 5 percent compared to 2008. E. Numbers of Enterprises Still Face Operational Difficulties As the Chinese economy has a higher dependence on foreign trade, the sharp decline in external demand has resulted in a decrease in orders for many export-oriented enterprises, and furthermore, as many orders are short-term, under-capacity operations have a severe issue, with sluggish production growth, which also has an adverse impact

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on the enterprises involved. Enterprise profitability remains far from ideal, and unprofitable enterprises’ deficits continue to increase. From January to August, national industrial enterprises above a designated size saw a profit decline of over 10 percent, and state-owned enterprises’ profits dropped by 19.6 percent year-on-year. Furthermore, small enterprises face financing difficulties, while industrial enterprises are finding it hard to eliminate such difficulties, thus affecting employment and workers’ income growth. Current employment conditions remain harsh, which is mainly reflected in high employment pressure for college and university graduates and major employment difficulties for the disadvantaged. F. The Assets Market Has Experienced Considerable Fluctuations The Shanghai Composite Index rose by almost 25 percent in August. The stock market has picked up but its foundations remain insufficiently solid. “Stagnation” has affected the real estate market. Housing prices in 70 large and medium-sized cities saw a year-on-year rise in August for the third straight month, and prices in some areas exceeded the peak in 2007; the selling prices of new houses and second-hand houses both rose, but in certain large and medium-sized cities, the housing sales area saw a dramatic decline in its link relative ratio. For instance, the sales area of new commercial housing in Shenzhen in August dropped by 42 percent compared to July; in Beijing, the trading volume of future marketable housing properties recorded a link relative ratio drop of 10 percent, and the trading volume of complete housing properties saw a link relative ratio drop of 38 percent. G. Financial Risk and Local Public Finance Risk Deserve Attention This year, the majority of new loans have shifted to government investment-related projects including infrastructure construction, energy, traffic, etc. at the central or local levels. As these projects are characterised by their large credit amounts and long term nature, an increasing number of loans are long-term, and more loans are concentrating on borrowers supported by government credit. In view of this credit centralisation trend, the number of loans which have flown to the stock or housing markets, the lack of any fundamental improvement in the overcapacity pattern, the risk of incremental loans becoming bad assets is rising. Furthermore, local government debt is growing rapidly,

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and the number of local investment and financing platforms in particular is soaring. As of the end of May, China had 4,985 investment and financing platforms, and local government investment and financing platforms had been established in 87 percent of provinces, 91 percent of cities and 93 percent of counties, and outstanding government debt due to local investment and financing platforms increased sharply. As these investment and financing platforms mainly depend on land revenue to pay off debt in a direct or indirect manner, financial risk will emerge once land revenue turns negative. III. Financial and Economic Outlook for 2010 As a whole, China’s package plan and policies to respond to the international financial crisis will perform more effectively, the world economy will enter a stage of mild recovery, China’s domestic demand will maintain steady and rapid growth and China’s external demand will improve in 2010, enabling China’s macro economy to maintain a trend of steady recovery and gradually enter the ascendant period of a new economic cycle. A. China’s Economy Will Maintain Its Recovery Trend There are numerous reasons for this, including: 1. The vigorous growth of leading indicators such as new projects, investment; enterprise benefits and market demand have picked up, liquidity remains adequate, and enterprise investment capacity and desire will rise accordingly; with the accelerated implementation of the RMB 4 trillion investment plan, and the increasing effectiveness of the policy of structural tax abatement, investment will maintain rapid growth. 2. The higher Engel coefficient and high rigidity of consumption demand; fiscal subsidies to low-income groups have continued to increase, and personal income is growing faster than GDP growth; the increase in investment in improving people’s well-being such as education, medical treatment, low-rent housing, employment and social security have enabled a reduction in personal preventive savings; because of the reduction and exemption of taxes on the trade of cars and housing, and the full implementation of policies governing

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the sale of designated household appliances, cars and motorcycles in rural areas, and the policy of replacing old household appliances and cars with new ones, personal consumption demand will maintain steady growth. 3. Taking into account the effects of the policy for stabilising external demand, the slowdown of the global recession and possible global economic recovery, the Federal Open Market Committee in particular expected in June that the US economy would see modest growth in the second half of the year, record an annual economic decline of 1.5–1 percent in 2009, see a gradual recovery in 2010 with economic growth of 2.1–3.3 percent, and accelerated growth of 3.8–4.6 percent in 2011, meaning that China’s decline in exports will narrow gradually, the decline in external demand will have a decreasing impact on economic development, and the negative pull action may disappear in 2010. Based on an analysis and assessment of investment, consumption and exports, we expect that the economy will grow by approximately 8.5 percent in 2010. A number of international bodies have in fact adjusted their forecast for China’s economic growth upward. For instance, Standard Chartered Bank changed its forecast for China’s economic growth rate in 2010 from 8.0 percent to 8.9 percent, and JP Morgan has raised its forecast of China’s economic growth from 8.5 percent to 9.0 percent. B. Prices Will Recover The loose monetary environment is creating the basic conditions for a recovery of prices. China’s prices will pick up generally in the context of a stabilised recovery of agricultural product prices, a gradual recovery of capital goods, and a rise in the prices of bulk commodities on international markets. Furthermore, China’s numerous industrial materials have a rising dependence on the international market, and these have a particularly strong synchronism with the US PPI and prices of capital goods. With the weakening of the impact of the international financial crisis, the US dollar may depreciate again due to a excessively low money multiplier, a possible acceleration of currency flows and greater provision of base currency, thus massively increasing the risk of international inflation. In terms of China’s price trends, the carry-over effect affected CPI considerably before November, and the CPI is likely to rise in

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November year-on-year. This is unlikely to generate strong inflationary pressure in practical operations this year, and annual CPI for 2009 is expected to drop by approximately 0.5 percent. The risk of price inflation will come from fluctuations in agricultural product prices, a rise in the prices of international bulk commodities and a rise in housing prices in 2010; China’s PPI and raw materials, fuels and power purchasing prices in particular may rise significantly. If the expectation of currency inflation continues to grow over the coming year, costpull and imported inflation in particular will increase, and the CPI may continue to rise after turning positive. In the overall pattern of supply exceeding demand, however, there is little space for inflation of general consumer goods, so there is little possibility of generalised inflation. The initial forecast is that CPI will grow by 2–3 percent in 2010, but this does not exclude the possible higher growth rate for certain months. C. The Contraction in Fiscal Revenue and Expenditure Is Still Notable Fiscal revenue will continue to recover in the second half of 2009 as a number of favourable changes in economic operations are reflected in sales tax and other related taxes, certain tax increment measures such as the increase in the cigarette consumption tax rate, product oil tax reform take effect, and the financial and taxation authorities enhance the administration of taxation. As price levels are generally lower, however, enterprise benefits have declined as a whole, imports continue to decline, the policy revenue reduction effect will continue, and fiscal revenue will not register any remarkable recovery, making it particularly difficult for the central fiscal authorities to achieve their budget objectives, and the contradiction between annual financial revenue and expenditure will remain noticeable. For the coming year, as the 2009 policy of revenue reduction continues, the effectiveness of certain policies for an increase in lump sum revenue decreases, and there is little general economic growth, fiscal revenue is likely to recover, but the degree to which it does so will not be significant, and growth is expected to keep pace with economic growth. In terms of fiscal expenditure, the expenditure pressure of implementing the proactive fiscal policy is unlikely to ease markedly in 2010. In particular, expenditure in investment, in improving people’s well-being and expenditure for reform can only increase over the existing base number. Fiscal expenditure will therefore extend its rapid

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growth. As a whole, the contradiction between financial revenue and expenditure will remain noticeable in 2010, and the financial deficit will remain at high levels. IV. The Macro-Control Policy Orientation Ahead Due to the deep and wide-ranging impact of the current international financial crisis, the current economic recovery has been mainly due to policy stimulus, and the economic basis of endogenous growth remains weak; a number of unstable factors have also appeared in economic operations. The primary mission of macro-economic control must therefore still be to promote stable, rapid economic development, and the package plan in response to the international financial crisis should be implemented and expanded in an effort to consolidate and develop the economic recovery trend. A. The Proactive Fiscal Policy Should Continue to Be Implemented with Appropriate Adjustments to Its Application Areas The emphasis of the proactive fiscal policy should shift from promoting investment to expanding consumption, and demand for consumption should more effectively promote economic growth. 1. Government investment should be further optimised and consumption investment enhanced. Government investment should turn to support sectors relating to people’s well-being, public consumption facilities, restructuring, technological transformation and independent innovation. Financial investment should favour rural areas by enhancing items focusing on the rebuilding of hazardous premises, water conservancy, electricity networks and road construction; it should also favour China’s central and western regions by continuing to support the development of the western regions, promoting the revitalisation of the northeast and other former industrial bases, and promoting the development of the country’s central region. It should also favour sectors relating to people’s well-being by supporting the construction of guaranteed housing, ecological environment, health, education and culture, and post-disaster reconstruction. It should favour technological innovation by enhancing support for enterprises implementing technological upgrades.

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Meanwhile, blind activity such as duplicate construction and enlargement of surplus capacity should be firmly prevented. The role of government investment should be further exerted in the piloting of social investment, and demonstrating and making flexible use of investment allowances, injections of capital and interest subsidies to promote social investment. 2. The emphasis should be on adjusting the income distribution structure to expand consumption demand. The disposable income of agricultural workers and urban low-income earners should be improved, the minimum wage system should be fine-tuned and implemented, and a reform scheme for performance pay in institutions should be studied and established so as to expand effective demand. The fiscal expenditure structure should be adjusted and optimised, and the ability to provide public products and services to all citizens enhanced; income obtained from state-owned monopoly resources can be used more widely to provide community services and increase personal disposable income. Wage and endowment insurance reform should be integrated and coordinated, and an emphasis placed on resolving the issue of the equitable treatment for retirees from different types of work units. A fiscal policy system should be established and improved to support the expansion of consumption, including expanding the scope of subsidies for products designated for sale in rural areas, accelerating the implementation of the policy of replacing old cars and household appliances with new ones and the beneficial engineering of energy-efficient products, supporting the construction of an urban and rural circulation system and accelerating the development of a modern service industry. 3. The promotion of social security system reform should be accelerated, and a comprehensive social security system established with complete coverage, movement and connectivity. Various policies to promote employment should be implemented and improved in order to further stabilise the employment situation. While ensuring the active and appropriate development of the trial new-type rural social endowment insurance, the integrated planning of relevant systems should be strengthened, and the trial scope expanded. The promulgated medical treatment and health system reform schemes should be implemented, and the associated support initiatives such as reforming the government’s health investment mechanism, enhancing the integration of various medical insurance items, and increasing the integration level of social security should be expanded.

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B. Continue to Implement a Moderately Loose Monetary Policy, Grasp Policy Priorities, Strength and Rhythm Under the premise of maintaining the direction of the moderately loose monetary policy, the monetary policy strength can be adjusted slightly in a dynamic manner in accordance with the economic trend and price changes at home and abroad, and an equilibrium point sought for promoting economic growth and preventing inflation. 1. Various monetary policy instruments should be adopted in a flexible manner in order to pilot the appropriate growth of monetary credit. The credit growth rate should be regulated in a timely and appropriate manner, the sustainability of credit growth improved, financial regulation enhanced, and risk reported to financial institutions, thus preventing the adoption of drastic means leading to sharp credit fluctuations; meanwhile, the pace of IPOs should be reduced to an appropriate level in order to stabilise market players’ expectations with regard to liquidity. 2. The credit structure should be further optimised and restructuring pushed forward. Consumer credit should be appropriately expanded in order to support the upgrade in the urban and rural consumption structure focusing on improvements to living standards and transportation. Credit support should be enhanced for agriculture, rural areas, and agricultural workers, small enterprises, restructuring, independent innovation, employment, social initiatives and post-disaster reconstruction, while stricter controls should be applied to the provision of loans to high pollution and/or high energy consumption industries, to capacity expansion projects for industries already suffering from excess capacity, and weak enterprises. 3. Further improvements should be made to the exchange rate formation mechanism in order to prevent the impact of any sharp depreciation of the US dollar. Pressure on the US dollar to depreciate is considerable, and deserves a good deal of attention. China’s exchange rate formation mechanism should be improved in order to enhance exchange rate flexibility, and emergency response schemes should be prepared.

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C. Marketisation Reform Should Be Pushed Forward in Order to Enhance the International Growth Vitality of the Economy Reforms should be accelerated to release the potential of domestic demand and expand the economic development space so as to enhance the energy and impetus of economic development. 1. Relevant price reforms should be accelerated to further sort out the price mechanism. Based on further improvements to the product oil pricing mechanism, the government should accelerate the pricing reform of resource products including coal, electricity, gas, and water. Implementation of the resources tax reform scheme should be accelerated, an environment tax system established, a compensation system for resource usage, a sewage discharge rights acquisition and trading payment system established and improved, and a potential environment tax studied in order to establish a sound resource and environment compensation mechanism. In order to further improve the price level linkage mechanism at home and abroad, and in particular to improve the pricing mechanism and regulation means for products on the international market which are vulnerable to hot money speculation, in order to prevent the excessive price fluctuations of international key commodities having an adverse impact on domestic production. 2. The amendment and promulgation of the government investment project approval list should be accelerated in order to optimally reduce the approval scope, the approval authority transferred to subordinates where appropriate, a scientific definition of government investment sectors and range drafted, and non-government investment encouraged and expanded to kick-start market investment. 3. The reform of monopoly industries should be increased, the institutional reform of electric power, railway, and town planning services pushed forward, and the merger of telecom networks, computer networks and cable television networks promoted in order to achieve substantial progress. Supporting policies for loosening access control to monopoly industries and certain service sectors should be established and improved in order to fully open these to social capital and the private economy. 4. The pattern of ownership should be optimised, the strategic structural adjustment of the state-owned economy pushed forward, and the policies to encourage and guide the development of the non-public ownership economy improved.

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5. Financial innovation should be actively pushed forward. IPOs in the GEM market should be accelerated, but a reasonable grasp of the issuing pace must be achieved in order to prevent any impact on the capital market; the study and establishment of Regulations for Moneylenders《放贷人条例》should be accelerated on the basis of actively developing small-loan companies and rural banks. The marketisation of interest rates should be continually pushed forward, and the regionalization and internationalisation of the Renminbi promoted.

FINANCIAL OPERATIONS UNDER THE MODERATELY LOOSE MONETARY POLICY Wang Yi, Yan Xiandong, and Li Guanglei1 In order to address the impact of the international financial crisis, the Chinese government quickly adopted a proactive fiscal policy and moderately loose monetary policy in 2009, which rapidly boosted the recovery of domestic demand and economic confidence, and led to an increase in the money supply and domestic credit; as a result, the Chinese economy has shed the shadow of decline and become a major force leading the world economy out of recession. It should however be noted that the swift growth of monetary credit over a short period has resulted in considerable inflationary pressure, and the potential of a rebound credit risk. The inflow of international capital in the economic recovery process also has also increased pressure on the RMB exchange rate and China’s monetary policy operations. As a next step, the government should spare no effort to maintain the moderate growth of money and credit, enhance RMB rate flexibility, and prevent a rapid accumulation of inflationary pressure or systematic financial risk. I. The Real Economic Environment for Financial Operations Since September 2009, the US subprime mortgage crisis has evolved into a global financial tsunami, the most severe international financial crisis since the 1930s. Affected by the declining economy in Europe and the United States, China’s external demand growth slowed remarkably in the fourth quarter of 2008, and domestic employment pressure increased, while increased risk was seen during the economic downturn. To cope with the complicated financial situation at home

1 Wang Yi, Yan Xiandong, Li Guanglei are members of the Survey & Statistics Department of the People’s Bank of China. This article only reflects its authors’ viewpoint, and does not represent the opinion of their employer.

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and abroad, the Party Central Committee and the State Council proposed primary macro-economic control tasks for 2009, specifically maintaining economic growth, expanding domestic demand and adjusting structures, and promulgated and implemented a timely package of economic stimulus plans, which have effectively promoted the step-by-step recovery of China’s real economy. A. Economic Growth Recovered Steadily and the Economic Upturn Exceeded Expectations In 2009, GDP year-on-year growth was 6.1 percent, 7.9 percent and 8.9 percent in the first, second and third quarters respectively, with growth increasing by quarter. The speed of the economic recovery exceeded expectations at the beginning of the year. The seasonally adjusted quarter-quarter annualised GDP was 8.5 percent, 14.9 percent, 8.7 percent for the first, second and third quarters respectively, indicating strong growth in the economy. A People’s Bank of China economic climate survey indicates that the entrepreneurs’ confidence index stood at 75.4 percent in the third quarter, an increase of 7 percentage points over the previous season, and an increase of 14.5 percentage points compared to the rock-bottom figure of 60.9 percent in the fourth quarter of the preceding year. The bankers’ confidence index was 55.4 percent, a sharp increase of 15.4 percentage points compared to the previous quarter. Overall, the Chinese economy has passed the worst, stimulated by vigorous financial and monetary policies. China’s economy will recover with difficulty, due to the combined action of a series of factors such as enhanced independent forces and weakened policy stimulus strength. B. Domestic Demand Has Risen Steadily and the Decline in External Demand Has Slowed Driven by the government’s investment stimulus plan, investment in fixed assets has grown at high levels in 2009, becoming the main force boosting economic growth. The average real growth rate of urban investment in fixed assets was 38.9 percent over January-September, an increase of 11.3 percentage points compared to the average level over the same period for 2003–2008. Planned total investment in new urban investment projects in fixed assets over the January-September 2009 period increased by 83 percent over the same period of the pre-

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vious year, with an increase in growth 1.3 percentage points higher than that for January-August. Furthermore, the implementation of a series of consumption stimulus policies has accelerated social consumption. Gross retail sales of consumer goods increased by 17.0 percent in real terms over January-September, and an increase of 2.9 percentage points over the same period of the previous year, reaching historic levels. From the perspective of changes in domestic demand, the economic growth rate was higher than the rate reflected by GDP. Affected by the international financial crisis, China’s imports and exports started to decline sharply in the fourth quarter of 2008. By May 2009, the year-on-year growth rates of imports and exports had dropped to –26.4 percent and –25.2 percent respectively. Since June, however, the link relative ratio of imports and exports has turned positive, and the year-on-year growth decline has slowed. In the third quarter of 2009, exports saw a year-on-year increase of –20.3 percent, an increase of 3.1 percentage points over the previous quarter; imports saw a year-on-year increase of –11.9 percent, an increase of 8.6 percentage points over the previous month; the quarterly trade surplus was USD 39.28 billion, an increase of USD 4.51 billion. Following the outbreak of the financial crisis, China’s exports have accounted for a rising market share in the major economies. Over the January-July period, China’s exports accounted for 14 percent of the import market share of her principal trade partners (including the EU, the US, Japan and some emerging market nations, accounting for 61.2 percent of China’s total exports), an increase of 1.9 percentage points compared to the 12.1 percent figure in August 2008, extending the rising market share trend of China’s export commodities since 2000. C. Prices Are Expected to Emerge from Depression China’s prices have generally dropped in 2009. The CPI dropped by 1.3 percent in the third quarter compared to the preceding year, its rate of decrease was 0.2 percentage points less than the previous quarter. The CPI in the second quarter marked the bottom of this downtrend. The PPI dropped by 7.7 percent in the third quarter compared to the preceding year, and its rate of decrease was 0.2 percentage point less than the second quarter. In the link relative ratio, however, the CPI continued to rise in August-September. The CPI coincident composite index measured and calculated by the People’s Bank of China remained in the descent stage, but the rate of decrease has slowed,

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showing evidence of a bottoming-out; the leading composite indicator has rebounded remarkably, indicating that the CPI will turn positive at the end of 2009. II. The Moderately Loose Monetary Policy and Its Operation Performance 2009 marked the first time that the People’s Bank of China implemented a moderately loose monetary policy since it started to exercise the functions of a central bank independently in 1984. In view of their performance in fulfilling policy, the policies adopted to address the international financial crisis have made considerable achievements with a continued rapid growth in investment, steady and rapid consumption growth and increased promotion of domestic demand in the economy. Against a global background of recession in credit demand and tight market liquidity in the major economies, China boasts a financial system with abundant liquidity, swift growth of the money and credit supply, and a smoothly running financial system. The swift growth of the money and credit supply became the solid basis supporting the Chinese economy as it shed its declining trend and recovered vigorously in 2009.

YoY %

30 26

M1 M2

22 18 14 10

Source: People’s Bank of China.

Figure 13.1

Money Supply Growth Rate.

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2009.01

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2007.01

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6

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A. The Money Supply Grew Rapidly In 2009, the growth of the money supply, particularly M1, recovered forcefully at all levels. At the end of September, M1 grew by 29.5 percent and M2 by 29.3 percent, an increase of 20.4 percentage points and 11.5 percentage points over the figures at the end of the preceding year respectively, and an increase of 22.7 percentage points and 14.5 percentage points compared to the bottom values in 2008 at the nadir of the international financial crisis. The current M1 and M2 growth rates are both record highs since March 1995 and January 1996 respectively. M1 and M2 growth have remained at rates of over 25 percent for the third and seventh consecutive months respectively. It should particularly be noted that the M1 growth rate was approximately 0.2 percentage points higher than M2 growth rate in September 2009, a first since May 2008. Improved M1 activity and enhanced monetary liquidity indicate increasingly active real economic activities and an improved economic climate.

37

24500

34

Monthly new RMB loans (RHS)

31

RMB loan growth (LHS)

19500

YoY %

14500 25 22 9500 19 16

4500

13 10

Source: People’s Bank of China.

Figure 13.2

Rapid Credit Growth.

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–500

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28

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B. There Is a Substantial Increase in Credit Large amount loans have been provided continuously throughout 2009. New RMB loans of RMB 8.67 trillion were issued in the first nine months of 2009, a year-on-year increase of RMB 5.19 trillion. New RMB loans in September totalled RMB 516.7 billion. By the end of September, various RMB loans ha grown by 34.2 percent yearon-year, and the growth rate was 0.1 percentage point higher than the figure for the previous month. New loans in the third quarter totalled RMB 1.30 trillion, a decrease of RMB 1.49 trillion compared to the second quarter. Monthly average new loans totalled RMB 427.66 billion in the third quarter, far lower than the average of RMB 1.23 trillion over the first half of 2009, but credit remained relatively loose, with new amounts clearly higher than the historical average. New loans in the third quarter were twice the average of the third quarter over the 2002–2008 period. C. Real Estate Credit Growth Has Recovered Remarkably The real estate loans had a year-on-year increase of 9.9 percent at the end of January 2009, creating the new low since 2007. But with

20000 Monthly average increase in new loan amounts, 2002–2008

RMB billion

16000

Monthly average increase in new loan amounts, 2009

12000 8000 4000

Dec

Nov

Oct

Sep

Aug

Jul

Jun

May

Apr

Mar

Feb

Jan

0

Source: People’s Bank of China.

Figure 13.3

Monthly New Loans in 2009 Far Exceeded the Monthly Average for 2002–2008.

moderately loose monetary policy

Real estate loan amount

68000

205 % 35

Rate of increase

30 63000

RMB billion

25 58000 20 53000

15

48000

10

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0 2007/07

38000 2007/05

5

2007/03

43000

Source: People’s Bank of China.

Figure 13.4

Balance and Growth Rate of Real Estate Loans.

the warning of the real estate market, the real estate loan growth has recovered. At the end of September 2009, real estate loans had increased yearon-year by 28.26 percent, an increase of 17.9 percentage points over the preceding year, 9.5 percentage points compared to the end of the second quarter, and 3.7 percentage points compared to the previous month, approaching 2007 levels. The growth trends of real estate development loans and personal housing mortgage loans were the same as the real estate loan trend. Real estate development loans saw a year-on-year increase of 25.25 percent at the end of September 2009, an increase of 8.96 percentage points and 4.78 percentage points compared to the end of the first quarter and the end of the second quarter respectively. At the end of September, personal housing mortgage loans saw a year-on-year increase of 30.65 percent, an increase of 21.02 percentage points and 12.79 percentage points compared to the end of the first quarter and the end of the second quarter respectively.

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wang yi, yan xiandong, and li guanglei % 30 24000

28

21000

26 24

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22 15000

20

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0 1

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3

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6

2008 monthly increase/decrease 2008 YoY rate of increase

7

8

9

10

11

12

2009 monthly increase/decrease 2009 YoY rate of increase

Source: People’s Bank of China.

Figure 13.5

Changes in RMB Deposits.

D. Various Deposits Have Increased Rapidly and Enterprise Funds Are Abundant RMB deposits increased by 25.73 percent, 29.02 percent, 28.35 percent at the end of March, June and September of 2009 respectively, an increase of 8.38, 10.18, 9.56 percentage points compared to the preceding year respectively, indicating the rapid growth of RMB deposits. By the end of September, savings deposits had registered a yearon-year increase of 24.9 percent, an increase of 0.8 percentage points compared to the previous month, and a drop of 1.4 percentage points compared to the previous year. The growth in savings deposits is mainly attributable to a return flow of large amounts of capital invested in new GEM shares. By the end of September, enterprise deposits had registered a yearon-year increase of 35.7 percent, an increase of 0.5 percentage points and 20.3 percentage points compared to the preceding month and year respectively. Cumulative new enterprise deposits in the first nine months of the year totalled RMB 5.60 trillion, a year-on-year increase of RMB 3.77 trillion. In September, new enterprise deposits totalled RMB 223.8 billion, a year-on-year increase of RMB 109.4 billion. Overall, enterprise funds were relatively abundant.

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% 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2009/08

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2005/05

0.0

Shanghai inter-bank weighted average interest rate Weighted inter-bank market repurchase average interest rate

Source: CEIC.

Figure 13.6

The Market Interest Rate is Running Low.

E. The Market Interest Rate Is Running Low Between September and the end of 2009, the People’s Bank of China reduced the RMB benchmark deposit and lending interest rate five times, the RMB deposit reserve ratio of financial institutions four times, and also reduced the size of open market operations. Under the overall action of these policies, Shanghai inter-bank weighted average interest rate and the weighted interbank market repurchase average interest rate stood at 0.9 percent. Prior to June 2009, the market interest rate had been running at between 0.8–0.9, with adequate market liquidity. The People’s Bank of China proposed dynamic fine-tuning of the monetary policy and resumed the issue of one-year central bank bills to guide the market interest rate upward in July. By the end of September, the Shanghai interbank weighted average interest rate and the weighted average inter-bank market repurchase rate stood at 1.27 percent and 1.28 percent, respectively, an increase of 0.36 percentage points and 0.37 percentage points compared to June respectively.

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% 22

% 6

Reserve ratio Financial institution excess reserve rate 5

18

4 14 3 10 2 6 1

2 2009.06

2009.02

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2007.02

2006.10

2006.02

2006.06

2005.06

2005.10

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2004.10

2004.06

2004.02

2003.10

2003.06

0

Source: People’s Bank of China.

Figure 13.7 The Excess Reserves Rate of Financial Institutions Has Picked Up.

F. Commercial Banks’ Excess Reserve Rates Have Dropped At the end of January 2009, the financial institution excess reserve rate was 3.3 percent; this has since generally dropped off due to a rapid increase in credit provision by commercial banks. By the end of August, the rate reached a new low of 1.3 percent. With commercial banks’ control of credit provision, financial institutions’ excess reserve rate rose to 2.06 percent at the end of September, a rise of 0.76 percentage points over the preceding month. By financial institution, the percentage for state-owned commercial banks stood at 1.8 percent at the end of the month, a month-onmonth increase of 0.8 percentage points; that for other commercial banks was 2 percent at the end of the month, a month-on-month increase of 1.18 percentage points.

moderately loose monetary policy

209

8.8

85 2000=100

90

8.4

95 8.0

100 105

7.6 7.2 6.8

USD/CNY

110

Nominal effective exchange rate Real effective exchange

115 120 125 2009.08

2009.05

2009.02

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2008.05

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2008.02

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2006.02

2005.11

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2005.05

6.4

Source: People’s Bank of China.

Figure 13.8

The RMB Exchange Rate Remained Generally Stable.

G. The RMB Exchange Rate Remained Generally Stable The fluctuation interval of the RMB to USD rate has narrowed remarkably since mid 2008. The RMB nominal effective exchange rate (BIS) appreciated with the appreciation of the US dollar, but it has depreciated continually since April 2009. The RMB nominal effective exchange rate in August depreciated by 6.6 percent compared to March 2009, while foreign exchange reserves increased by USD 298.761 billion over the same period, forming a strong contrast. III. Several Issues Deserving Attention A. The Money Supply Growth Far Exceeded GDP Growth The money supply grew rapidly while nominal GDP growth was relatively slow in 2009. By the end of September 2009, money supply growth was 24.6 percentage points higher than nominal GDP growth in the first three quarters. The gap between the two growth rates reached a peak value since 1995, the first year for which such data is available, and future inflationary pressure is significant.

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In the long run, monetary credit growth, real economic growth and price changes maintain a high degree of equivalence. In the three decades since the start of the reform and opening up period, the average growth rate of various kinds of loans was 18.4 percent, the nominal GDP growth rate was 15.8 percent, with a gap of 2.6 percentage points between them; from 2001 to 2008, the average loan growth rate was 15.0 percent, nominal GDP growth was 14.9 percent, with only a gap of 0.1 percentage points between them. Table 13.1 The Relationship between Loan Growth Rates and Nominal GDP Growth Since the Start of the Reform and Opening Up Period Time

Loan growth rate (%)

Nominal GDP growth rate (%)

19.0 15.0 18.4

18.2 14.9 15.8

1991–2000 2001–2008 1978–2008

Difference between two percentage points 0.8 0.1 2.6

% 35 Nominal GDP increase rate (LHS) 30

M2 increase rate (RHS)

25 20 15 10 5

Source: CEIC.

Figure 13.9

The Gap between the Money Supply Amount and the GDP Growth Widened Sharply.

2009.09

2009.03

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0

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According to this relationship, at the end of September 2009, the M2 growth rate will be 29.3 percent and the growth rate of various kinds of loans will be 34.2 percent. Such rapid growth of money supply and credit will drive GDP to grow at high speed, or push up prices generally. It is however impossible for GDP to grow sharply in the short term, and inflationary pressure is increasing. B. Housing Prices Are Rising Significantly and Expectations of Inflation Are Strong Housing sale prices fell back in the second half of 2008. By 2009, however, the real estate transaction market started to warm up, and the real estate price index link relative ratio started positive growth in March. By September, house selling prices in 70 large and mediumsized cities had registered a year-on-year increase of 2.8 percent and a link relative ratio of 0.7 percent, approaching to a new peak link relative ratio since November 2007. Major cities have experienced rapid increases in housing prices. From January to August, the average prices for presold housing properties within Beijing’s 4th Ring Road, between the 4th and 5th Ring

% 12

% 2.0

10

1.5

8

1.0

6 0.5 4 0.0

National YoY increase (LHS) National link relative ratio increase (RHS)

2

Sources: National Bureau of Statistics; People’s Bank of China.

Figure 13.10

National Housing Sale Price Growth Rates.

2009.09

2009.06

2009.03

2008.12

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2008.06

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–1.0 2006.03

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–0.5

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0

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Roads, between the 5th and 6th Ring Roads and beyond the 6th Ring Road were RMB 18,113/sqm, RMB 16,868/sqm, RMB 9,749/sqm and RMB 7,847/sqm, increasing by 27.3 percent, 16.8 percent, 35.3 percent, and 17.1 percent respectively over January respectively; at the end of September, average housing prices in Shanghai within the internal ring road, between the internal and external ring roads and beyond the external ring road in Shanghai were RMB 32,135/sqm, RMB 17,117/sqm and RMB 8,642/sqm, increasing by 12.4 percent, 24.0 percent, and 11.1 percent compared to the beginning of the year respectively. In September, housing sale prices in Shenzhen saw a year-on-year increase of 11.1 percent, an increase of 4.6 percentage points over the previous month. In terms of development, the swift growth of monetary credit, rising investment demand and relieved digestion pressure of commercial housing and tighter supply will support the continued rise of housing prices.

2000

USD billion

1500 1000 500 0 –500

2008Q3

2008Q4

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Balance of trade Increase in external debt

Unexplainable FDI

–1500

2008Q1

–1000

Sources: People’s Bank of China; State Administration of Foreign Exchange. Notes: 1: The incremental external debt for the third quarter of 2009 is an estimated value. 2: Unexplainable segment = Foreign exchange reserves – Balance of trade – FDI – External debt increment.

Figure 13.11

Breakdown of Foreign Exchange Reserves Structure, 2008–2009.

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The product sale price index of 5000 industrial enterprises monitored and measured by the People’s Bank of China proceeded to climb from 45.6 percent in the second quarter to 48.8 percent in the third quarter of 2009; a questionnaire survey of depositors by the People’s Bank of China indicates that expectations of inflation rose to 66.7 percent in the third quarter. Expectations have risen for three consecutive quarters, indicating enhanced inflation expectations. Inflationary pressure will therefore increase markedly in 2010 under the combined effect of factors such as international “imported” inflation pressure, the swift growth of domestic monetary credit, a significant recovery in domestic demand and the bottoming-out of inventories. Meanwhile, international commodity prices continued to rise and domestic demand has picked up. These factors provided the impetus for an upward shift in prices. C. Return Flow of International Capital Affected by the international financial crisis, China’s trade surplus and absorbed foreign direct investment declined, and international hot money also tended to flow outward in the first quarter of 2009. Since the second quarter, however, the excess liquidity in the international financial system returned to China, as China was showing signs of economic recovery and warming asset markets, with a sharp rise in the stock market in particular, and loose economic policy. Preliminary estimates indicate that China’s increase in foreign exchange reserves in the third quarter exceeded the sum of the trade surplus, FDI and external debt over the same period by approximately USD 58.2 billion, with a monthly average increase of USD 19.4 billion; international hot money flowed into China instead of out at a level higher than one year before. In September, the RMB counterpart of foreign exchange reserves increased by RMB 436.8 billion in September, a year-on-year increase of RMB 76.7 billion. D. New Loans Concentrate on the Government’s Investment and Financing Platforms Bad loans in the banking industry have continued a “dual-decline” since the start of 2009. By the end of September, the balance of commercial bank bad loans was RMB 504.5 billion, a decrease of RMB 55.8 billion compared to the start of the year, while the bad loan ratio was 1.66 percent, a drop of 0.76 percentage points compared

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to the start of the year. Behind this “dual-decline” in bad loan data, however risk due to high credit growth has accumulated. Loans from investment and financing platforms supported by government credit have soared in 2009, but the future cash flow for certain government investment projects is insufficient to repay the principal and interest on these loans, and commercial banks generally expect local governments to repay the loans. In fact, following the implementation of taxsharing fiscal reform in 1994, local governments have reduced their financial power and increased their administrative power, and local public financing has been generally relatively difficult. If the economic adjustment period is excessively long, and loans from local government investment and financing platforms continue to rise rapidly, local public finance may be unable to pay large-scale bank loans. Therefore, loans provided by local government investment and financing platforms hide higher credit risk.

130

USD nominal effective exchange rate USD nominal effective exchange rate against major currencies

120

110

100

90

80

2009/10

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2006/04

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2002/04

2001/10

70

Source: CEIC.

Figure 13.12

The USD Nominal Effective Exchange Rate Has Tended to Depreciate Since March 2009.

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E. The USD-RMB Exchange Rate Is Dropping and RMB Appreciation Is Expected to Increase The USD nominal effective exchange rate has depreciated generally since February 2002. The US dollar exchange rate has appreciated with an increasing desire to avoid risk since the second half of 2008. The international economy has improved since March 2009, with an increasing appetite for risk, and the USD has started to depreciate. The USD nominal effective exchange rate index stood at 101.92 points in October 2009, down by 9.4 percent compared to March 2009. Taking a long-term view, the United States will continue to increase its savings ratio, reduce its consumption ratio as well as the current account deficit drive, and it is inevitable that the USD will depreciate over the longer term. The expectation for RMB appreciation has improved since midAugust 2009. RMB one-year NDF transaction data on the Hong Kong market shows that the market expects the RMB to appreciate to RMB 6.63 to the US dollar within one year. IV. Reflections on Monetary Policy Orientation for 2010 A. Maintain the Moderate Growth of the Monetary Credit The People’s Bank of China performed a special survey of 613 projects nationwide at the beginning of October 2009. The survey findings show that the RMB loan demand for fixed asset investment projects is RMB 8.8 trillion in 2010, an increase of RMB 1.8 trillion over the medium and long-term credit of 2009. Monthly total investment in new fixed asset investment projects from February to September 2009 increased by over 80 percent, a historical high for the past decade. If no proper control is maintained over new projects, the investment scale will expand excessively, overcapacity will worsen, and bank bad loans will see a significant rise in rebound pressure. The rapid growth of investment in local projects and by state-owned enterprises and state holding enterprises promoted the rapid growth of urban investment in fixed assets in 2009, and the capital for these projects was mainly sourced through bank loans. Controlling the investment scale requires the appropriate growth of monetary credit. China’s

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1000 Increase rate of foreign exchange reserves 800

BIS nominal effective exchange rate

120

600 110

400 200

100

–200

2001.03 2001.08 2002.01 2002.06 2002.11 2003.04 2003.09 2004.02 2004.07 2004.12 2005.05 2005.10 2006.03 2006.08 2007.01 2007.06 2007.11 2008.04 2008.09 2009.02 2009.07

0

–400

90

80

Source: CEIC.

Figure 13.13

Changes in the Nominal Effective Exchange Rate and Foreign Exchange Reserves.

M2 increased by an annual average of 17.1 percent over 2000–2008. If M2 grows by 17 percent in 2010, it will be necessary to control the growth rate of urban investment in fixed assets at approximately 18.5 percent; if M2 grows by 18 percent or 19 percent in 2010, it will be necessary to control the growth rate of urban investment in fixed assets at approximately 20.3 percent or 22.6 percent. The aforementioned three conditions show that urban investment growth in fixed assets should drop from 33.3 percent over the first nine months of 2009 to approximately 21 percent in 2010, which means that the growth in planned total investment in new projects will decline significantly from 83.0 percent over the first nine months of 2009. B. Enhance RMB Exchange Rate Flexibility Since the outbreak of the international financial crisis, China’s foreign exchange reserve growth has slowed, and negative growth even appeared in October 2008, January and February 2009. Since March

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2009, China’s foreign exchange reserves have increased month by month with an increase of USD 61.768 billion in September 2009, or year-on-year growth of USD 40.337 billion. The RMB counterpart of foreign exchange reserves increased by RMB 436.8 billion in September, a year-on-year increase of RMB 76.7 billion. Looking to the future, China’s economy is tending to stabilise and improve with the general situation more effectively than the United States, Japan, and the developed countries of Europe; China will however see a remarkable rise in real estate prices, increasing capital inflow pressure, and monetary policy regulation may be faced with the dual challenges of credit expansion and increased RMB counterpart of foreign exchange reserves. In the longer term, China’s history data and major countries’ data, either from the perspective of balance of trade, current balance or general balance, all indicate that China has a relatively severe imbalance in international payments. With regard to the country’s balance of payments, net exports (favourable balance of goods and services) are the main item in China’s current account surplus. In the funds flow statement (barter business), net exports (favourable balance of goods and services) is only a constituent of the added value. Higher net exports expand added value when other conditions remain, thus resulting in an expansion of disposable gross income and gross savings. In this sense, China’s imbalance in international payments and current account surplus are increasing the savings investment gap. Against the background of the financial crisis, it is reasonable to maintain the RMB exchange rate at stable levels in order to reduce the external impact. With the warming of the world economy and the rapid growth of China’s foreign exchange reserves, maintaining the long-term stabilisation of the RMB nominal rate of exchange will run counter to the optimisation and upgrading of China’s industrial structure, the depression of the straight increase in the savings ratio, the reduction of China’s external imbalance, and may result in an increase in trade friction and international contradictions. The government should therefore intensify research into policies to increase RMB rate flexibility, allow the exchange rate to actively play its fundamental role in the allocation of resources and work to achieve the independent floatation of the RMB in 5–10 years.

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C. Prevent the Accumulation of Systematic Financial Risk The systematic financial risk is currently mostly reflected in government investment and financing platform loans. Reducing government investment and financing platform risk requires efforts to be made in the following aspects: 1. Active research should be performed into allowing local governments to issue bonds directly instead of requiring the central fiscal authority to issue bonds on their behalf. Allowing local governments to directly issue bonds would allow their hidden deficits to be exposed, facilitating the management of local obligations, enhance transparency as well as internal and external constraints of local government debt behaviour, and enable local governments to become leading governments integrating financial, administrative, budgeting and borrowing power. 2. Banking product innovation should be increased, and the securitisation of local government investment and financing platform loans pushed forward; 3. Loans from investment and financing platforms with false financial contributions and unsound governing structure, internal control, venture management and fund management systems should be tightly controlled, and systematic financial risk effectively prevented and eliminated.

SHANGHAI STOCK EXCHANGE REVIEW OF 2009 AND OUTLOOK FOR 2010 Wu Qian and Zhu Pingfang Against a background in which the global economy is emerging from a trough to begin its recovery, the Chinese economy is achieving its general objective of maintaining economic growth, expanding domestic demand, and adjusting structures through the implementation of a proactive fiscal policy and moderately loose monetary policy. China’s macro-economic indices have improved markedly, and listed companies’ profits bottomed out in 2009. Driven by the expectation of economic recovery at home and abroad and extremely loose liquidity, China’s A-share market rose in the first seven months of 2009, with the Shanghai Stock Index rising from 1935.50 points at the beginning of the year to a peak of 3478.01 points on August 4, an increase of almost 80 percent, outperforming other stock markets around the world. In early August, the A-share market underwent rapid correction under the impact of accelerated market capacity expansion and expected credit policy fine-tuning. As a whole, the A-share market took on a sharp fluctuation pattern in 2009. I. Review of Shanghai Stock Market in 2009 A. The A-Share Market Rose and Then Declined with an Increasing Fluctuation Spread in the First Three Quarters of 2009 China’s A-share market was dominated by the uptrend with few corrections during the January–July 2009 period, and particularly in July when the market rise was accelerated by blue chips. The outperformance of other stock markets by the A-share market is a comprehensive reflection of policies, economy and environment: 1. The A-share market was policy-driven to rise, and maintained this uptrend in the first seven months of 2009. The government’s RMB 4 trillion investment plan and subsequent economic stimulus plans

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including sector planning, regional planning and a series of consumption stimulus policies led to the unexpected provision of bank credit, which hugely enhanced investment confidence. 2. The domestic economy has weathered the worst. China’s macro economy was in a relative depression from November 2008 to February 2009, but then stabilised, and started to pick up in May 2009. PMI, power output, industrial added value, and enterprise operating efficiency have all taken on an uptrend. 3. There is abundant market liquidity. Since the fourth quarter of 2008, when the government implemented a moderately loose monetary policy, the benchmark interest rate and deposit reserve ratio have been adjusted downward, reducing lenders’ costs on the one hand, and on the other hand increasing bank fund supplies. As the bank line of credit was cancelled in the first half of 2009, large amounts of loans were provided (see Figure 14.1); financial institutions’ outstanding loans grew by over 30 percent, and M2 grew by over 25 percent year-on-year, far higher than expected, thus injecting substantive liquidity into the market. 4. As China’s macro economy bottomed out, the profit generation capacity of listed companies recovered remarkably in 2009, with the net assets earning rate of all comparable companies in the A-share market reaching 6.45 percent in the first half, basically recovering to

20000

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New loans for current month (RMB billion) Shanghai Stock Exchange Index (RHS)

Source: Wind Info.

Figure 14.1

Huge Amounts of Credit Boosted the Stock Market in the First Half of 2009.

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mid-2006 levels, and the quarterly earning rate of net assets in the second quarter even exceeded the figure for the same period of 2006. It is expected that listed companies’ profit growth will improve further in the third and fourth quarters of 2009. 5. Overseas capital flooded the emerging Asian markets. Following the outbreak of the financial crisis, international capital returned to the US to avoid risk as the impact of the financial crisis was difficult to estimate. But with the mapping out of financial crisis risk, international capital seeking investment yield has once again flowed into the recovering Asian emerging markets. The A-share market declined rapidly in early August 2009. Besides the extremely rapid growth in the previous stage and technical corrections, this is mainly attributable to the following three aspects: 1. The Fine-Tuning of Monetary Policy Led to Capital Pressure In July 2009, the central bank restarted its issue of one-year central bank bills and punitive directed central bank bills, reduced the percentage of capital converted from cross-held subordinated debt, and implemented the New Basel Capital Accord, while the China Banking Regulatory Commission (CBRC) also promulgated rules prohibiting credit funds from flowing illegally into the capital market. This finetuning of monetary policy led to certain capital pressure. 2. Commercial Banks Were Restricted from Providing New Loans From the perspective of the commercial bank credit system, new bank credit will fall back by a large margin in the second half, after a total credit amount of RMB 772 million was provided in domestic and foreign currency in the first half of 2009. Because of the repaid credit expansion, the mid-year report for 2009 shows that the capital adequacy rate and the core capital adequacy rate of listed banks declined by 1.96 percentage points and 1.6 percentage points on average respectively compared to the start of the year. The CBRC has adjusted the capital adequacy ratio for banks from 8% to 10%, and will apply greater restrictions on the subordinate debt ratio of supplementary capital. The average capital adequacy ratio of listed companies is 11.4 percent. Other than four state-owned commercial banks and three city commercial banks, medium-sized joint stock system banks, particularly Minsheng Bank, Shanghai Pudong Development Bank and Shenzhen Development Bank, are all faced with capital bottlenecks to varying degrees. Bank asset operation developments will be determined by capital adequacy.

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Figure 14.2

IPO Financing Since the Second Half of 2006 (RMB 100m).

3. Market Capacity Expansion Is Accelerating, Resulting in Increased Pressure for Diversion of Funds In terms of stock supply, the stock markets are facing a remarkable pressure increase. First, the pace of IPOs has accelerated. After a suspension of eight months, IPOs were re-launched in the second half of 2009. Following the first launch of Guilin Sanjin Pharmaceutical on June 29, 24 companies had completed IPOs in the A-share market by the end of the third quarter of 2009, generating total financing of RMB 104.74 billion. Of these listed companies, CSCEC performed the largest IPO in the A-share market since 2008, generating financing of up to RMB 50.16 billion. Second, this includes non-tradable shares for shareholding reform and non-tradable shares for original IPO shareholders, meaning that the floating pressure of non-tradable shares is increasing. Statistics shows that the intention to make an underweighting of non-tradable shares is increasing with the warming of the securities market. The rate of market floatations has accelerated since the end of November 2008. The monthly reduction figure reached 1 billion shares for the first time in February 2009, and exceeded this figure for the subsequent five months. According to data from the China Securities Depository and Clearing Corporation Limited, the floating amount for large and small-sized non-tradable shares, after reaching a historic high in June,

shanghai stock exchange review of 2009 3500

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3,191

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0 200912

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Source: Wind Info.

Figure 14.3

Monthly Distribution of Floating Amount of Non-Tradable Shares in 2009 (100m shares).

established a new record in July with a total of 1.363 billion shares on the Shanghai and Shenzhen Stock Exchanges, an increase of 9.92 percent over June, marking a new high for the preceding 14 months, as well as a record high since such data first became available. In August, the approved float share amount fell, to a total of 707 million shares. As of the end of August 2009, a total of 246.097 billion non-tradable shares for shareholding reform had been approved for floatation on the Shanghai and Shenzhen Stock Exchanges, accounting for 51.68 percent of all non-tradable shares for shareholding reform; 36.763 billion shares had been floated. Third, GEM bulk issues were introduced to the stock market; the total financing scale is relatively insignificant, but this will attract large amounts of capital on the main board in search of high-tech concepts to invest in GEM in the short term. Fourth, apart from IPOs, various forms of refinancing such as public issuance, corporate bonds, and separable debts have been relaunched. As of the end of the third quarter of 2009, listed companies had completed refinancing for a total of RMB 211.153 billion, and further proposals for refinancing schemes involved a total of RMB 628.606 billion.

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B. The Bond Market Fell Back by a Small Margin, While Varieties of Different Terms Exhibited Different Trends A total of 707 kinds of bonds were issued in the first three quarters of 2009, with a total issue amount of RMB 6.191678 trillion, accounting for 85.44 percent of last year’s total issue amount of RMB 7.247026 trillion. Central bank bills, national debt bonds, medium-term notes and financial debt were the major products issued, with issue amounts of RMB 2.7260 trillion, RMB 1.1436 trillion, RMB 569.4 billion, and RMB 931.9 billion respectively, accounting for 44.03 percent, 18.47 percent, 9.20 percent and 15.05 percent of the total respectively. Of these, central bank bills made up the lion’s share of issues (see Table 14.1). After one year, separable debts and convertible debt issues recovered in July and August of 2009 respectively, indicating that the central bank has fine-tuned the credit policy and expanded corporate financing channels. In the secondary market, China’s bond market declined by a small margin in the first three quarters of 2009, with the CSI enterprise bond composite index dropping from 112.79 to 110.58, or 1.96 percent. When viewed in terms of bond terms, bond varieties with terms of 10 years or above declined more severely, by a margin of 5 percent; bond Table 14.1 List of Bond Market Issues in the First Three Quarters of 2009 Type

Treasury bonds Local gov’t debts Corporate bonds Financial bonds Central bank bills Short-term financing bonds Corporate bonds Medium-term notes Convertible bonds Separable bonds Total Source: Wind Info.

Issues

Percentage of total issues

Issue amount (RMB 100m)

Percentage of total issue amount

53 50 139 73 47 184

7.50 7.07 19.66 10.33 6.65 26.03

11,436.00 2,000.00 2,678.33 9,319.00 27,260.00 3,100.05

18.47 3.23 4.33 15.05 44.03 5.01

17 138 5 1 707

2.40 19.52 0.71 0.14 100.00

361.00 5,694.00 38.40 30.00 61,916.78

0.58 9.20 0.06 0.05 100.00

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varieties with a term of less than five years declined more slightly, by a maximum margin of 1.68 percent, and bond varieties with a term of less than 1 year saw positive earnings of almost 0.5 percent. The earning rates of IPO and one-year central bank bills climbed following the re-launch, but central bank bills have no investment worth. The earning rate of inter-bank fixed interest rate corporate bonds increased, with less investment opportunities. The major causes for the decline of the bond market and the differentiation of trends for bonds with different terms are given below: 1. The moderately loose monetary policy implemented at the end of 2008 resulted in credit expansion, and increased government investment to support the recovery of the real economy. Because of the optimistic expectations with regard to China’s economic outlook, large amounts of capital were withdrawn from the bond market and invested in the stock market; 2. The provision of huge amounts of capital within a short period increased market supply, and resulted in the straight decline of the money market rate and increased market anxiety over future inflation, which were reflected in the pattern of the bond market in that shortterm varieties declined slightly, certain short-term bonds with terms of less than one year rose, and long-term varieties plunged. C. The Fund Market 1. The Issue of Funds Accelerated and Index Funds Have Greatly Expanded In the first three quarters of 2009, a total of 93 new funds were issued, with a total financing amount of RMB 269.471 billion. The issue rate of new funds accelerated in the first three quarters of 2009, as only 63 new funds were issued in 2007 and 99 new funds in 2008. In terms of fund types, stock-type funds made up the majority. Coupled with a pickup in the stock market the financing scale of stock-funds faced continuous risk. The average financing scale of new stock-type funds was only 1.217 billion shares in the first quarter, but this rose to 3.628 billion shares in the second quarter and 13.713 billion shares in the third quarter. 19 index funds (including ETF) were issued in the first three quarters of 2009, and the index fund family expanded rapidly. The Shanghai Stock Exchange increased its efforts to promote the

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development of ETF products in 2009. The SSE Central SOEs 50 ETF was successfully issued; the SSE 180 Corporate Governance ETF and Feeder Fund, and Hua An 180 ETF Feeder Fund are currently being issued; and a good number of ETF products will then be issued. The quantity of index funds issued is expected to exceed the total of index funds issued in the past seven years by the end of 2009. 2. Stock-Type Funds Performed Better Than Bond-Type Funds With the strong rebound of the stock index in 2009, funds performed better than last year, with stock-type funds and index-type funds forging ahead while bond funds lagged behind. As of September 30, the average net worth increment of index-type funds and stock-type funds was 62.06 percent and 46.94 percent respectively, far higher than other types of funds, making these the fund market winners for 2009; over the same period, the average net worth increment of bond funds was 0.995 percent, and the average net worth increment of money market funds was 0.9943 percent. 3. The Introduction of Separately Managed Accounts (SMA) Started a New Age for the Fund Industry In mid-August 2009, SMA business for fund companies was launched, thus allowing the fund industry to expand from single public fund managers to asset managers covering high, medium and low-end financing business, and starting a new age for the fund industry. Compared with conventional public funds, SMAs are more flexible, provider wider investment scope and greater stable investment scale, free from impact of routine subscriptions and redemptions as well as a more flexible rate structure. Meanwhile, these also have higher requirements for fund operations, particularly greater challenges in terms of venture control. In contrast with public offering products, SMAs pursue absolute earnings and stock positions can range from 0–100 percent. But high levels of operational flexibility are usually coupled with high risk. Fund companies do not bear the investment losses of SMAs except in the case of capital preservation products.

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II. Outlook for Shanghai Stock Exchange in the Fourth Quarter of 2009 and 2010 Based on the key policy of paying equal attention to maintaining economic growth and adjusting structures, we believe that the route forward for China’s economic recovery is still relatively optimistic. The Chinese economy will be driven mainly by investment, exports and domestic demand instead of investment alone. With the pickup of the international environment and economic recovery in advanced economies, exports are expected to become a force driving the rise in the securities market. There is still however uncertainty over the role of exports in promoting economic growth due to the impact of international trade protectionism. We believe that the securities market will turn from being driven by economic recovery and liquidity to being driven by economic recovery alone, and this will also be subject to the impact of uncertainties including accelerated market capacity expansion and policy fine-tuning in the fourth quarter of 2009 and 2010. A. Main Factors Affecting Securities Market Movements 1. Major Overseas Economies are Stabilising and Starting to Recover The degree of recovery of overseas economies will determine the timing and strength of the improvement in China’s exports. Major overseas economies have taken on a clear bottoming-out trend. In terms of the leading index PMI in August 2009, the United States returned to a level of 50, Japan maintained a level above 50 for two consecutive months, and the European Union reached 48.2, a figure which keeps it in the economic shrinkage range, but this has taken on a nice uptrend. U..S. historical data indicates that PMI is closely correlated with GDP, and its turning point is usually ahead of GDP by a few months. Over the past four decades, the PMI peak value of the US manufacturing industry has generally preceded economic booms by approximately 6–18 months, and economic troughs by 1–4 months. US private consumer spending has shown signs of stabilising in 2009 following a sharp reduction in 2008, showing an improvement in consumer confidence. Housing prices continue to fall, but have tended to stabilise. Housing demand is stable and the year-on-year drop in housing prices has a limited range, while housing financing has seen a substantial improvement. Based on our analysis of the housing price

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index and the sales status of new houses, it is possible to come to the prudent but optimistic conclusion that the US economy will pick up at the end of 2009. 2. China’s Economic Recovery Process Is Optimistic Of the three demands contributing to GDP growth in the first half of 2009, investment and consumption made the greatest contribution to China’s economic recovery, while exports played a negative role. According to statistics from the National Bureau of Statistics, investment contributed 87.6 percent to economic growth, final consumption contributed 53.4 percent, and exports contributed –41 percent. We expect that the Chinese economy, led by investment, will enter a comparatively balanced development phase through the combined actions of investment, consumption and export from the fourth quarter of 2009 onwards. Since May 2009, China’s total goods imports and exports, total imported commodity amounts and total exported commodity amounts have turned positive, indicating an improvement in foreign trade. The year-on-year decrease widened in July and August 2009, but considering the sharp decline in imports and exports in the fourth quarter of 2008 due to the impact of the global financial crisis, the year-on-year data for the fourth quarter of 2009 will improve. The external economy is picking up and its adverse impact on China is shrinking. These factors are likely to improve China’s exports remarkably. China’s foreign trade was most severely affected by the financial crisis. Coupled with the pickup of the global economy, Chinese corporate export orders will see a marked increase, and import and export trade will improve. Because of the low base number effect of 2009, China’s exports are expected to return to positive year-after-year quarterly growth in 2010, net exports will turn positive, acting as a tractor for GDP growth, and exports will grow to become a major force driving economic recovery. Uncertainty however remains with regard to the degree of recovery of exports, as the external economy still has no solid support, although it has demonstrated evidence of a revival; secondly, rising trade protectionism will increase uncertainty relating to China’s export recovery. Appreciation fluctuation in the RMB exchange rate will add further uncertainty to the degree of China’s export recovery. In terms of government investment, government investment growth will fall back substantially in 2010. Economic growth will be driven by private investment in real estate in this second stage, as opposed to

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the first stage, when it was driven by government investment. China’s economic recovery is in a transition period from the first stage to the second stage, i.e. from government-led investment to market-oriented investment. Market forces will therefore determine whether China’s economy recovery will be smooth. The government has intensified its management of overcapacity industries, and investment growth space is as a result limited, but investment will remain at a high level. With a highly uncertain export situation, the key to sustained economic development is consumption. Consumption is likely to maintain its uptrend, as the government is increasing policy support for promoting people’s well-being and guaranteeing consumption, and the economic uptrend is driving employment and income growth. 3. Macro-Economic Policy Will Maintain Its Stability and Continuity The focus of macro-economic policy will not change substantially, although partial adjustments may occur. China’s policy goal will steer from simply emphasising continued economic growth in the first half of 2009 to not only maintaining economic growth but also adjusting structures. a. A Proactive Fiscal Policy Will Be Implemented throughout 2009 A proactive fiscal policy will be implemented throughout 2009. Fiscal expenditure is expected to slow in the fourth quarter, particularly the end of 2009. In terms of structural adjustments, besides curbing overcapacity in certain industries, these may start with the following: First, the reform of the pricing mechanism for resources and public service products including water, coal, electricity and gas should be pushed forward; second, policies should be promulgated to stimulate private investment, expand the market access scope for private capital and push forward the liberalisation of private capital investment; third, policies must be promulgated to support the development of small and medium-sized enterprises as well as the tertiary industry in order to promote employment, improve people’s well-being and achieve growth with full employment. b. Monetary Policy Will Return to a “Moderately Loose” Level In the first half of 2009, the uptrend in the stock market was attributable to the promotion of liquidity. This abundant liquidity however resulted in the substantial growth of money supply and credit, and the government became increasingly worried about possible inflation.

230 59000

wu qian and zhu pingfang Monthly incremental loans (RMB 100m) Annual incremental loans (RMB 100m)

49000 39000 29000 19000 9000 –1000 01/2008

04/2008

07/2008

10/2008

01/2009

04/2009

07/2009

Source: Wind Info.

Figure 14.4

Credit Provision Will Grow Steadily in the Fourth Quarter of 2009.

A proactive fiscal policy and moderately loose monetary policy were proposed at the Fourth Plenary Session of the Seventeenth Central Committee of the Chinese Communist Party. Monetary policy will therefore return to a moderately loose position from excessive looseness in the first half of 2009, and start steady growth. In the fourth quarter of 2009, we expect that the money supply and credit provision will maintain steady growth, and dynamic adjustments will be limited to the issue of central bank bills and the regulation of liquidity via open market operations; the deposit reserve ratio and interest rates will remain firm, not regulated upward. Liquidity will remain adequate in the fourth quarter of 2009. Incremental RMB credit throughout 2009 is expected to reach RMB 10 trillion, and M2 growth is likely to reach approximately 22 percent by the end of this year. After declining from a high level, incremental credit will maintain steady growth in the fourth quarter of 2009. It is predicted that M1 will climb to a peak at the end of 2009 and maintain fluctuations at a high level. The turning points for M1, and M1–M2 are likely to appear in the first quarter of 2010.

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4. Market Expansion Pressure Cannot Be Overlooked The introduction of GEM ahead of schedule and its bulk distribution is likely to shift capital and hot speculation spots on the main board, but generally, its share of total new issue financing in the A-share market is unlikely to be significant, and GEM is unlikely to substantially affect capital distribution on the main board. The international board is subject to intensive activity, and red chips are about to return to the A-share market. The market will in the short term be confronted with a sharp expansion. The rhythm and rate of the expansion in new issue capacity will become a factor restricting stock market development. Furthermore, the high financial levels of listed companies and the floating of large and small-sized non-tradable shares will bring certain capital pressure to bear on the market. According to Wind statistics, as of the third quarter of 2009, listed companies had already refinanced RMB 211.153 billion, and companies proposing refinancing plans (including issues, share placements, corporate bonds, convertible bonds, etc.) intend to generate up to RMB 628.606 billion in funds. Furthermore, listed companies also issued corporate bonds of RMB 393.475 billion on the interbank bond market. Another salient feature of this tide of refinancing is the increased refinancing amount.

25000

1294.20 Not including Sinopec

1573.20 Not including ICBC + Sinopec

20000 15000 10000

808.22 Not including China Life Insurance

5000

10-12

10-11

10-10

10-09

10-08

10-07

10-06

10-05

10-04

10-03

10-02

10-01

09-12

09-11

09-10

09-09

09-08

09-07

0

Source: Wind Info.

Figure 14.5

Floating of Non-Tradable Shares in 4Q 2009 and 2010.

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A number of heavyweight shares including Shanghai Pudong Development Bank, Vanke A, Wuhan Iron & Steel Co. have put forward financing schemes involving respective financing amounts of RMB 10 billion or more. Looking forward to the floating of non-tradable shares from the fourth quarter of 2009 onward throughout 2010, the size of this floating market will be most considerable in November 2010, reaching RMB 2.209254 trillion, although this drops to only RMB 129.42 billion if the PetroChina share is excluded. Generally, most of the shares to be floated will come from the largest shareholders of large stateowned enterprises, and actual floating pressure will be far lower than theoretical values. Therefore, the floating pressure of non-tradable shares will have a limited negative impact on the stock market, but this will be more reflected as a damping force due to unreasonable rises in market valuations. B. Outlook of the A-Share Market In our opinion, China’s A-share market will shift from the dual driving forces of economic recovery and liquidity in the first half of 2009 to a single force, economic recovery, in the fourth quarter of 2009 and 2010, and resistance to negative factors will be weaker than in the first half of 2009. The A-share market is likely to maintain its fluctuation pattern in the fourth quarter of 2009. The Shanghai and Shenzhen Stock Exchanges will receive major support from the economic recovery. We therefore believe that the stock market will improve in the long run, and the stock market will gradually rise. The stock market operating range in the fourth quarter and 2010 is expected to be between 2500–4000 points. According to Merrill Lynch’s Investment Clock theory as well as from the perspective of economic environment change, China’s macroeconomy is characterised by the following: a fallback in liquidity from its current high levels, a pick-up in economic growth, low-level recovery of inflation, and the CPI is also expected to turn positive at the end of 2009. The economic growth structure will also change, with investment growth falling back from its current high levels, export growth recovering from its current low levels, and the stable continuity of consumption growth. In line with the Investment Clock theory, against a background of weakening liquidity support and gradually apparent improvement in performance, we recommend that attention be

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paid to investment opportunities in medium-stream and downstream industries characterised by relatively stable performance growth such as machinery, automobile and parts, power equipment, communication equipment, medicine and biology, foods and beverage, trade and retail; consideration should also be given to investment opportunities in such areas as the low carbon economy, inflation expectation, energy conservation and emission reductions. C. Bond Market Outlook In the fourth quarter of 2009, the bond market will be affected by two negative factors. The first is expectations of a hike in interest rates caused by expectations of inflation, which will affect the uptrend of the bond market; the other is that the weakening adequate liquidity pattern will impair support for the bond market. No major changes in liquidity will occur in the short run, but the bond market will be dominated by fluctuations, with a possible declining area at the short end of the yield curve in the fourth quarter of 2009. The possible phased investment opportunities in the bond market will come from the seesaw effect formed by the entrance of capital into the bond market to avoid risk during the correction of the stock market. After the bond market earning rate was corrected in the first three quarters of 2009, bonds were better able to resist a rise in the earning rate. If the yield curve remains unchanged, the highest term for quarterly earnings from five-year national debt will be 3–4 years. We advise investors to establish a three-year portfolio in the fourth quarter of 2009. The interbank credit market is likely to see a transitory rise in margins as commercial banks face an investigation into the abundance of capital, and the rise in the central bank bill rate will also increase interest rate risk for short-term financing bills in the fourth quarter of 2009. The exchange credit debt market will seek pricing equilibrium from higher short-term gains, larger supply shocks, as well as alternative products. We recommend that investors maintain a shortterm inter-bank credit portfolio, and improve the credit rating of their credit portfolio in the fourth quarter of 2009; configure credit debt appropriately using low ratings and high yields in the stock market, and maintain the credit debt portfolio duration within 5 years.

ANALYSIS AND FORECAST OF CHINA’S FOREIGN TRADE SITUATION IN 2009 Pei Changhong China’s total import and export volume reached USD 1.33865 trillion in the first eight months of 2009, a drop of 22.4 percent over the same period of the previous year; of this, exports reached USD 730.73 billion, a year-on-year drop of 22.2 percent; imports reached USD 607.92 billion, a year-on-year drop of 22.7 percent; the total trade surplus was USD 122.82 billion, a year-on-year drop of 19 percent. Foreign trade took on the following features in the first eight months of the year: 1. Monthly merchandise exports in July and August 2009 recovered to in excess of USD 100 billion. Monthly exports for the last four months of 2008 remained in excess of USD 100 billion level, although these were affected by the international financial crisis. In 2009, monthly exports for the first six months declined to below USD 100 billion, and the month of February in particular, when export volume reached a new low of only USD 64.9 billion, a year-on-year drop of 17.5 percent. The situation changed in July and August 2009, with monthly exports rising to over USD 100 billion. The year-on-year rate of decrease remained significant, but an exports uptrend has appeared. 2. The bilateral trade ranking changed, with a rise in the market position of ASEAN nations. The European Union, the United States and Hong Kong are mainland China’s top three export markets. Japan previously ranked fourth, but was displaced by ASEAN from the first Table 15.1

Rate of Change in Monthly Exports, September 2008–August 2009 (Unit: USD 100m)

09/08 10/08 11/08 12/08 01/09 02/09 03/09 04/09 05/09 06/09 07/09 08/09 Sum Change

1363 21.4

1282 19

1150 –2.2

1112 –2.8

905 649 903 919 888 954 1054 1037 –17.5 –25.7 –17.1 –22.6 –26.4 –21.4 –23 –23.4

Source: Customs Statistics, August 2009.

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half of 2009 onwards. In the first eight months of the year, China’s exports to ASEAN totalled USD 62.94 billion, a year-on-year drop of 18.3 percent; China’s exports to Japan totalled USD 60.02 billion, a year-on-year drop of 20.2 percent. The implementation of ASEAN’s free trade zone strategy contributed to the rise in its export market position. China and ASEAN have implemented zero-level tariffs for over 60 percent of products since January 1, 2009, thus promoting bilateral trade. As of January 1, 2010, more than 90 percent of products on both sides will be subject to zero tariffs. In terms of bilateral trade between China and its principal trade partners, China’s exports to the United States, ASEAN, Australia, and India declined relatively more slightly, and China’s imports from the EU, the United States, Australia and Brazil also declined softly. Complete pessimism is therefore unfounded with regard to China’s export trade and the implementation of trade protectionism by the United States and other countries against China. With the changes in global trading patterns, developing country markets are increasingly important to each other. In the first half of 2009, China became the largest trade partner of Brazil and Chile, countries whose largest trade partner had always been the United States. In the first half of 2009, Brazil’s exports to China grew by 62.4 percent, while those to the United States declined by 52.7 Table 15.2

Decrease in Imports and Exports between China and Principal Trade Partners, January–August 2009 (%)

Trade partner

World EU USA Japan ASEAN Hong Kong South Korea Taiwan Province Australia India Brazil

YoY decline in imports and exports

Decline in exports

Decline in imports

22.4 20.7 16.4 22.1 21.3 22.9 26.4 33.1 8.4 29.1 22.8

22.2 25.1 17.3 20.2 18.3 21.7 35.1 34.5 13.8 14.2 38.7

22.7 11.4 13.7 23.5 24 39.4 20.9 32.8 5.4 48.7 12.9

Source: Customs Statistics, August 2009.

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percent, those to the European Union declined by 23.8 percent; Chile’s exports to the United States declined by 31.4 percent, while those to the European Union declined by 55.7 percent, and those to China declined by only 14 percent. China thus replaced the United States as Brazil and Chile’s largest trade partner. 3. Exports of low-technology and labour-intensive products are able to better weather declines in market demand. In the first eight months of 2009, exports of agricultural products, dominated by foods and live animals, only declined by 6.0 percent year-on-year, while the rate of decline of exports of labour-intensive products including textiles and apparel, shoes, plastics, luggage, furniture was far lower than the average level. The rates of decline of exported mechanical and electrical products, high and new technology products all approached average levels; while the export volumes and prices of electrical appliances, electronic products, and vehicles all declined at rates not exceeding 50 percent; exports of steel products, aluminium products and tires all declined in terms of volume and value. Exports of resource products such as petroleum and coal also declined substantially. Table 15.3

Changes in the Volume and Value of China’s Exports, January–August 2009 (%)

Commodity Coal Crude oil Product oils Plastics Textile yarn, fabrics and associated products Bags and similar containers Apparel and clothing accessories Shoes Steel products Mobile phones and parts Integrated circuits Toys Automatic data processing equipment and parts Furniture and parts Lamps, lighting fittings and parts Mechanical and electrical products High-tech products Source: Customs Statistics, August 2009.

Volume

Value

–55.9 37.1 36.3 –14.2 — — — — –68.4 — 1.6 — –18.8 — — — —

–51.5 –28.4 –25.4 –8.1 –14.9 –9.4 –10.4 –5.8 –67.9 –9.3 –16.2 –12.2 –18.7 –9.4 –17.6 –20.6 –19.1

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This phenomenon indicates that low-technology and labour-intensive products are characterised by lower income demand elasticity, and that furthermore, other economies will find it difficult to displace China as a major supplier to the world market. Therefore, industries and products of this kind should not be eliminated in the industrial upgrading and structural adjustment process. This comparative advantage should furthermore be extended—specifically, these industries should be shifted to mainland China’s central and western regions to allow China to become a support base for low-technology and labourintensive products on the world market. 4. The price decline of imports has been worse than the quantity decline, so the time is right to import reserve resources. There has been little fluctuation in the import volumes of iron sand, crude oil and product oil, but prices declined considerably; the import volumes of copper and aluminium rose, but their prices declined; the import volumes of intermediate inputs such as methanol, sulphuric acid and steel products rose significantly, but their prices declined; the import volumes of agricultural products including soybean and rape seed rose, but their prices declined. This indicates that imports of iron sand and petroleum must be increased for reserve purposes. In the first half of 2009, due to the price decline of international petroleum and mineral resource products, imports of petroleum and mineral resource products declined by over 45 percent, but imports of intermediate inputs declined relatively more lightly. The percentage of imported petroleum and mineral resource products therefore dropped from 23.8 percent in the first half of 2009 to 19.1 percent in the second half; the proportion of imported intermediate inputs increased by three percentage points. In the long run, petroleum and mineral resource products are all commodities of which China must import large amounts. Their prices are not very high on the international market, and the launch of a mechanism to convert foreign exchange with physical reserves to import these resource products in large amounts would not only facilitate China’s economic development, but also help to create increasing demand on the international market, thus stimulating the recovery of the world economy; this is also a weapon with which China can withstand protectionism. The relevant authorities should give this careful consideration.

analysis and forecast of china’s foreign trade Table 15.4

239

Changes in the Volume and Value of China’s Imports, January–August 2009 (%)

Commodity Soybean Iron ore and concentrates Crude oil Product oils Plastics in primary forms Steel products Unwrought copper and copper products Motor vehicles and chassis Mechanical and electrical products High-tech products

Import volume

Import value

20.6 32 7.4 –9.8 28.1 3.7 75.8

–14.1 –29 –46.5 –55.6 –11 –19.5 3

–23.5 — —

–26.9 –19.1 –20.4

Source: Customs Statistics, August 2009.

5. No substantial change has occurred in the pattern of international labour division, and international trade led by transnational companies remains the norm. In the first eight months of 2009, state-owned enterprise exports declined by 30.5 percent year-on-year, far higher than the average level; foreign-funded enterprise exports declined by 22.3 percent, while collective enterprise exports declined by 31.9 percent, and those of other types of enterprises declined by 13.5 percent, indicating that non-public ownership enterprises performed better in resisting market risk. In terms of import trade, state-owned enterprise imports declined by 29.9 percent, those of foreign-funded enterprises declined by 23 percent, those of collective enterprises declined by 18.4 percent, and those of other types of enterprises declined by 2.3 percent, indicating that the change in domestic demand affected state-owned enterprises most severely. In terms of the type of trading, processing trade was not affected as severely as general trade in terms of exports. Table 15.5

China’s Foreign Trade, January–August 2009 (Units: USD 100m, %)

Mode of trade

Value of exports

YoY change

Value of imports

YoY change

Total General trade Processing trade Other trade patterns

7307.4 3279.5 3515.1 512.8

–22.2 –25.2 –21 –5.3

6079.2 3269.0 1904.8 905.4

–22.7 –18.8 –26.3 –27.8

Source: Customs Statistics, August 2009.

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The decline of the processing trade was lower that that of the general trade. In the first eight months of the year, processing trade exports by foreign-funded enterprises accounted for over 83 percent of processing trade exports as a whole, indicating that the international division of labour dominated by transnational companies and the trade thereby generated continued to play a significant role and these more effectively resisted the decline in market demand. There was a decline in processing trade imports, indicating that the international division of labour saw increased demand matching in China due to the impact of the international financial crisis, but this was a form of structural demand—namely exports of low-technology and labour-intensive products declined slightly, while demand matching for such products was considerable; exports of machinery and electronic products declined significantly, reflecting the low demand for domestic matching for products of this kind. This type of structural demand runs counter to the upgrading of the export trade structure, but it is not determined by trade but rather by the market and productive structure. 6. The policy of export tax rebates has reached its limits, with little space for further expansion. In order to assist export trade and weather the impact of the international financial crisis, the government adjusted export tax rebate rates seven times upward from the second half of 2008 onwards. In the first half of 2009, the size of export tax rebate grew to RMB 351.393 billion, a year-on-year increase of 21.9 percent. The annual figure is expected to reach RMB 700 billion, a net increase of RMB 120 billion over the RMB 587 billion figure for last year. The comprehensive export tax rebate rate has risen to 13.5 percent. Of a total 13,000 taxable items, 1971 were awarded the full tax rebate amount; of 2500 taxable machinery and electronic products, 1771 were awarded the full tax rebate amount, i.e. 70 percent. The export tax rebate rate for textiles and apparel has reached 15 percent. Despite this, many foreign trade enterprises remain in difficulties due to rising costs and the squeeze on profits, and they are beseeching the government to once again increase the export tax rebate. A good number of experts have also asked the government to award full amount tax rebates for all forms of export trade. Such a measure is however very unlikely, from the perspective of fiscal expenditure. Were the government to take such a measure, the financial revenue and expenditure consequences would be extremely disadvantageous, and result in the further distortion of the export tax rebate policy.

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7. International trade protectionism is increasing, and China’s export trade has become more the subject of increasingly frequent trade remedy investigations. According to data recently released by the Ministry of Commerce, a total of 17 countries (regions) initiated 79 trade remedy investigations against China in the first eight months of 2009, including 50 anti-dumping cases, 9 countervailing duty cases, 13 safeguard protection cases, and 7 special safeguard protection cases, involving a total amount of approximately USD 10.035 billion, a yearon-year increase of 121.2 percent. Major countries or regions filing for trade remedy investigations against China include India (22 cases), the United States (14 cases), Argentina (10 cases), Turkey (6 cases), the European Union (4 cases), and Canada (4 cases). The trade protectionism case which has most affected China is the September decision by the US government to take special safeguard measures against imported tyres from China. According to this decision, the United States will levy ad valorem duties on imported tyres from China at a rate of 35 percent, 30 percent and 25 percent respectively over the next three years. The implementation of such punitive duties will affect China’s tyre exports to the United States by approximately USD 2.2 billion annually. Furthermore, the United States will continue to initiate new trade remedy investigations, action which may lead to other countries following suit, and severely affecting China’s export trade enterprises. This makes it clear that the hypocritical commitments of foreign politicians to oppose trade protectionism should not too easily be believed, and that it may be necessary to fight a trade war. China should conduct any such war in a justified, forceful and restrained manner; there is no purpose in being blindly timid and giving an impression of weakness when addressing international economic competition. Our opposition to international trade protectionism must primarily be rooted our rejection of the excessively gentlemanly so-called “virtue and morality” of Duke Xiang of Song. In response to the impact of the international financial crisis, China’s foreign trade enterprises, besides relying on the support of public policies, also developed new methods, such as “huddling for warmth” and “collective winterisation”—i.e. numbers of enterprises agreed to form a common competitive advantage to weather the impact of the international financial crisis. The competitive advantages of China’s export products on the international market are the low cost of domestic capital goods on the one hand, and the efficient service provided by

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overseas importers within their domestic circulation areas on the other. From the point of view of domestic operations, the decentralisation of manufacturing sectors requires the provision of efficient services in the circulation sector including logistics, finance, customs clearance and settlement, etc. in order to maintain the competitive edge developed at home or increase a new competitive factor for China’s export products. As it is difficult to improve manufacturing technology in such a way as to eliminate production efficiency bottlenecks in the short term, the creation of cost-cutting advantages in the circulation field is the best way for business enterprises to address the severe impact of the international financial crisis. A number of business enterprises have extended their business from foreign trade agency to other service areas. Specifically, when a number of production enterprises encountered difficulties in financing their foreign trade, they expanded their bank fiduciary lines to provide trade credits to foreign trade producers, thus making up for the scarcity of bank credit and credit guarantees for small and medium-sized enterprises, and effectively introducing various services into the foreign trade production sector. Numerous foreign trade producers have also seen a deep need for services of this kind, and demand thus expands. This sort of supply chain, linking together a variety of productive services, reduces the export cost of foreign trade enterprises, and offsets the negative effect of impaired low domestic production costs. Foreign trade enterprises refer to supply chain services of this kind as “huddling for warmth”. In fact, this is the result of extensive experience in foreign trade growth, applied to address the impact of the international financial crisis. In 2009, Xiamen Jiasheng Foreign Trade Co., Ltd. achieved import and export turnover of USD 500 million, or a year-on-year increase of over 20 percent, by expanding supply chain-type services to enterprises. This experience is worth reviewing, both in practice and in theory, as a successful transition from an export trade growth mode is no easy task. This requires not only innovation in terms of production and manufacturing technologies but also improvements to the product value chain. In a large manufacturing country such as China, however, it will be necessary to retain low-end production technologies and production links for a considerable period of time to come. Improvements in the value chain in some sectors do not mean that such improvements are applied nationwide. China will see partial improvements in the division of production in the value chain, decentralisation as well as regional increases in low-end production. The high-end, middle-end

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and low-end division of production will co-exist for a long time to come, and the economic connotations of the transition of China’s export trade growth mode therefore require not only an improvement of the division of production in the value chain but also the achievements of a regional expansion of the international division of production, and low-end manufacturing technologies must create more widely applicable beneficial results for China’s population. This can only be achieved by ensuring the provision of all of the systems which favour the high-speed growth of export trade, including external demand and a favourable domestic policy environment, but also the creation of a commercial system and policy environment for the partial realisation of improvements in the value chain of the division of production, as well as the continual expansion of the international division of production. This kind of commercial mechanism is specifically a supply chain mechanism and its management mode. The export trade supply chain is currently split into two parts: when Chinese products are exported overseas, the supply chain servicing these is dominated by overseas importers, and China’s foreign trade enterprises are usually unable to enter this chain; foreign businessmen however also face difficulties in properly controlling Chinese domestic production and operations, meaning that there is considerable development space for domestic business enterprises. China’s business enterprises should develop by integrating the concepts of supply chain management, thus creating a new competitive factor for Chinese exports and promoting the transition of the export trade growth mode. China’s foreign trade service enterprises should expand globally by establishing overseas supply chain systems to achieve the integration of domestic and foreign trade. Only when this is achieved will a solid foundation have been laid for the transition of the export trade growth mode and the formation of a new competitive edge in the international economy. The UNCTAD Trade and Development Report for 2009, issued on September 8, 2009, forecast that the world trade volume in real terms and in present USD terms would decline by 11 percent and 20 percent respectively in 2009. The total global volume of imports and exports was approximately USD 32 trillion in 2008, and this will drop to approximately USD 25 trillion in 2009. China’s total import and export volume calculated in present USD terms for the first eight months of the year declined by 22.4 percent year-on-year, and the challenge for China is whether the country can achieve a percentage lower than the global average decline for the whole of 2009. From

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the data available for the first half of 2009, it can be seen that US exports declined by 22.25 percent, and its imports declined by 29.9 percent in the first quarter; Japan’s exports declined by 42.7 percent, while its imports declined by 38.6 percent in the first half of 2009; the 27 countries of the EU saw a drop-off in exports of 30.3 percent and imports of 30.9 percent in the first quarter. The global average rate of decrease cannot currently be ascertained, but China should strive to achieve a rate of decrease lower than the global average. Compared with other major trading nations, China saw a relatively shallow decline in foreign trade. Germany, replaced the United States as the world’s leading exporter since 2003, but it may lose its champion’s crown this year. China’s export value stood at USD 1.428 trillion in 2008, just slightly lower than Germany’s figure of USD 1.465 trillion. With this in mind, the World Trade Organisation on July 22 2009 declared that China would overtake Germany to become the 2009 global export champion. It is expected that in the last four months of 2009, China’s export trade will continue the monthly export level in excess of USD 100 billion, with total value for the four months of USD 450 billion; the country’s import trade may continue to reach a monthly level of USD 90 billion, with a total value of USD 400 billion. By adding the trade total for the previous eight months, China’s total imports and exports volume may reach USD 2.2 trillion, of which export trade may make up USD 1.2 trillion; the trade surplus is estimated at approximately USD 180 billion, a drop of about 14 percent, 16 percent and 40 percent than 2008 respectively. With regard to the economic outlook for 2010, many experts hold the opinion that the global economic recovery will remain fragile and instable, and individual national economic growth will continue to rely on policy stimulus and government investment, rather market forces. The high rate of unemployment and overcapacity in developed countries will also increase uncertainty. As of May 2009, the utilisation rates of productive capacity in the United States, Germany, and Japan were historical lows of 68.3 percent, 72 percent, and 65 percent respectively. The world economy will therefore grow at slow speed for at least the next two years. The average forecast of 28 international consultative bodies is that the global economy will bottom out in 2009, and the economic growth rates of the United States, Japan, and the EU will be 2.1 percent, 0.4 percent, and 1.4 percent respectively in 2010; these will then reach 3.4 percent, 16 percent, 1.8 percent in 2011. As developed countries need time to recover economically and demand will not pick

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up by a large margin, China’s foreign trade growth should not overly rely on the demand pull of the world’s advanced economies. China’s foreign trade, and particularly its export trade, will be unable to grow fully depending on external demand, and China’s policy environment will in a sense play a more important role. Measures such as export tax rebates, the Renminbi exchange rate, trade financing and export credit guarantees will determine China’s foreign trade prospects in 2010. If China has a favourable domestic policy environment, enabling foreign trade enterprises to adapt to this new environment more effectively and make further progress in developing emerging markets, China’s foreign trade—and its export trade in particular—will pick up. Survey data indicate that China’s exports account for approximately 17–22 percent of the US, Japan, and European Union markets; and China’s exports are likely to account for a larger market share of emerging economies. China’s exports currently only account for 9.2 percent, 3.7 percent, 10.4 percent, and 6.9 percent of the market shares of the Middle East, Eastern Europe, Africa and Latin America respectively, and there is considerable space to grow. Furthermore, the setup of free trade zones will help expand external demand. If China’s total import and export volume drops to USD 2.2 trillion in 2009, it may increase by over 10 percent in 2010, recovering to 2008 levels; export trade will recover to the 2008 level of USD 1.43 trillion, with a growth rate of over 15 percent. References “Shang ban nian wo guo duiwai maoyi jinchukou qingkuang zongshu 上半年我国对 外贸易进出口情况综述 [Overview of China’s Foreign Trade in the First Half of 2009]”, Guiji shangbao ( July 30, 2009): 2. “Waimao jingqi xianghao qushi weibian 外贸景气向好趋势未变 [Foreign Trade Pickup Trend Continuing]”, Jinrong shibao (September 12, 2009): 5. “Waixu shifou huinuan, jinchukou qiye zenyang jixu qianxing 外需是否回暖, 进出口 企业怎样继续前行 [ Has External Demand Picked up? Ways Forward for Import and Export Enterprises]”, Guiji shangbao (September 1, 2009): 4. “Waixu xingshi jinyibu quhao 外需形势进一步趋好 [External Demand Situation Improves]”, Guiji shangbao (September 18, 2009): 8. “Weiji zhongyaxia chongqi Duoha huihetanpan 危机重压下重启多哈回合谈判 [Doha Round Negotiation Restarted in Crisis]”, Guiji shangbao (September 12, 2009): 1.

MAJOR IMPACT IN 2009 AND STRUCTURAL SHORTAGES IN 2010—INTERPRETATION OF THE COMPLEXITY OF CHINA’S EMPLOYMENT SITUATION Cai Fang China’s employment situation, which has been affected by the financial crisis since 2008, was not simply reflected in the impact on the labour market, but also in a series of complicated and confusing phenomena comprising the impact on employment and labour shortages, rural migrant workers’ return to their villages or towns, and the rise or drop of the unemployment rate. Unless these ever-changing surface phenomena are analysed, it will be difficult to accurately grasp the current and future trends of the labour market. This paper attempts to analyse the laws governing changes in the employment situation from the perspective of the long-term trends and short-term contradictions of labour supply and demand in China, thus providing a reference for a full understanding of the macro economy. I. Who Knows First: Employment during Macro-Economic Fluctuations? I once used a line of a poem, “The duck knows first when the spring river becomes warm”, to describe the feelings and response of coastal export-oriented enterprises to the shortage of labour which began to appear from 2004 onwards. This sentence can now be paraphrased to read, “The duck knows first when the spring river is still cold”, to describe the impact of the global financial crisis on the coastal exportoriented economy in terms of the reduction of orders. China’s economists and policy-makers may not place primary reliance on labour market indices such as the unemployment rate to get an understanding of the macro-economic situation, but for enterprises and workers, firsthand experience relating to employment is more timely, accurate and important than recondite macro-economic indices such as the GDP growth rate, M2 circulation, etc.

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In the United States, the federal government releases the latest employment figures on a monthly basis, the main indices being institutional employment and unemployment information, based on household surveys and enterprise surveys. On the morning of the first Friday of each month, a group of selected reporters obtain this labour market information when it is exclusively released by the Bureau of Labour Statistics, and report it—this usually has a major impact on the macro economy and the capital market1. China’s labour statistics also include the results of household surveys and enterprise surveys, but the summarisation and release of these results is slow, and therefore unable to meet macro economic and the labour market situation assessment needs. Usually, the only information obtained is ad hoc quarterly registered unemployment rates and lagging post supply and demand information for certain labour markets. Therefore, macroeconomic regulation and control decisions are in most cases made based on rough assessments of employment. With the completion of the laid-off subsidy as an unemployment guarantee, the laid-off worker segment began to disappear from the statistics in 2003. Laid-off workers who failed to return to employment began to receive unemployment insurance payments. The registered unemployment rate that year reached a record high of 4.3 percent before then declining with the year, dropping to 4.0 percent in 2007. In 2008, the registered unemployment rate rose to 4.2 percent due to the impact of the financial crisis; and this rate continued to rise to 4.3 percent in the first quarter of 2009 (see Figure 16.1). Similarly, the ratio of the number of jobs available to the number of applicants in the labour market (hereinafter referred to as “job opening-to-application ratio” showed an increasingly recovering trend from the late 1990s onwards, reaching 0.98 in 2007 and 2008. The impact on employment starting from 2008 onwards however led this ratio to drop to 0.85 in the fourth quarter of 2008, and 0.86 in the first quarter of 2009.

1 Bernard Baumohl; 徐国兴、申涛 Xu Guoxing, Shen Tao trans., Jingji zhibiao jiedu—dongxi weilai jingji fazhan qushi he touzi jihui 经济指标解读—洞悉未来经 济发展趋势和投资机会 [The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities], Zhonghua Renmin daxue chubanshe (2005).

1.00

4.3

0.95

4.2

0.90

4.1 4.0

0.85

3.9

0.80

3.8

0.75 Registered unemployment rate

3.7

0.70

3.6

.1 09 20

08 20

07 20

06 20

20

20

20

20

20

05

0.60

04

3.4

03

0.65

02

3.5

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Opening-to-application ratio

4.4

01

Unemployment rate (%)

major impact in 2009 and structural shortages in 2010

Sources: National Bureau of Statistics: Zhongguo tongji nianlan 中国统计年鉴 [China Statistical Yearbooks], Zhongguo tongji chubanshe; China Labour Market Website (http://www.lm.gov.cn/).

Figure 16.1

Changes in the Labour Market State Index.

A China Central Television reporter once asked Paul Krugman about the macro-economic indices he was most concerned with; his answer was, employment information and the Purchasing Managers Index (PMI). The PMI, as calculated by CLSA Asia Division and the China Federation of Logistics and Purchasing, debuted in China at roughly the same time as this financial crisis, and is now widely quoted by those concerned with the macro economy. The PMI dropped sharply in 2008 and bottomed out in early 2009, rising through the data line of 50 in March and April. A string of monthly and quarterly macroeconomic indices all also show that the Chinese economy is picking up. In terms of relevance, the employment index should also reflect this situation. We expect the surveyed unemployment rate and the job opening-to-application ratio to pick up after the first quarter. It is worth discussing the best way to understand the employment indices, namely whether this type of index lead or lag behind the macro economy? As we all know, labour demand is a cause or derived demand, and is generated by economic growth itself. More specifically, in order to understand the relationship between China’s exclusive employment situation and the macro economy, this must be considered from at least the following two aspects:

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1. The inalienable relationship of both aspects must be understood. Because economic growth contributes to labour demand, the macroeconomic cycle is certainly reflected in employment fluctuations. The US economist Thomas Rawski (2001)2 used this correlation to question the authenticity of the GDP growth rate of 7.8 percent, as employment recorded “zero growth” in 1998. Further indices used in combination with employment to question the economic growth rate also include power consumption and traffic growth. But putting aside the argument that “zero growth” employment is an incorrect conclusion, a careful examination of the indices which were used to prove macro economic growth in an indirect manner reveals a common feature, i.e. employment, energy consumption and traffic have strong elasticity to economic growth, such that when the economy is in an uptrend, these aspects will grow more strongly; when the economy is in a downtrend, their decline will be more remarkable.3 It is therefore important to realise that the employment elasticity of economic growth has its particularities. An economic upsurge produces huge and urgent employment demand, particularly for irregularly employed workers in cities and for the majority of migrant workers who are irregularly employed, but once the economy begins to decline, they will bear its brunt. This is to say that the elasticity of response of irregular employment to macro-economic climate is higher and more sensitive than steady regular employment, and irregular employment therefore has a more fragile status in the labour market. It is very helpful to know this point in order to understand the position and role of employment in China’s macro economy and understand the precarious employment situation of migrant workers. II. A Tale of Two Cities: Observing the Complicated Employment Situation of Migrant Workers It is not by chance that Dongguan, Guangdong attracted the attention of Chinese and foreign media earlier this year, as it contains all of the potential flash points such as abnormally high export dependence, Rawski, Thomas G., “What’s Happening to China’s GDP Statistics?” in China Economic Review Vol. 12 No. 4 (December 2001): 298–302. 3 Cai, Fang and Meiyan Wang “How Fast and How Far Can China’s GDP Grow?” in China and World Economy 5 (2002). 2

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low-end labour-intensive industries, large-scale use of migrant workers, low wages and highly intensified labour. Since the second half of 2008, however large-scale lay-offs of migrant workers started here due to a reduction in orders. Dongguan is therefore useful as a typical case and source of information in the ongoing discussion of the return of high numbers of migrant workers to their home villages due to unemployment. It is worth noting the factor which produced the maximal employment shock effect was the flight of employers in overseas investment enterprises. A northeastward drive along the coastal road over hundreds of kilometres will bring you to another city—Quanzhou, in Fujian province. This has the same features as Dongguan—export dependence, a labour-intensive economy and large-scale use of migrant workers, but unlike Dongguan, the city faces frustrating difficulties in recruiting workers. Why do two diametrically opposite labour market phenomena coexist in regions with similar industrial types? One interpretation is that unlike Dongguan, which is dominated by Hong Kong, Macao and Taiwan invested enterprises, Quanzhou is dominated by local enterprises. Even if the number of orders decreases due the impact of the financial crisis, enterprise bosses will not shut down their enterprises unless it is absolutely necessary to do so. The shortage of migrant workers caused them keenly felt pain prior to the outbreak of the financial crisis, and they were therefore more willing to overcome difficulties with workers than the enterprises in Dongguan. This is a humane interpretation, and I was personally happy to believe that this was the case. The development of the situation however provides an interpretation that conforms more with economic logic. It has been noted that official information varies widely with regard to the degree to which migrant workers have been affected by the financial crisis. From early 2009 to September of that year, large amounts of information were released through official channels—20 million migrant workers returned to their home villages due to unemployment before and after the Spring Festival, 70 million migrant workers including 12 million directly affected by the financial crisis returned to their home villages, 95 percent of the 70 million migrant workers who returned to their home villages then returned to the cities to work, the migrant worker unemployment rate was less than 3 percent, the total size of the migrant worker population has increased from 140 million in 2008 to its current 150 million, 96 percent of migrant workers who returned to their home villages have returned to the cities to work, and

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the shortage of migrant workers has appeared. If all of this information was released in single day, it would have ended up in a landfill. But from the perspective of a single time sequence, these pieces of information connect to form a course of reaction by migrant workers to the changing macro-economic situation in 2009. The simple analytical framework of “cyclical unemployment + labour market segmentation” is sufficient to interpret the aforementioned changes with economic clarity. The economic growth cycle resulted in an employment growth cycle. The financial crisis resulted in the downtrend of China’s real economy, thus generating cyclical unemployment. As small and medium-sized enterprises in the export sector were most severely affected by the financial crisis and these enterprises mainly employ migrant workers with low dismissal costs, it is natural for this employment segment to be the first to lose their jobs. The household registration system no longer restricts people from working and living in other places, but migrant workers who leave their household register locations find it difficult to receive social protection and employment aid in the locations where they work. Unemployed migrant workers therefore do not find it necessary to stay in the said location in order to seek a new job. It is more logical for migrant workers to return to their home villages in advance, as the Spring Festival was approaching. The following story is equally logical. The forerunners of migrant workers also had a name in economics, i.e. rural surplus labour— meaning that jobs in rural areas were unable to meet their employment needs; in other words, they do not form part of the existing work force required in rural areas. Furthermore, a number of new changes have made it difficult to return to their rural posts. For instance, the significant improvements in farm labour efficiency mean that agriculture no longer acts as a reservoir of surplus labour; most newgeneration migrant workers were born in the 1980s or 1990s, and neither know how to farm nor want to farm. Therefore, regardless of whether a labour contract awaits them, the vast majority of such workers will return to the cities to seek work after the Spring Festival. Migrant workers have no unemployment insurance, nor can they claim the urban minimum living guarantee. Because they cannot afford long-term unemployment, their desire to seize any job opportunity is more apparent than that of urban workers. If there is any decrease in manufacturing jobs, they will turn to the service industry;

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similarly, when the economic stimulus scheme to initiate infrastructure construction was launched, they entered the construction industry. It is not difficult to understand that most of these workers rapidly recovered employment through self regulation in the labour market following industrial restructuring. No matter whether this is due to the continual increase in China’s domestic consumption, the initial economic recovery in other countries or the effect of the government’s economic stimulus policies spreading to more industries, economic growth will more or less get back on track, and cyclical unemployment will improve accordingly. One further item should be added to the economics analysis chain, namely labour market segmentation. Even in the event of slight additional demand for labour, for example an unexpected Christmas order, will result in a short-term imbalance in work force supply and demand, and a recurrence of a shortage of migrant workers. Even Dongguan has experienced shortages of migrant workers—no coincidence, as the job opening-to-application ratio in the city’s labour market has recovered from a trough figure of 0.76 to 1.51. If China had no household registration system or any difference in urban and rural access to public services, and thus no geographical breakup of the labour market, the employment response to the economic cycle would follow the following mechanism. During an economic decline, the cyclical unemployment rate would rise, and the unemployed would actively seek work while receiving unemployment insurance payments; on the other hand, a proportion of the workforce would leave the labour market due to difficulties in finding employment, or a decrease in wages, which would be reflected in a drop in the general labour participation rate. When the economy was growing, labour force demand would increase, which would reduce the unemployment rate and attract workers who had left the labour market as well as the new economically active population to enter the labour market through easier employment and higher pay, thus raising the general labour participation rate, and the labour supply would rise accordingly. With the household registration system, however the labour force demand in industries other than the agriculture (which usually occurs in cities and coastal areas), and the work force supply (to be found in rural areas, and China’s central and western regions) are divided geographically. The response of labour supply to labour demand is

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much slower than in a normal labour market, which results in sharp swings in the labour supply in certain regions. Therefore, the changing employment situation for migrant workers and the co-existence of shortages of migrant workers, as well as migrant workers’ return to their home villages, can be explained within a framework of “cyclical unemployment + labour market segmentation”. III. Lewisian Turning Point: How to Understand the Long-Term and Short-Term Features of the Labour Market Economic growth is inevitably coupled with cyclical fluctuations. Cyclical unemployment can therefore be controlled but not exterminated. The labour market segmentation phenomenon as well as its overblown influence on society can be eliminated through reform. Objectively, China’s labour market has made considerable progress in terms of growth and integration. In the 21st century, the total number of migrant workers working outside of their home town for more than six months doubled. On the basis that a person must be resident for more than six months in order to be included in urban population statistics, labour force mobility has made a huge contribution to urbanisation. However, as migrant workers cannot live in urban areas permanently, this not only results in instability of the labour supply and demand relationship, but also distorts the age structure of the rural population. Therefore, urbanisation as it currently stands is an unstable form of urbanisation, as it fails to convert migrant workers and their families into urban residents. Ensuring sustainable economic growth requires not only the acceleration of the drive towards urbanisation, but also ensuring stable urbanisation; reform of the household registration system is thus required. But the household registration system is not merely a single document, nor is household registration reform simply a change of household registration status or name. If migrant workers are unable to obtain public services as citizens while still receiving nominal urban household registration, this will not change the name of the game. Therefore, one appropriate reform method would be to unify and equalise social security and other public services for all citizens, and push forward reform of the domiciliary system. On the one hand, the gradual equalisation of urban and rural public services would reduce the social risks generated by the swarming of the population to the

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cities, as well as increase urbanisation order. On the other hand, the provision of an urban social security system or social welfare system in a broad sense, as well as public services such as compulsory education to migrant workers and their families would increase their selection opportunities, thus making civilianisation a gradual process as well as achieving the target of sharing public services. Urbanisation performed in this manner would be stable and people-oriented. More importantly, stable urbanisation is the key to fostering human capital, solving structural shortages in the labour force and dealing with natural unemployment. The extensive severe labour shortage in 2004 was neither accidental nor provisional, but it was backed by an irreversible population agent. Then my colleagues and I simulated various kinds of labour demand factors using the working-age population as the agency index of labour supply, and found that the labour supply curve and labour demand curve joined in 2004 at the earliest and 2009 at the latest,4 meaning that no fundamental change is occurring to the long-term status in which the labour supply exceeds labour demand. If this is expressed in terms of development economics, the unlimited supply of labour force feature starts to disappear, and the Chinese economy reaches a Lewisian Turning Point. As Lewis’s basic definition of a dualistic economy relies on the existence of plenty of surplus labour in the agricultural sector, a survey and estimation of the size of the labour force remaining in agriculture is the best way to support the argument of the impending arrival of a Lewisian Turning Point, as well as respond to various questions and criticisms. My colleagues and I have also made efforts in this area.5 As there are too many disputes concerning the surplus labour estimation method, however, we have shown the rural labour supply trend in Table 16.1. As the increase in urban labour depends on the movement of the labour force from rural areas, a large portion of the rural work force has moved to urban areas, and if defined on the basis of the resident population, the rural working-age population has taken on a decreasing tend. As the elderly and school students do not participate

4 Cai Fang, Du Yang, Wang Meiyan 蔡昉, 都阳, 王美艳, Zhongguo laodongli shichang de fayu yu zhuanxing 中国劳动力市场的发育与转型 (Development and Transformation of China’s Labour Market), Shangwu yingshuguan (2005). 5 Cai, Fang and Meiyan Wang, A Counterfactual Analysis on Unlimited Surplus Labor in Rural China, in China and World Economy Vol. 16, No. 1 (2008): 51–65.

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Table 16.1 Rural Working-Age Depopulation Trend (Unit: 10,000 persons)

2001 2002 2003 2004 2005 2006 2007 2008 2009

Aged 15–64

Migrant workers

Students at senior high schools

52662 52291 51767 51597 51424 51192 50894 50543 50117

8399 10470 11390 11823 12578 13212 13697 14041 15000

231 229 255 234 232 209 — — —

Sources: (1) Figures for rural workers working outside over six months during 2000–2007 are quoted from the Department of Rural Survey of the National Bureau of Statistics’ Zhongguo nongcun zhuhu diaocha nianjian 中国农村住户调查年鉴 [China Rural Household Survey Yearbooks], Zhongguo tongji chubanshe; the figures for 2008 are taken from the National Bureau of Statistics website; the figures for 2009 came from Xin, Dingding, “Country Sees Boost In Jobs for Migrant Workers”, Renminribao, September 5–6 (2009); (2) The rural working-age population forecast was performed by Hu Ying based on the 2000 population census; (3) The number of senior high school students in rural areas was drawn from the National Bureau of Statistics’ Zhongguo tongji nianjian 中国统计年鉴 [China Statistical Yearbook], Zhongguo tongji chubanshe.

in the labour market, the total labour force from rural areas has drastically decreased. The Chinese economy has achieved 30 years of high-speed growth, and China is now the world’s third largest economy. China’s per capita income however remains fairly low, and its central and western regions are ripe for development, making it possible to maintain highspeed economic growth over the next 10–20 years. China was the first country to emerge from the financial crisis, and its economy will return to normal growth in 2009. The shortage of ordinary labour, suspended due to the impact of the financial crisis, will re-appear in certain regions and sectors in a friction manner. The ultimate means of solving labour market contradictions is to increase the integrative level of the labour market and improve the quality of workers. There is therefore unprecedented urgency in the implementation of series of reforms such as accelerating the reform of the household registration system, integrating urban and rural social security, public services and employment, and enhancing training for rural migrant workers.

CHINA’S AGRICULTURAL ECONOMY IN 2009 AND OUTLOOK FOR 2010 Li Guoxiang China’s agricultural economy faces numerous disadvantages in terms of its operation and development in 2009. In 2009, China’s economic growth slowed due to the impact of the international financial crisis, concern over agricultural, agricultural workers and rural issues has weakened in certain regions due to abundant agricultural product harvests in recent years, and severe droughts which affected the main wheat production areas in the country’s north in the spring and most of the main autumn grain production areas in the northeast in the summer. Nevertheless, with the effect of comprehensive and effective policy measures, the agricultural economy is expected to maintain sound operations, the goal of stable agricultural development can be achieved, and the situation for increasing agricultural workers’ incomes is better than expected. Looking forward to 2010, the uncertainties facing the operations and development of the agricultural economy will continue to remain, but there should be fewer unfavourable factors than in 2009, and agriculture will hold a more solid fundamental position in the national economy. I. Principal Features of Agricultural Economic Operations in 2009 To prevent the international financial crisis from affecting China’s agriculture, the government formulated rural policy goals at the beginning of the year to achieve the stable development of agriculture and a sustained increase in the income of agricultural workers. In terms of the operations of the agricultural economy, it is estimated that the effective supply of major agricultural products will increase, the prices of agricultural products will bottom out, and agricultural workers’ income is expected to rise considerably in 2009, thus providing a solid foundation for maintaining the stable, rapid development of the national economy.

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A. Major Agricultural Product Yields Continued to Increase In order to address the severe drought and impact of the international financial crisis, governments at all levels increased their support for agricultural production and implemented timely disaster relief measures; this once again resulted in abundant harvests. Severe draughts occurred in the northern part of the country in 2009, and Jilin Province and Inner Mongolia Autonomous Region in particular; these were characterised by their extended duration and area, affecting a total area of 150 million mu; the droughts mainly occurred during the critical period of grain output formation, and grain production in drought-stricken regions was severely affected. 2009 however saw a considerable increase in the sown area of grains, particularly highyield crops such as corn and rice. The south was also severely affected by drought, although these mainly occurred in dry lands and areas outside of the main grain production areas, and were characterised by their short duration, small impact area and relatively smaller impact upon agricultural production. Agricultural workers’ enthusiasm for expanding agricultural production was generally high due to government policies to support and benefit agriculture in 2009. Gross output of summer grain in 2009 totalled 123.35 million tonnes, a year-on-year increase of 2.60 million tonnes or 2.2 percent, extending the yield growth for a sixth consecutive year. The increased planting area resulted in a total increase of 2.50 million tonnes of grain, accounting for over 96 percent of the gross increase of summer grain output. According to Ministry of Agriculture estimates, the total yield of early season rice exceeded 33 million tonnes and the autumn grain yields increased in most provinces. Good harvests are expected throughout the year, thus extending yield increment for a sixth consecutive year. A Ministry of Agriculture status survey indicates that the gross yield of summer rapeseed exceeded 13 million tonnes, a record high. Furthermore, the annual yields of live hogs, poultry, eggs, milk products, and aquatic products have taken on a steady development trend. B. Agricultural Product Prices Fluctuated Remarkably The rate of decline of agricultural product selling prices generally expanded during the first half of 2009. The production prices of agricultural products dropped by 5.9 percentage points in the first quarter

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over the same period of the previous year, but by the second quarter, the drop expanded to 6.6 percentage points. Annual agricultural product selling prices in 2009 are expected to be lower than those for 2008. Because of the macro control over agriculture and its certain effect on the real economy, the selling price level of agricultural products in the second half of 2009 remained lower than that for the same period of the previous year, but higher than that for the first half of 2009. Demand for agricultural products is booming, as there are numerous festivals in the fourth quarter. Compared with the start of the year, price levels of agricultural products are expected to pick up in the second half. As agricultural product prices are affected by the market supply and demand relationship as well as indirect government regulation, the majority of agricultural products experienced remarkable price fluctuations in 2009. The majority of grain varieties saw a steady rise in prices due to the government’s support policy, and wheat and rough rice prices rose substantially. The prices of cotton, soybean, and rapeseed and so on were in recession in the first half of the year, but started to recover in the second half. Live hog and egg prices were low in the first half but recorded a rising recovery and seasonal fluctuations in the second half. Most fresh agricultural products saw remarkable seasonal price fluctuations. In general, only very few agricultural products saw a year-on-year price rise due to government regulation. C. Agricultural Product Import and Export Values are Likely to Decline Due to the impact of the international financial crisis, China’s imports of agricultural products are favourably positioned, but its agricultural product exports face quite a number of unfavourable factors, with the result that the import and export values of agricultural products throughout 2009 are likely to decline. The prices of major agricultural product imports saw a substantial decline over the previous year. The quantities of major agricultural products imported registered considerable growth, but these are likely to decline in 2009 compared to the previous year. Affected by the international financial crisis, numerous importers of agricultural products suffer from tight credit to various degrees. China’s agricultural product export enterprises have reduced exports of certain agricultural products in order to avoid credit risk, and total exports of agricultural products are as a result likely to decline in

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2009. As agricultural products’ import and export values are likely to decline, international trade in agricultural products throughout 2009 is likely to maintain its adverse balance but its scale is likely to shrink. Compared with the change in the total import and export values of agricultural products, China is likely to see substantial growth in the value of imported agricultural products, as China is relatively more dependent on imports. As domestic demand for edible vegetable oils is seeing substantial growth and there is a huge price difference between the domestic and international markets, China’s imports of soybean and rapeseed is likely to grow extraordinarily. In order to protect and promote agricultural workers’ enthusiasm for planting soybean and oil crops, the government adopted a temporary reserve policy for soybean in certain major producing areas in late 2008, and for rapeseed in the summer of 2009. Policy-related purchasing prices for domestic soybean and rapeseed are relatively higher. When compared with domestic purchasing prices, soybean and rapeseed prices on the international market continued their recessionary trend due to the impact of the international financial crisis in the first half of 2009, which resulted in domestic edible vegetable oil processing enterprises importing soybean and rapeseed from the international market in large amounts. China’s soybean imports exceeded 22 million tonnes in the first half of 2009, and annual soybean imports are likely to exceed 40 million tonnes; in the first half of 2009, rapeseed imports totalled 1.564 million tonnes, a two-fold year-on-year increase, and rapeseed imports for the second half of the year may continue to register a rapid increase in growth. D. Agricultural Workers’ Income Maintained Rapid Growth In China, agricultural workers’ per capita net income has grown at a rate of over 6 percent in real terms since 2004. Because of the general fall in agricultural product prices and insufficient growth in rural migrant workers’ wages, forecasts indicate that agricultural workers’ per capita net income is likely to decline in real terms in 2009 compared to the year before, but may still achieve real growth of 6 percent. In order to overcome the adverse impact of the international financial crisis on China’s economy, governments at all levels have increased investment in infrastructure and other significant projects in 2009 in order to ensure an increase in employment in various locations. According to a survey of rural migrant workers’ employment and social security conditions jointly conducted by the National

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Bureau of Statistics and the Ministry of Human Resources and Social Security in June 2009, employment of rural migrant workers has basically recovered. As of the end of the second quarter, a total of 150 million rural migrant workers, or less than 3 percent of rural migrant workers, remained unable to find employment. It is reported that a new round of labour shortages has occurred in the developed coastal provinces in the second half of 2009. As the employment situation for rural migrant workers has picked up, agricultural workers’ per capita wage income is likely to continue its relatively rapid growth. As a minority of agricultural and animal husbandry products such as cotton and live hogs remain low-priced, the operating income of agricultural households in certain regions is likely to grow at a slow pace. The operating income of agricultural worker households across the country, and those of grain farmers in particular, is however still likely to grow by a small margin. According to monitoring by the National Bureau of Statistics, income from sales of animal husbandry products in agricultural household operating income saw a per capita reduction of RMB 38, or 8.4 percent, due to the sharp decline in live hog prices in the first half of 2009. However, national agricultural workers’ household operation cash income nevertheless increased by 5.5 percent compared to the previous year. As policies for agriculture, agricultural workers and rural areas enable agricultural workers to increase their income, the growth rates of agricultural workers’ property income and transfer income have exceeded the growth rate of their per capita income. Surveys show that agricultural workers are more enthusiastic about developing agricultural production, rural land circulation is accelerating, and agricultural land rental has become a significant source of additional agricultural income, and is growing noticeably. The government is continuously improving policies to support and benefit agriculture, various social security policies cover an increasing amount of rural areas, and the proportion of transfer income in agricultural workers’ income is therefore likely to continue to rise or even grow at high levels in 2009. II. Agricultural Policies to Support and Benefit Agriculture Effectively Prevented the International Financial Crisis from Affecting China’s Agriculture in 2009 The international financial crisis has had an increasing impact on China’s agricultural economy and rural labour transfer since the fourth quarter of 2008. In order to achieve the goal of stable agricultural

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development and sustained and rapid increases in agricultural workers’ income in 2009, the government expanded the scale of the agricultural subsidy, improved the procurement policy for agricultural products, stabilised agricultural product prices and increased employment services for rural migrant workers so as to provide as many opportunities for the transfer of rural labour as possible. The results show that the government’s policies to offset the impact of the international financial crisis on agriculture had the intended effect. The selling prices of agricultural products dropped and a number of agricultural product prices even declined sharply; major agricultural products such as corn, soybean and cotton not only suffered from low selling prices but also became difficult to sell. The selling price of live hogs declined more remarkably in the first half of 2009. In June, the live hog price-to-corn wholesale price ratio (namely the meat-grain ratio) was for four consecutive weeks lower than the break-even point of 6:1. Since the fourth quarter of 2008, the international financial crisis has resulted in numbers of coastal enterprises encountering operational difficulties, shortages of capital, operating under-capacity, and declining profits. In particular, a number of labour-intensive and export-oriented small and medium-sized enterprises cut back on production or even closed down, thus decreasing the employment of rural migrant workers, and a great many long-term rural migrant workers were forced to return to their villages prematurely. According to National Bureau of Statistics monitoring data, a total of approximately 70 million rural migrant workers returned to their home villages between November 2008 and the Spring Festival of 2009, accounting for approximately half of the 140 million rural migrant working population, of which over 60 percent worked in the China’s eastern coastal, export-oriented economy. According to the changes of the international and domestic economic situation in 2008, CPC Central Committee and State Council Document No. 1 in 2009 proposed the goals to firmly prevent a decline in grain production, prevent any lack of improvement in agricultural workers’ income, and ensuring steady agricultural development. The State Council issued Opinions Concerning Stabilising Agricultural Development and Promoting Agricultural Workers to Increase Income《关于当前稳定 农业发展促进农民增收的意见》in May 2009, requiring the further implementation of more forceful, practical measures and the strengthening of market regulation to protect agricultural workers’ production

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morale and stabilise agricultural development while continually implementing the promulgated policies to support and benefit agriculture. Agricultural policy factors played a vital role in maintaining favourable agricultural production conditions, stabilising agricultural product prices and preventing stagnation in agricultural workers’ income growth. In order to effectively address the impact of the international financial crisis, the government consolidated and strengthened the basic position of agriculture, overall expanded policy support for agriculture, and grain production in particular; the grain subsidy policy has played a significant role in safeguarding agricultural workers’ production morale in recent years. Government subsidies for grains, capital goods, superior varieties and agricultural tools for agricultural workers reached RMB 123.08 billion in 2009, a year-on-year increase of 19.4 percent. To prevent a decline in agricultural product prices from affecting agricultural development and the national economy, the government adopted effective and timely control of different agricultural products. The government promulgated an implementation scheme for minimum purchasing prices for wheat, early indica rice and medium and late rice in 2009. The minimum purchasing prices for early indica rice, medium and late indica rice, and japonica rice were RMB 90, RMB 92, and RMB 95 per 50kg respectively, a year-on-year increase of RMB 13; the minimum purchasing prices for white wheat, red wheat and hybrid wheat were RMB 87, RMB 83, and RMB 83 per 50kg, year-on-year increases of RMB 10, RMB 11, and RMB 11 respectively. The minimum purchasing price policy protects agricultural workers’ production morale and also helps to prevent any excessive drop in grain market prices. Meanwhile, the government increased its reserve and temporary purchases and storage of major agricultural products including rice, corn, soybean, cotton, and sugar. The temporary purchase and storage policy solved the issue of sluggish sales of certain agricultural products. Throughout 2009, the prices of the majority of agricultural products continued to drop, but general grain prices have risen in 2009. Due to support from the government’s purchase policy, the prices of major grain varieties generally maintained a reasonable rising trend. The general agricultural production prices declined by 6.2 percent in the first half of 2009, with the production price of wheat rising by 8.7 percent and that of rough rice rising by 4.9 percent.

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In 2009, the government implemented a minimum grain purchasing price policy and took temporary measures to purchase grain, which made grain prices rise steadily and boosted the enthusiasm of agricultural workers to plant grain crops. According to Ministry of Agriculture data, the gross planting area for autumn grains exceeded 1,130 million mu in 2009, a year-on-year increase of over 13 million mu. In response to the continuous fall in live hog and pork prices, and the drop of the meat-grain ratio below the breakeven point of 6:1 for six consecutive weeks after May, the relevant government bodies adopted measures to establish government reserves for frozen meat nationwide in June under the premise that they do not directly intervene in live hog prices in line with the Regulation Scheme for Preventing Excessive Falls in Live Hog Prices (Provisional)《防止生猪价格过度下跌 调控预案（暂行）》. Pork prices later started to rise. The reserve of frozen meat and other measures effectively curbed the sharp decline in pork prices, stabilised the production of live hogs and protected agricultural workers’ farming enthusiasm. In order to maintain stable, rapid economic development, China has implemented a RMB 4 trillion investment plan package for investment sectors covering agriculture, transportation, energy and post-disaster reconstruction, which is estimated to generate over 20 million jobs. This economic stimulus plan will make it possible for rural migrant workers to work in different sectors. III. Outlook for China’s Agricultural Economy in 2010 As the factors for the operation and development of the agricultural economy become more favourable, China’s agricultural economy will maintain steady development in 2010. The global economy has bottomed out, China’s national economy is picking up, the low comparative benefits of agriculture are improving, and government policies in support of and benefiting agriculture are continually improving. All of these will promote the steady development of agriculture, the prices of agricultural products will become more reasonable and agricultural workers’ income will grow rapidly. A. Major Agricultural Products Will Maintain Steady Development Agricultural capital goods maintained steady in terms of supply and at low prices in 2009, preventing excessive increases in the operating

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expenditure of agricultural production. The major grain varieties remained at reasonable prices. Agricultural products such as cotton, soybean and rapeseed which suffered a price recession in the first half of the year saw a price recovery in the second half, and the prices of live hogs and eggs picked up remarkably in the second half of 2009. The comparative benefits of major agricultural products tended to improve in 2009, which was helpful in promoting the steady development of agricultural production in 2010. According to monitoring by the Ministry of Agriculture, the pork industry’s loss coverage reached 45.8 percent in May 2009, i.e. every live hog sold incurred an economic loss of RMB 26. By the end of August, this loss coverage had dropped to 6.8 percent, and the benefits of livestock breeding saw a remarkable improvement, which protected and promoted production enthusiasm among certain breeders in the main live hog production areas. B. China’s Agricultural Product Prices are Likely to Rise in General An abundant grain harvest over six consecutive years means a more abundant grain supply, a more loose supply and demand relationship, and a more solid foundation for grain market price stability. According to the nationwide grain stock inventory performed from April to August of 2009, the stock of raw grain held by state-owned grain enterprises totalled 225.4 billion kg by the end of March 2009, with a qualification rate exceeding 97 percent, and over half of the grain in stock was harvested in 2008. The abundant grain stock provides a solid foundation for grain price stability. Grain prices play a fundamental role in determining the general price levels of agricultural products. China’s agricultural product prices will probably rise in 2010 due to China’s policy of adjusting agricultural product prices upwards and the impact of international agricultural product prices. In order to promote agricultural workers to develop crop production and promote its steady development, the government decided to raise the minimum purchasing price of wheat by RMB 0.06 per kg on average, raise the minimum purchasing price of rough rice appropriately, particularly quality rough rice, continue to implement the temporary purchasing and storage policy for corn, soybean and rapeseed, improve operating methods and mechanisms as well as the import coordination mechanism for agricultural products in an effort to promote the steady rise of agricultural product market prices in 2010.

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The changes in supply and demand and the fluctuations of prices of agricultural products on the international market are bound to affect agricultural product prices on China’s domestic market. In recent years, the prices of agricultural products on the international market have seen severe fluctuations. The market prices of agricultural products on which China has relatively higher import dependence are basically subject to synchronous oscillations with the market prices of international agricultural products. According to the supply and demand situation and price changes in international agricultural products, it is unlikely that China’s agricultural product prices to turn downwards in 2010. Since 2007, major agricultural production nations have expanded their agricultural production, and major agricultural products have seen continuous large-margin increases in yield due to comparatively advantageous climatic conditions, but the gross global yield of grain is likely to decline due to reduced grain production by the main agricultural product exporters in 2009. According to the FAO’s Crop Prospects and Food Situation in July 2009, the global crop yield reached 2,135 million tonnes in 2007, a year-on-year increase of 5.5 percent; it reached 2,286 million tonnes in 2008, a year-on-year increase of 7.1 percent; but as developed countries are likely to suffer from a substantial reduction in crop yields in 2009, the gross global crop yield is estimated at 2,208 million tonnes, a year-on-year drop of 3.4 percent. The global cereal production cut in 2009 indicates that grain prices on the international market will tend to rise further in 2010. Global food prices have been dropping since climbing to a peak in June 2008, but by the second half of 2009, global food prices in general have tended to rise in a link relative ratio. According to FAO monitoring, global wheat, corn and rice prices rose by 31.5 percent, 36.5 percent and 83.7 percent in 2008 over the previous year respectively, but in the first half of 2009, these prices then dropped by 43.1 percent, 28.0 percent and 7.9 percent over the same period of the previous year respectively. It is however increasingly evident that the majority of agricultural product prices will bottom out in the second half of 2009. China has a greater dependence on soybean and cotton imports. The international market price fluctuations of soybean and cotton will therefore be passed on to China’s domestic market. According to October 2009 US Department of Agriculture estimates, the gross global yield of soybean was 210.64 million tonnes in 2008/09, a year-on-year

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drop of 4.7 percent; this will be 246.07 million tonnes in 2009/10, a year-on-year increase of 16.8 percent. Under the impact of the global reduction in soybean yields, however, soybean prices on the international market will rise in the second half of 2009. The global yield of cotton was 23.422 million tonnes in 2008/09 and will be 22.597 million tonnes in 2009/10, a year-on-year drop of 10.7 percent and 3.5 percent separately. The continued reduction of worldwide cotton production is likely to result in substantial rises in cotton prices on the international market. C. Agricultural Workers’ Incomes Will Probably Increase Substantially 2010 is likely to see more favourable factors for an increase in income of agricultural workers. During its standing conference for the planning of autumn and winter planting in October 2009, the State Council required enhancements to the subsidy policy to protect agricultural workers’ enthusiasm for planting crops and to stabilise the planting area in autumn and winter; it also required the strengthening of macro-economic control and the stabilisation of agricultural product prices so as to safeguard agricultural workers’ benefits. This enhanced agricultural subsidy and the further pickup in agricultural product prices will continue to ensure the rapid growth of agricultural workers’ transfer income and household income from agriculture and animal husbandry. China’s economic pickup has become increasingly obvious since the third quarter of 2009. With accelerating economic growth, rural migrant workers will receive more job opportunities and increasing wages; and the increase in wage income will contribute to agricultural workers’ income growth in 2010.

ANALYSIS OF THE REAL ESTATE MARKET IN 2009 AND ITS OUTLOOK FOR 2010 Liang Shuang I. Features of the Real Estate Market in 2009 Although the major economies have yet to display any clear development trends, and China’s economic growth has yet to develop a solid foundation in 2009, China’s real estate market has undergone a miraculous process from recession to recovery and then boom. The real estate housing climate index rose from a rock-bottom of 94.74 in March 2009 to 100.08 in August 2009, an increase of 5.34 points. The real estate industry has played a positive role in maintaining economic growth and expanding domestic demand, and made a considerable contribution to the recovery of the national economy. A. Driven by Strong Demand, Total Real Estate Transactions Have Risen Rapidly, but the Link Relative Ratio Fluctuated Considerably The volume of transactions is a significant index for assessing the market climate. The real estate market transaction volume declined sharply from 2008 to early 2009, due to China’s macro-economic control policy and the global financial crisis. In the first half of 2009, however, the government’s loose monetary policy and a series of policies to stimulate reasonable housing consumption played a role in the pickup of market expectations and market confidence. Inflation expectations, the demand for own-use housing, the demand for housing to improve existing living conditions, the demand for investment and the demand for speculation also entered the housing market, thus driving up the volume of transactions. From January to August, the nationwide sales area of commercial housing totalled 494.16 million square meters, a year-on-year increase of 42.9 percent. Of this, the sales area of commercial housing increased by 44.5 percent, the sales area of office buildings increased 18.5 percent, and the sales area of commercial buildings increased by 29.4 percent. By region, the east and west saw a faster rate of growth, at

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53 percent and 40.5 percent respectively, and the sales area of commercial housing in Beijing grew by 134.8 percent year-on-year. Coupled with this growth of sales area was a rise in sales revenue, which reached a total of RMB 2.3464 trillion from January to August, a year-on-year increase of 69.9 percent. Of this, sales revenue from commercial housing increased by 74.6 percent, that of office buildings by 35.6 percent, and that of commercial buildings by 43.5 percent. The total sales area and sales revenue of commercial housing over the January–August period have remained at high levels in recent years, but remarkable fluctuations occurred in month-on-month growth. The sales area and sales revenue of commercial housing in June rose by 34.84 percent and 29.99 percent over May respectively; month-onmonth growth in July however declined by 19.21 percent and 13.84 percent respectively; month-on-month growth in August then rose again by small margins, 0.19 percent and 1.69 percent respectively. The sales market was characterised by severely weakened growth and increased fluctuations, and fluctuations of this kind increase uncertainty over future market development. B. Real Estate Investment Growth Accelerated, New Construction Area Recovered Rapidly, and the Development and Supply of Commercial Housing Returned to Steady Growth From January to August, completed investment in real estate development nationwide was RMB 2.1147 trillion, a year-on-year increase of 14.7 percent, or 3.1 percentage points higher than the year-on-year growth figure for January–July. Completed investment in commercial housing was RMB 1.4848 trillion, a year-on-year increase of 10.9 percent, or 2.7 percentage points higher than the year-on-year growth for January–July. It can be seen from the August data that the new housing construction area expanded, with a year-on-year drop of 5.9 percent, 3.2 percentage points lower than the rate of decline for January–July. The increase in new construction area reflects developers’ optimism and confidence in the market on the one hand, while on the other hand it guarantees the sustainable development of this market. From January to August, real estate developers’ construction area and completed area registered year-on-year growth. The construction area of housing totalled 2.629 billion square meters, a year-onyear increase of 13.5 percent; the completed area of housing was 292

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million square meters, a year-on-year increase of 25.1 percent. This shows that real estate developers’ operations were at normal levels, and development and supply maintained steady growth. C. Real Estate Prices Recovered Rapidly under the Impact of a Sizeable Number of Factors China’s housing prices saw a general rise before the end of the first half of 2008. By the second half of 2008, real estate market prices had however started to drop due the impact of the international financial crisis and the domestic economic growth slowdown. The tide of price cuts and discounts spread from the Pearl River Delta to the country as a whole. In 2009, real estate prices resumed positive growth in March, with the housing selling price index of 70 large and medium-sized cities registering month-on-month growth of 0.2 percent due to the sustained action of a series of policies including a continued reduction in financial institutions’ depository reserve ratio, deposit and loan benchmark rates, reduced housing transaction tax, and loosened requirements for the provision of mortgage loans for second housing properties. In June, this index rose 0.2 percent year-on-year, marking a first in 2009. In August, the index rose 2.0 percent year-on-year, 1.0 percentage point higher than the figure for July; its month-on-month growth was 0.9 percent. D. The Land Market Started to Boom, Developers Enthusiastically Bid for Plots with the Frequent Emergence of “Sky-High Auction Prices” Against a favourable background of a recovery in the real estate market, the government’s major promotion of plots for real estate construction, and an increasingly loose financing environment, developers regained their confidence in the real estate market, the lack of any successful plot auction in 2008 was replaced by the frequent occurrence of sky-high plot auction prices in 2009. This phenomenon was particularly prevalent in major cities such as Beijing, Shanghai, Guangzhou, Tianjin and Wuhan. In June in Beijing alone, the transaction volume of non-industrial real estate exceeded RMB 12.9 billion, RMB 8.8 billion more than the total for the preceding five months. The auction prices for Guangqumen Plot No. 10, Aoyuncunxiang Plot in Chaoyang District, and Guangqumen Plot No. 15 all set new consecutive

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records. From January to August, real estate development enterprises completed land purchases for a total area of 186.31 million square meters, a year-on-year drop of 25.3 percent, or 14.8 percentage points lower than the rate of decline for January–March; they completed the development of a land area of 149.20 million square meters, a yearon-year drop of 9.7 percent, 1.6 percentage points lower than the rate of decline for January–March. One of the salient features of the current tide of land auctions is that sky-high price plot bidders included state-owned enterprises— successful bidders, which included Chengdu Zhongze, Sinopec Fang Xing, Poly Real Estate, were all state-owned enterprises. It is clear that state-owned enterprises with solid financials also chose to invest in the recovering real estate market; another characteristic is the full participation in the auctioning of real estate by major developers such as Vanke, Shimao and Greenland. Within three months, Vanke obtained 14 plots in nine cities including Wuxi and Foshan, thus increasing its land reserve area of 3.91 million square meters and spending RMB 7 billion in land investments. Against the background of a brisk land market, the existence of certain acts in breach of the relevant provisions will severely impair the sound and stable development of the real estate market. These acts include collusion between real estate developers and local governments in the land auction process, real estate developers’ delayed development of the real estate they have obtained, and instalment payments of the real estate price. These acts against the relevant regulations are likely to result in an insufficient effective supply, thus driving up housing prices in an improper manner and adversely affecting the achievement of residents’ demand to purchase housing properties for their own use, or the improvement of existing living conditions. The government should take strict measures to prevent and punish such acts. E. Construction of Social Security Housing Has Been Enhanced and the Housing Social Security System Is Improving Increasingly With the rapid rise in housing prices, the housing difficulties of lowincome families have become more prominent. The government has continued to enhance its efforts to ensure housing security since 2007. 2009 is a key year in the implementation of the government’s policy

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of maintaining economic growth and booming domestic demand, in terms of accelerating the construction of social security housing. This aims to combine the provision of material resources and rental subsidies to solve the housing problems of 2.60 million low-income families who face housing difficulties; the removal, repair and rebuilding problems of 800,000 families living in shantytowns in forest land, on reclaimed land and around coalmines. The quantities of social security housing under construction increased nationwide. Some local governments have also promulgated a wide range of housing policies adapted to local conditions so as to improve the housing security system. A new provision issued in Beijing approved the allocation of housing accumulation funding for down-payments on policy-regulated housing. This provision will help to resolve certain issues which are associated with this. In Kunming City, the government has attempted to provide low-rent housing for rent or for sale. Public rent housing has been constructed in Xiamen, Shenzhen and Beijing to solve the housing problems of “sandwich” groups, including families facing housing difficulties who do not have the financial capacity to purchase affordable housing, and new college graduates. The first local regulations relating to social security housing nationwide, the Xiamen City Regulations on the Administration of Social Security Housing《厦门 市社会保障性住房管理条例》were implemented on June 1, 2009, marking the progression of Xiamen’s housing security system from its formulation stage to improved adaption. II. Analysis of Factors Affecting the Real Estate Market in 2009 A. Under the Action of Government Policy Stimulus and Drops in Housing Prices, the Demand for Self-Residence Housing and for Improved Housing Conditions Saw Initial Steps Forward In order to address the unfavourable circumstances of the international economic recession, slowdown in domestic economic growth and continued stock market depression, China implemented a wide range of policies and measures such as increasing investment, encouraging consumption and boosting domestic demand. As an important mainstay industry of the national economy, the real estate industry has played a significant role in pulling up economic growth. China has promulgated

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a range of government policies and measures to encourage ordinary housing consumption since the second half of 2009: Reducing the housing transaction tax to support housing consumption for self residence or residential improvement; expanding the floating downward decline of loan rates for ordinary self-residence housing, adjusting the minimum down-payment percentage to support residents to purchase housing; encouraging and guiding financial institutions to prioritise meeting the purchasing demands of medium and low-income families for housing properties for their own use; loosening the loan policy for purchasing a second ordinary housing property to improve one’s own living conditions; implementing a policy to reduce or exempt business tax on housing transfers for one trial year, and so on. Real estate development enterprises also reduced housing prices due to a sharp decline in transaction volume and tight capital chain in 2008, thus enabling the value of real estate to emerge. Initiated by the aforementioned two factors, demand for self-use housing took the lead in entering the housing market; the most demanded type of housing was small apartments; driven by demand for self-use housing, demand for improvement housing then started to enter the housing market. B. Inflationary Expectation Has Led to a Boom in Investment Demand and Speculation Demand The RMB 4 trillion economic stimulus plan package and the unprecedentedly loose monetary policy have turned investment into a forceful engine for economic growth. In June alone, new RMB loans from financial institutions reached RMB 1.53 trillion, while new loans for the first half of 2009 approached RMB 7.4 trillion. Combined with the continued expansion of credit has come a nationwide spread of inflationary expectations. As the real economy has yet to warm up and there are few investment channels, popular demand for investment in housing and the stock market has increased substantially. Other than demand for self-use housing and for demand housing improvements, investment demand and speculation demand have rapidly entered the real estate market since the end of the second quarter, thus driving up transaction volumes and prices in the real estate market. For a period, a number of major cities saw a boom in luxury housing projects and second-hand housing markets.

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C. The Financial Pressure on Real Estate Development Enterprises Has Eased Greatly with Improving Sales, Declining Capital Ratio and an Increasingly Loose Financing Environment In 2009, the central bank firmly implemented a loose monetary policy and commercial banks also raised the credit limits available to real estate developers. Furthermore, the State Council issued a notice on May 27 reducing the minimum capital percentage for social security housing and ordinary commercial housing from 35 percent to 20 percent; the capita percentage for other real estate projects was reduced from 35 percent to 30 percent. This was the first relaxation of the capital percentage of 35 percent for real estate development projects since 2004. The reduction of the own capital percentage reduced the threshold for developing real estate projects and raises the leverage of real estate developers’ own capital. In addition, the financing activities of real estate enterprises, such as secondary offerings and rationed shares in the capital market recovered in the second quarter; and real estate enterprises also used corporate bonds to raise capital. From January to August, real estate developers raised capital of RMB 3.3689 trillion, a year-on-year increase of 34.2 percent. Of this, domestic loans amounted to RMB 738.4 billion, up by 46.3 percent; utilised foreign capital amounted to RMB 29.8 billion, down by 33.6 percent; enterprises’ self-generated funding amounted to RMB 1.1045 trillion, up by 12.6 percent; other funding sources totalled RMB 1.4961 trillion, up by 52.7 percent. Of other funding sources, downpayments and advance payments amounted to RMB 871.2 billion, up by 43.2 percent; individual mortgage loans amounted to RMB 450.7 billion, up by 94.1 percent. Against a favourable background of improving sales, reduced capital percentages and a loose financing environment, real estate enterprises have shaken off the financial pressure and enthusiastically bid for plots with great confidence in the real estate market.

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A. Housing Demand Has Great Potential and the Factors Supporting the LongTerm Sustainable Development of the Real Estate Industry Have Not Changed In the three decades since China’s reform and opening up to the outside world, urban residents have eliminated their housing issues, with an increase in per capita housing area from less than 7 square meters in 1978 to over 28 square meters in 2009. In the long run, China’s real estate market still has huge demand potential. On the one hand, China is in a phase of rapid urbanisation, and the continuously increasing urban population will create substantial housing demand. On the other hand, with the increasing income and declining Engel coefficient of urban residents, housing has become a major urban demand item and a significant asset; increasing numbers of families can afford to purchase commercial housing and they are eager to purchase housing assets and improve their housing conditions. Such significant housing demand is an important support for the sustainable development of the real estate industry. B. As the Real Estate Industry Is Still a Mainstay of the National Economy, It Remains Important to Maintain Its Sound Development in Efforts to Boost Domestic Demand The real estate industry is a mainstay industry of the national economy. In order to maintain its stable, sound development to enable an increase in investment, increase employment, and promote the development of associated industries, it is of far-reaching importance to maintain the smooth running of the national economy. In recent years, investment in real estate development has risen. Gross national investment in real estate development accounts for over 20 percent of gross urban fixed asset investment, and the contribution rate of the real estate industry to economic growth has been kept at a level above two percentage points. The real estate industry has high levels of association with other industries. There are over 50 sectors which are closely related to the real estate industry. In recent years, China has recorded annual housing completions in urban areas totalling approximately 600 million square meters. Construction figures of this kind effectively drive the development of upstream and downstream industries including

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iron and steel, building materials, household appliances, household supplies, and the service industry. The sustainable, sound development of the real estate industry is a significant factor for achieving the current goal of maintaining economic growth and booming domestic demand. C. The International Economic Situation Remains Unclear, the Domestic Economy Has Picked Up, but Its Foundations Remain Shaky and Short Waves in the Real Estate Market are Inevitable The international economy still requires time to recover. Affected by the financial crisis, major economies such as the United States, European countries and Japan have entered depression with the first appearance of overall negative growth since WWII. In the second quarter of 2009, the US, the EU and Japan saw a slowdown in the economic downtrend, but their unemployment rates remained at high levels, making it difficult to boost consumption. A simple dependence on an increase in liquidity is not a sustainable way of driving world economic growth. By August, a number of indices reflecting China’s macro-economic operations showed favourable changes, with the rapid growth of investment in fixed assets, a remarkable acceleration of industrial growth, whereas private investment continued to grow slowly, and export growth faced considerable uncertainty. Economic growth mostly depended on policy stimulus and had not entered a state of indigenous growth. Against a background of a lack of overall recovery of the international and domestic economy, a boom in the real estate market lacked any economic basis; rising housing prices will make it difficult to generate purchasing demand for housing properties for self-use, buyers and sellers will thus enter a new round of wait-and-see; the strict policy for the provision of mortgage loans for second housing properties will affect the generation of improvement demand, investment demand and speculation demand; it is inevitable that short waves will appear in the real estate market. In addition, the urban housing supply, and first-tier cities in particular, have mainly expanded beyond the city’s central area. For instance, very few housing properties are available within Beijing’s Fourth Ring Road, and most of the housing property supply is outside of this area—this contrasts with the fact that the

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majority of demand is concentrated on the city’s central area. Therefore, structural supply and demand imbalances will drive up housing prices in the city’s central area. D. A High Priority in Housing Initiatives for the Coming Year Should Continue to Be the Improvement of the Housing Security System and Increased Construction of Social Security Housing The increasing reform of the urban housing system and the rapid development of the real estate market have facilitated improved housing conditions for the majority of urban residents, but some low-income families continue to face housing difficulties. Improving efforts to construct social security housing may not only solve these families’ housing difficulties and improve popular well-being, but also help to increase investment and boost domestic demand. In line with government measures, 2009–2010 social security housing construction goals are: the government shall effectively resolve the housing issues of the current 7.47 million urban low-income families facing housing difficulty, as well as the removal, repair and rebuilding issues of 2.40 million families living in forest land, on reclamation land and around coalmines by 2011. Housing security initiatives will continue to make considerable progress and the housing difficulties of low-income families will be gradually resolved in 2010. Furthermore, the housing security system will be sounder, with continuous improvement to policies relating to low-rent housing, affordable housing and public rent housing.

THE ENVIRONMENT SITUATION IN 2009 AND THE OUTLOOK FOR ENVIRONMENTAL PROTECTION IN 2010 Shu Qing In 2009, in order to address the complex situation caused by the international financial crisis, environmental protection authorities at all levels have carefully implemented the strategic measures of the CPC Central Committee and the State Council, established “firewalls” to counter high-pollution, high energy consumption, and resource dependent projects, overcapacity and redundant construction, provided “green channels” for projects which conform to industrial policy and environmental requirements; as increasing efforts have been made with regard to environmental protection, discharge amounts of sulphur dioxide and chemical oxygen demand continued their downward trend in the first half of the year, while reductions in pollutant emissions promoted an improvement in environmental quality, thus enabling environmental protection initiatives to make considerable progress. 2010 will be a marathon year for achieving pollutant emission reduction targets. This will require the continued implementation of policies and measures as well as the completion of the tasks determined in the environmental protection program of the 11th Five-Year Plan. I. Environmental Protection Initiatives Made Some Achievements in 2009 2009 marked the 60th anniversary of the People’s Republic of China, and this was also a crucial year during which China dealt with the international financial crisis, sustained stable, rapid economic development, and promoted social harmony as well as stabilisation and the smooth operation of the 11th Five-year Plan. The CPC Central Committee and the State Council proposed a definite philosophy for environmental protection. General Secretary Hu Jintao, Premier Wen Jiabao, Vice Premier Li Keqiang and other central government leaders issued a series of major instructions governing environmental protection, the elimination of all redundant construction, as well as of projects characterised by their high energy consumption, high pollution, and resource

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dependence, or any project saddled with overcapacity in the process of dealing with the financial crisis; they proposed managing the crisis as an opportunity to implement economic restructuring and alter the pattern of economic development, as well as push forward environmental protection, and they also emphasised that sustaining economic growth should not be at the cost of the environment. They put forth definite proposals for the development and revitalisation of the environmental protection industry as a significant measure to overcome the impact of the financial crisis, and a focus on the development of the ecological environment as a new hub for economic growth. In the process of dealing with the financial crisis, all measures, whether these include expanding domestic demand, sustaining economic growth or protecting the environment, should faithfully adhere to the major decisions and significant deployments of the CPC Central Committee and the State Council. The right-headed leadership of the CPC Central Committee and the State Council has ensured the implementation of the Scientific Outlook on Development across all regions and sectors of China. A series of measures have been taken to enhance pollution prevention and ecological protection. As a result, the deteriorating trend of environmental pollution and ecological damage has slowed, and environmental quality has improved in certain regions and cities, while the economy has maintained rapid growth. Reducing pollutant emissions has become a central task in current environmental protection, and major efforts are being made to push forward a structural reduction in pollutant emissions. There have been a number of achievements in environmental protection as the prevention and treatment of pollution has become a positive act instead of a negative one, and significant changes have occurred in the awareness and practice of energy conservation, emissions reductions and environmental protection. First, in terms of reduction of pollutant emissions, the gross discharge amount of chemical oxygen was 13.207 million tonnes in 2008, a drop of 4.42 percent over 2007; the discharge amount of sulphur dioxide was 23.212 million tonnes, a drop of 5.95 percent over 2007. Compared with 2005, the gross discharge amounts of chemical oxygen demand and sulphur dioxide dropped by 6.61 percent and 8.95 percent respectively, thus continuing their effective downtrends and meeting the reduction goals as scheduled for the first time. In the first half of 2009, the gross discharge amount of chemical oxygen was 6.576 million tonnes, and that of sulphur dioxide was 11.478 million tonnes,

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or reductions of 2.46 percent and 5.40 percent over the same period of 2008 respectively. The sulphur dioxide emission reduction target as determined in the 11th Five-Year Plan is expected to be achieved one year ahead of the schedule, while the chemical oxygen emission reduction target is expected to be achieved on schedule. Second, in terms of promoting economic restructuring, the environmental protection access threshold has been raised while the environmental appraisal system has been strictly implemented, and the excess growth of sectors characterised by high energy consumption, high pollution, and resource dependence levels has been held in check. Initiatives to conserve energy and reduce pollutant emissions are being energetically applied, with greater efforts being made to close down backward production facilities in the electric power, iron and steel, building materials, electrolytic aluminium, ferroalloy, calcium carbide, coke, coal and sheet glass industries. Between 2006 and 2008, China eliminated backward production facilities including iron-making capacity of 60.59 million tonnes, steelmaking capacity of 43.47 million tonnes, cement capacity of 140 million tonnes, paper capacity in excess of 5 million tonnes, coking capacity in excess of 30 million tonnes, capacity alcohol in excess of 500,000 tonnes, and the country also shut down over 10,000 small-sized collieries. As of the end of the first half of 2009, China had closed down small thermal power stations with a total capacity of 54.07 MKW, thus achieving the target set forth in the 11th Five-Year Plan a year and a half ahead of schedule. It is planned to close down backward iron-making, steelmaking, paper and electric power production facilities with a total capacity of 10 million tonnes, 6 million tonnes, 0.50 million tonnes and 15 MKW respectively. The completion of this task will further contribute to environmental protection. Third, in terms of the development of environmental facilities, China’s municipal sewage treatment capacity reached 90.92 million tonnes/day in 2008, an increase of 38.72 million tonnes/day over 2005, thus achieving 86 percent of the target figure set forth in the 11th Five-Year Plan. The sewage disposal pipe network was extended by a further 49,000 km, and over 1300 sewage treatment plants are now fitted with online monitoring units. China’s gross installed desulphurisation capacity reached 363 MKW, almost eight times the figure for the ten years before 2005; thermal power units equipped with desulphurisation equipment now account for 60 percent of all thermal power units, an increase of 48 percentage points over 2005.

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A total of 16 iron and steel strand gas desulphurisation plants have been erected nationwide, eliminating 16,800 tonnes of sulphur dioxide annually. From January to June 2009, coal desulphurisation units with a total capacity of 42.35 MKW were put into production, while the increase in urban sewage treatment capacity reached 5.68 million tonnes/day. Fourth, in terms of environment policy, a wide-ranging consensus has been reached over the vital role of environmental economic policy in tasks such as conserving energy, reducing pollutant emissions, environmental protection, restructuring and transformation of the pattern of economic growth. A Summary of Products with High Pollution and High Environmental Risk (2009)《高污染 高环境风险”产品目录 (2009 年)》has been formulated and applied as part of the policy to increase the export tax rebate rate of certain products, the policy of issuing production safety licenses, and the implementation of the green trade policy. Efforts are being made to research a policy to levy a scarce resources tax, and a List of Items on Environmental Protection, Energy Conservation and Water Conservation for Preferential Corporate Income Tax (Trial Implementation)《环境保护节能节水项目企业所得税优惠 目录 (试行)》. Experiments in green credit and pollution liability insurance should continue to be pushed forward, and environmental letters and call information, green procurement standards and lists, utility technology for environmental protection, environmental appraisals, examinations and approvals, and acceptance information in the bank credit system must all be implemented. Fifth, with regard to environmental supervision and a rural pollution prevention and control capability, the central government has allocated almost RMB 6 billion to support capacity construction for three systems relating to a pollutant emissions reduction index, monitoring and examination over the next three years, which has driven local governments to increase input in support of environmental protection capacity construction. As a result, considerable progress has been made in improving fundamentally weak capacity such as low environmental monitoring levels and obsolete instruments and meters. Following the establishment of a special fund for rural environmental protection in 2008, the central government allotted special funding of RMB 1 billion to support overall environmental improvement in villages following strong complaints from citizens, and to remedy obvious environmental issues in key watersheds and regions in order to prevent and control water pollution, as well as for key counties involved in

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national poverty relief development initiatives; over 1,200 villages with obvious environmental problems have since seen an improvement, over 170 ecological demonstration villages/towns have received support, and nine million people have directly benefited from this project. Sixth, with regard to the promotion of three fundamental strategic projects, the first nationwide pollution source survey since the foundation of the PRC in 1949 has helped to gain an understanding of the fundamental state of pollutant emissions nationwide, establish national and local records of pollution sources, as well as pollution source information databases at all levels. Macroscopic and strategic research on China’s environment jointly initiated by the Chinese Academy of Engineering and the Ministry of Environmental Protection has assembled more than one hundred academicians and scientists to tackle key issues, put forward a rage of strategic concepts—people-based, optimised development, environmental safety and ecological civilisation—as well as strategic policies—prevention first, combination of prevention and treatment; systematic management and overall improvement; taking the people’s well-being as an overall basis for allocating responsibilities at all levels; and government leadership and public participation, thus defining the long-term way forward for environmental protection development. As one of sixteen major national science and technology projects, a major technical project relating to water pollution treatment and control was the first of nine major special projects to successfully undergo comprehensive discussion and deliberation in an executive meeting of the State Council, and has since undergone a full-scale launch. The full-scale operation of these three projects will provide a solid foundation for achieving the environmental protection targets set forth in the 12th Five-Year Plan. The results of the reduction in pollutant emissions are appearing in terms of environmental quality. Monitoring data indicate that mean concentrations of permanganate in state-controlled water sections stood at 5.3 mg/L in the first half of 2009, a drop of 7 percent over the yearly permanganate index mean concentration (5.7 mg/L) in 2008; the mean concentration of sulphur dioxide was 0.045 mg/ Nm3 in 113 key environmental protection cities nationwide, a drop of 6.2 percent over the annual mean concentration of sulphur dioxide (0.048 mg/Nm3) in 2008. Despite these achievements, it is important to remember that China still faces a dire environmental situation. A number of environmental problems which have built up in recent years are as yet unsolved,

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while new environmental problems are emerging; a number of issues even directly impair public health and affect sustainable development, meaning that protecting the environment remains an arduous task. First, the outlook for the water environment is not optimistic. In 2008, of the 746 state-controlled surface water sections, 47.7 percent recorded water quality grades I–III, and were thus able to meet water quality requirements as drinking-water resources, but a considerable percentage, 23.1 percent, still recorded water quality grade V, meaning that the water had basically lost any practical application; the problem of lake eutrophication remains prominent; 23.6 percent of water samples from drinking-water sources in 113 key environmental protection cities still exceeded water quality Grade III. Almost 300 million rural inhabitants still lack access to suitable drinking water. The overall water quality of coastal waters nationwide is slightly polluted; Bohai Bay, Hangzhou Bay, Yangtze Estuary, Minjiang Estuary, Zhujiang Estuary are all heavily polluted. Second, air pollution remains serious. Cities where the number of fine air quality days exceeded 292 days accounted for 95.6 percent of the total, but inhalable particulate matter remains a key pollutant affecting urban air quality; China’s acid rain pollution remains relatively serious, with acid rain coverage of about 1.50 million square kilometres, mainly distributed in the south of the Yangtze River, Sichuan and the east of Yunnan; regional environmental problems were prominent with severe haze affecting the Pearl River Delta, the Yangtze River Delta, and the Beijing-Tianjin-Tangshan region. Third, solid waste and noise pollution is relatively serious. China remains relatively weak in terms of its capacity to reduce, recycle and decontaminate solid wastes. In 2006, a total volume of 170 million tonnes of urban refuse was removed, and secondary pollution from refuse in landfills was a relatively common phenomenon, while excessive rates of percolating water and groundwater pollutants in refuse landfills in 47 key environmental protection cities reached 71 percent and 89 percent respectively. Sample dioxin examinations from seven refuse incinerator plants revealed that four of them exceeded the required limits. Dioxins are severely carcinogenic, and toxic to the reproductive, immune and endocrine systems. In 2007, gross output of industrial solid waste reached 1.758 billion tonnes, while the discharge amount of industrial solid waste was 11.97 million tonnes, and the comprehensive utilisation rate was 62.8 percent. Annual output of hazardous waste was 10.79 million tonnes and the discharge amount

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was 7.36 million tonnes. Waste gas, percolating water and leachate generated by industrial hazardous waste which receive no safe treatment have become an important source of pollution and severely impair human health. With the serious situation of the four major environmental factors— water, air, sound and waste—has come the emergence of new environmental issues including worsening solid pollution, and a coming peak in electronic detritus. From a global perspective, China’s emissions of pollutants including sulphur dioxide, ozone-depleting substances and COD ranks first in the world, while its emissions of carbon dioxide ranks second. China has extensive borders, numerous neighbouring countries, and a diverse range of cross-border environmental issues, further complicating the situation. Cross-border environmental issues have become an increasingly hot topic among the international community. The current financial crisis has resulted in the development of profound change in the global economic structure, and circular, green and low-carbon economies are in the ascendant, bringing new opportunities as well as challenges to China’s environmental protection. II. Outlook for Environmental Protection in 2010 2010 will be a crucial year for completing the 11th Five-Year Plan and transferring to the 12th Five-Year Plan, as well as an important year for determining whether the emission reduction targets in the 11th Five-Year Plan can be achieved. The environmental protection requirements in the 12th Five-Year Plan will require us to continue to promote a historic transition in environmental protection, actively explore new means to ensure environmental protection, devote our energies to the construction of an ecological civilisation, and intensify environmental protection initiatives in the following areas: First, strengthen pollutant emission reduction initiatives to ensure that the emission reduction targets set forth in the 11th Five-Year Plan are met. Engineering measures are making a considerable contribution to the reduction in pollutant emissions. By 2010, China’s desulphurisation units will have an installed capacity in excess of 400 MKW, and urban sewage treatment capacity will reach 100 million tonnes/day. It is highly important that their failure-free operation be guaranteed, and that their full capacity can be applied. While continually pushing

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forward engineering construction, an emphasis should also be placed on guaranteeing the normal operation of equipment plants. Structural adjustments are an important means of reducing pollutant emissions as well as an important measure for resolving structural pollution. Pollutant emission reduction mechanisms should be applied further so as to promote industrial restructuring. We must make full use of automatic pollution source monitoring systems to intensify supervision, checking and monitoring, and fully investigate the potential of managing reductions in pollutant emissions. Second, environment protection access should be intensified, and the harmonious development of the environment together with the economy promoted. Projects which do not conform to the requirements of environmental protection access should be firmly restricted, and cancelled projects should be prohibited from resuming production or transferring to different locations in the name of technological innovation or investment pull. The development of the circular economy, green economy and low-carbon economy should be encouraged; a group of main projects promoted that could push forward industrial technological progress, while also adjusting structures and distribution to allow these to develop in a more rapid manner. We will continue to deepen reform of the environmental appraisal system, achieve a transition from purely emphasising environmental issues to an overall consideration of environmental, health, safety and social impact, effectively handle the service and control relationship, the short-term and long-term benefits, efficiency and quality, the macro and micro aspects, strengthen regulation and acceptance, and implement overall process supervision. Third, with regard to the construction of environmental protection facilities as an important sector for expanding domestic demand and reinforcing efforts in the environmental protection industry, according to the need to ensure the rehabilitation of heavy-burden rivers, oceans, seas and lakes, support should be intensified for affected projects in the key watershed water pollution control plan so as to ensure the start and completion of construction and the entry into operation of the completed facilities. Construction of environmental protection facilities including urban sewage treatment plants and their associated pipe networks, desulphurisation facilities for coal equipment units as well as key pollution source online monitoring systems will be accelerated, overall control of the rural environment will be implemented, the desulphurisation of certain heavy metal pollution treatment projects

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and fossil fuelled power plants, as well as demonstration sludge treatment and soil pollution treatment projects for urban sewage plants organised; investment in fundamental capacity construction for environmental management will be enhanced to cover environmental monitoring, supervision, information, technology as well as publicity, and fundamental capacity in environmental management will be vigorously improved. The focus of energies on the environment will be used to expand the environmental protection industry. Plans will be formulated, policies improved and effective measures taken to push forward an overall upgrade in the environmental protection industry and to form an environmental protection industry system characterised by its wide range of forms, advanced equipment and high levels of vitality. Fourth, improvements to environmental economic policy should be accelerated, and a long-term environmental protection mechanism established and improved. Full use will be made of the vital role of economic and market forces in environmental protection, and an overall design drawn up to not only optimise environmental economy policy in all aspects and but also implement this at the appropriate time based on internal environmental cost check functions. Production factors and resource pricing mechanisms will be improved in order to reflect market supply and demand, resource scarcity as well as the costs of environmental damage; the promulgation of the environmental economic policy will be actively pushed forward, ensuring the comprehensive utilisation of fiscal and taxation instruments and the full use of market economy laws; an excitation mechanism and bonding mechanism will be established for enterprises to protect the environment, make enterprises bear the cost of pollution treatment, and reducing the excessive dependence on administrative means to ensure environmental protection. Major efforts will be made to develop a new environmental protection pattern with governments, enterprises and communities cooperating and interacting with each other. Governmental responsibility will be intensified, and enterprises will be defined as the main party responsible for the prevention and control of pollution, while society as a whole will be encouraged and guided to participate in this; finally, systems to regulate ecological compensation and environmental pollution indemnity will be researched. The construction of a resource-conservative and environment-friendly society will be pushed forward in an orderly manner. The construction of pilot areas for the comprehensive support reform for a resource-conservative and

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environmentally-friendly society will be used to push forward breakthroughs in environmental issues in key regions and links, thus developing a recycling and sustainable development method characterised by low input and high output, low consumption and lower emissions. Fifth, environmental supervision and administration will be intensified in order to safeguard the environmental interests of the population. By adhering to the principle of people-orientation, focus will be placed on resolving noticeable environmental issues that adversely impact human health and affect sustainable economic development, and specific environmental protection activities will be continually expanded, while violations against laws and regulations will be subject to harsh crackdowns due to their impact on the popular interest. Post-supervision tasks should be energetically implemented in enterprises whose environmental conditions require improvement, critical environmental cases and in areas in severe breach of the law, and illegal acts punished. Environmental pollution emergencies should be handled in an appropriate manner. By adhering to the principles of responsibility, prudence and practicality, the relevant authorities shall investigate incident causes and publish investigation results in a timely manner, and punish the affected accountable enterprises, units and persons according to the law in order to resolve social contradictions in a timely manner. Typical cases should be firmly punished in order to issue a powerful deterrent to all kinds of environmental violations, so as to ensure environmental safety and safeguard the health of the population. Heavy metal pollution should be prevented and controlled. Treatment of smoke dust, mill dust, fine particles and vehicle exhaust in cities will be further improved. Regional defences and controls will also be implemented in order to gradually settle the issue of haze in major cities.

ANALYSIS AND FORECAST OF TAIWAN’S ECONOMIC SITUATION Zhang Guanhua In 2009, Taiwan’s economy suffered from a severe recession due to the impact of the global financial crisis, the second such event since the beginning of the 21st century. With the pickup of the world economy and expedited economic and trade exchanges and cooperation between Taiwan and mainland China, however, the Taiwanese economy started to stabilise after bottoming out in the first quarter, and appears to be recovering more rapidly in the second half; it is expected to emerge from recession and achieve positive growth in the fourth quarter of the year. Looking forward to 2010, the Taiwanese economy is expected to recover in an accelerated manner, driven by the global economic recovery and the accelerating development of cross-Straits economic and trade exchanges and cooperation. I. Taiwan’s Economic Performance in 2009 In 2009, the development of Taiwan’s economy was characterised by a sharp decline, stabilisation and gradual recovery, and its economic growth in the fourth quarter is expected to turn positive. A. Economic Growth Taiwan was in the group of Asia-Pacific economies that were affected most severely by the global international financial crisis. Following its –8.61 percent figure in the fourth quarter of 2008, Taiwan’s economic growth continued to drop, reaching –10.13 percent in the first quarter of 2009, a record low, before then starting to pick up with –7.54 percent in the second quarter and –3.59 percent in the third quarter; Taiwan’s economic growth is expected to turn positive in the fourth quarter due to the effect of the global economic recovery and the lower year-on-year base number. The Taiwan government’s Directorate General of Budget, Accounting, and Statistics (DGBAS) forecast

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positive growth of 5.49 percent in the fourth quarter and negative economic growth of –4.04 percent for the year as a whole, which marked an improvement over the mid-year forecast, but still the severest recession since the 1950s. As shown in the signal indicators of economic stimulus measures issued by the Taiwan government’s Council for Economic Planning, the Taiwanese economy switched from a “blue” signal indicating recession over the January–May period to a “yellow-blue” signal indicating a change in climate over the June–August period; the signal grade recovered from a bottom of 9 points in January to 18 points in July–August, and the signal point-value in August reached the prerecession level of August 2008. The recovery of the global markets, and the leading recovery of the emerging Asian economies in the second half of 2009 in particular, is a significant factor fuelling the bottoming-out of Taiwan’s economy. Especially in the second quarter, when European and American markets were still in recession, the emerging Asian economies—and the mainland Chinese economy in particular—took the lead in bottoming out, which contributed to an improvement in Taiwan’s exports, with export growth rising from –36.7 percent in the first quarter to –32.0 percent in the second quarter; this then recovered to –24.4 percent in July and –24.6 percent in August. Comparatively speaking, the sharp decline in Taiwan’s domestic demand, particularly investment demand, impaired Taiwan’s economy considerably. Personal consumption grew by –2.98 percent in the first quarter and –1.62 percent in the second quarter, and is expected to grow by –1.47 percent in the third quarter and 1.45 percent in the fourth quarter, with annual growth expected to be –1.21 percent. Affected by a sharp decline in exports and overcapacity, Taiwan businesses reduced its investment levels significantly. The non-government fixed asset investment declined by 38.19 percent in the first quarter and 33.0 percent in the second quarter, and is expected to decline by 25.47 percent and 4.81 percent in the third and fourth quarters respectively, with annual growth expected to decline by 26.76 percent year-on-year. In terms of the contribution of domestic and external demand to Taiwan’s economic growth, of the expected economic growth rate of –4.04 percent for 2009, personal consumption accounts for 0.12 percentage points, government consumption for 0.37 percentage points, fixed asset investment for –2.96 percentage points and inventory changes for –0.91 percentage points; in terms of external demand,

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exports and imports are estimated to contribute –8.14 percentage points and –7.48 percentage points respectively, with net external demand thus contributing –0.66 percentage points. Obviously, it is the decline in investment demand in Taiwan that has made the greatest contribution to the negative economic growth. The Taiwan authorities have enhanced public investment to attract domestic demand and make “government investment” and government-operated enterprise investment grow by 16.13 percent and 2.15 percent respectively as estimated, but the sum of the two types of investment only makes up approximately half of non-government investment amount, and is thus insufficient to offset the sharp decline in non-government investment. Private demand for consumption also declined significantly due to the rising unemployment rate and pay reductions, but its decline was relatively lighter as the Taiwan Stock Index bottomed out rapidly and the Taiwan authorities issued consumption coupons, and private demand for consumption thus contributed positively to Taiwan’s economic growth in 2009. B. Foreign Trade and Investment The total value of exports from January to August was USD 124.76 billion, a year-on-year drop of 31.7 percent; the gross value of imports was USD 105.25 billion, a year-on-year drop of 39.8 percent; the favourable balance of trade was USD 19.50 billion, a year-on-year rise of USD 11.71 billion. In terms of major exports from January to August, the growth of electronics exports improved from –45.3 percent to 13.4 percent, that of chemicals improved from –53.1 percent to –20.9 percent, that of electrical equipment improved from –62.3 percent to –25.0 percent, while the rates of decline of exports of rubber, plastic and their products, and textiles were also within 20 percent. In terms of major imports, the import of capital equipment slowed its decline in August and exceeded USD 2 billion for the third consecutive month, an increase of 7.8 percent over July; imports of raw materials for the primary and secondary industries in August increased by 12.3 percent over July, and the value of imports reached a record high for the preceding ten months; imports of consumer goods in August recovered to pre-financial crisis levels, with a year-on-year increase of 0.2 percent. It can be observed from foreign trade data that the decline amplitudes of both exports and imports tended to shrink more rapidly in the second half, showing that Taiwan’s foreign trade is bottoming

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out at a rapid pace under the favourable influence of the recovering external markets. In terms of regions for foreign trade, the leading recovery in the emerging markets was a significant factor in the continual shrinkage of the foreign trade decline in Taiwan. From January to August, Taiwan’s exports to the United States declined by 28.6 percent, while its imports from the latter declined by 45.2 percent; Taiwan’s exports to Japan declined by 23.0 percent while its imports from the latter declined by 35.1 percent; Taiwan’s export to Hong Kong declined by 23.7 percent while its imports from the latter declined by 46.7 percent; Taiwan’s exports to ASEAN declined by 33.9 percent while its imports from the latter declined by 33.2 percent; Taiwan’s exports to Europe declined by 34.2 percent while its imports from the latter declined by 33.9 percent. In addition, according to Taiwanese estimates, from January to July, Taiwan’s exports to mainland China declined by 34.6 percent, while imports from the latter declined by 36 percent, creating a trade surplus of USD 18.97 billion, a year-on-year drop of 32.7 percent; In August, Taiwan’s exports to the mainland and Hong Kong reached USD 8.29 billion, a record high for the preceding year, accounting for 43.6 percent of Taiwan’s gross exports; Taiwan’s imports from mainland China and Hong Kong reached USD 2.26 billion, an increase of USD 150 million over the previous month. It should be noted that the decline in Taiwan’s exports to the Mainland in 2009 was more serious than that to the United States and Japan, which was mainly attributable to the structural features of cross-Straits trade. This is because in cross-Straits trade, and Taiwan’s exports to the mainland in particular, processing trade accounted for over 60 percent of the total, and the final export markets for processing trade goods remain Europe and the United States. The considerable decline in exports from Taiwan to mainland China was due to the impact on Taiwan of the shrinkage in the European and US markets via crossStraits trade. In fact, the initiation of domestic market demand, and “the subsidies campaign for household appliances sold in the countryside” in the mainland in the first half of 2009 in particular as well as large-scale procurement from Taiwan by provinces, municipalities and departments on the Mainland also created a significant pull on Taiwan’s exports from cross-Straits general trade. The international financial crisis also imposed a serious impact on Taiwan’s investment abroad and ability to attract foreign investment. From January to August, Taiwan’s foreign direct investment

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(excluding into mainland China) totalled USD 1.762 billion, a yearon-year drop of 31.67 percent; the decline rates from January to April were in the range of 30–80 percent, but from May to August, foreign direct investment returned to growth as the economy bottomed out. In terms of attracting foreign investment, from January to August, Taiwan attracted foreign direct investment of USD 3.389 billion, a year-on-year drop of 31.98 percent. In terms of portfolio investment in the second quarter of 2009, Taiwan residents’ net investment outflow totalled USD 9.79 billion, while the net inflow of overseas portfolio investment was USD 8.68 billion, resulting in a net outflow of USD 1.1 billion; if overseas investment earnings and deposits of USD 6.03 billion privately remitted to Taiwan and the net inflow of USD 530 million from overseas investment in financial derivatives are taken into account, however, Taiwan’s net inflow of financial account was USD 4.65 billion in the second quarter. C. Industrial Status In terms of agricultural production, the output value of Taiwan’s primary industry declined by 3.3 percent in the first half of 2009 due to the impact of the macro-economic environment, of which planting, animal husbandry, fisheries and forestry declined by 2.2 percent, 2.7 percent, 8.6 percent and 13.2 percent respectively. In the second half of the year, flooding as a result of Typhoon Morakot in central and southern Taiwan led to serious agricultural losses, and its impact on the annual value of agricultural production should not be underestimated. Industrial production tended to stabilise after a sharp decline. In the first quarter, industrial production declined sharply by 26.51 percent, of which, the mining industry saw negative growth of 36.41 percent, manufacturing saw negative growth of 28.09 percent, the water, power and gas industries registered negative growth of 9.7 percent, and the construction industry recorded negative growth of 18.95 percent; in the second quarter, the degree of decline reduced due the impact of the manufacturing stock cover effect, a rebound in demand for consumer electronics, and the rate of decline of industrial production shrank to 18.89 percent, of which, the rates of decline of mining, manufacturing, the water, power and gas industries, and the construction industry were 22.63 percent, 19.84 percent, 8.33 and 14.87 percent respectively. In terms of the production index, the decline of the industrial

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output index and the manufacturing input index shrank from –43.31 percent and –44.94 percent in January to –9.62 percent and –9.38 percent in August, while the figures for the January–August period were –20.35 percent and –20.79 percent separately. If the manufacturing output index is divided into four industries, the decline of the metal and machinery industry, the information and electronics industry, the chemical industry and the leisure industry were –50.56 percent, –52.27 percent, –31.42 percent and –29.47 percent in January respectively, and these shrank to –24.33 percent, –6.35 percent, 0.97 percent and –6.87 percent respectively. The chemical industry saw positive growth in August for the first time, of which chemicals products increased by 9.05 percent as demand from the mainland drove up exports of petrochemical materials, and the prices of petrochemical materials picked up. The rate of decline of the information and electronics industry shrank to a single-digit figure in July and August, of which the decline in the electronic parts industry shrank to –0.73 percent in July and –2.32 percent in August. This is attributable to the rapid recovery of exports of semiconductors, LCD panels and associated electronic parts promoted by mainland China’s subsidies for household appliances sold in the countryside, and large-scale procurement in Taiwan from mainland Chinese businesses. Driven by demand from the mainland, Taiwan LCD panel manufacturers’ utilisation rate of productive capacity recovered from 30–40 percent at the end of 2008 to 70–90 percent in July 2009. The tertiary industry experienced a slighter decline in production. The output value of the tertiary industry grew by –2.81 percent in the first quarter of 2009, better than the –3.16 percent figure in the fourth quarter of 2008, and the rate of decline shrank further to –2.31 percent in the second quarter of 2009. Of this, the outputs of the wholesale and retail industry, the transport, storage and communications industry, the finance, insurance and real estate rental industry, and the government services industry grew by –6.15 percent, –2.31 percent, –1.74 percent and 1.90 percent respectively; these were –4.89 percent, –3.36 percent, –1.60 percent and 1.14 percent respectively in the second quarter. Of the major services industries, the financial services industry saw the lowest decline rate as decreasing bank credit and insurance premiums resulted in an overall decline in the output value of the finance industry on the one hand, while on the other hand, the leading bottom-out of the capital market and brisk trade on the stock market eased the decline of the financial industry. In

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terms of industrial characteristics, Taiwan’s tertiary industry remains focused on domestic demand. Its decline was relatively gentle due to the impact of the financial crisis, but its recovery pace was also relatively slow. Finding ways of enhancing the competitiveness of Taiwan’s tertiary industry, and its productive service industry in particular, in comparison with its external counterparts as well as expand the radius of service will be an important topic for Taiwan as it seeks to achieve its economic restructuring. D. Banking and Finance To deal with the international financial crisis, Taiwan’s monetary authorities decreased the interest rate seven times from September 2008 onwards, with a total rate of decline of 2.375 percentage points. By October 2009, Taiwan still maintained a low interest rate policy with a rediscount rate of 1.25 percent, secured loan financing interest rate of 1.625 percent, and short-term financing interest rate of 3.5 percent. No change is expected to occur to the loose monetary policy in the remaining months of 2009. The money supply will be kept loose. The money supply M1B grew by 3.3 percent and 13.1 percent, while M2 grew by 6.5 percent and 7.4 percent in the first and second quarters of 2009 respectively, all higher than the negative growth over the same period of 2008; by August, the growth rates of M1B and M2 rose to 22.14 percent and 8.17 percent respectively. At the same time, however, financial institutions’ credit growth was slow, at a mere 2.4 percent in the first quarter, 1 percent in the second quarter, and this then turned negative with –0.5 percent in July and –0.84 percent in August, reflecting the fact that bank loans were still affected by depressed non-government investment demand. In exchange rate terms, as the Taiwanese economy bottomed out, there was a gradual appreciation of the New Taiwan Dollar (NTD) against the US Dollar from NTD 33.92 = USD 1 at the end of the first quarter to NTD 32.82 = USD 1 at the end of the second quarter, even reaching NTD 32.18 = USD 1 on October 7 due to the increased net inflow of overseas capital and active hot money for speculating in foreign exchange. Taiwan’s stock market during the year showed a rapid upward trend. Taiwan stock index fell to approximately 4475 at the end of January and February due to the impact of the financial crisis, and then soared to approximately 6500–6800 over May–August, reaching

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7503 on October 8, thus increasing by 68 percent since the end of January. The trading volume increased steadily from a daily average of NTD 56.4 billion at the end of January to NTD 104.8 billion at the end of August, and the trading volume on October 8 set a new record of NTD 159.1 billion. Taiwan stocks recovered ahead of the economic pickup, a fact which can be attributed to a wide range of factors, particularly the rises in the mainland’s stock market, the loose money supply in Taiwan, the mass inflow of foreign capital, and the accelerated normalisation of cross-Straits economic relations. The permanent inflow of international capital was one significant factor behind the constant rise in Taiwan stocks. The net inflow of foreign capital into Taiwan’s stock market amounted to USD 136.4 billion in August, up from USD 122.7 billion in January, an increase of USD 13.7 billion; the foreign capital shareholding market value accounted for 30.91 percent of the gross market value in August, rising from 28.42 percent in January. Meanwhile, expedited economic and trade exchanges and cooperation between Taiwan and the mainland also increasingly boosted Taiwan’s stock market. Each significant opening initiated through cross-Straits economic and trade policy in 2009 generated a prominent stimulus to Taiwan’s stock index, and the mainland’s economic stimulus policies, such as providing subsidies for household appliances sold in the countryside, have promoted the performance of Taiwan listed information and electronics companies, making a major contribution to the rise in Taiwan stock. In fiscal terms, the decline in fiscal revenue due to the economic recession and the Taiwan authorities’ expansion of public investment and expenditure to expand domestic demand widened the fiscal deficit further in the first half of 2009. In the second quarter of 2009, the Taiwan authorities’ fiscal revenue (excluding income from government bonds, income from borrowing and annual budget residual ) was NTD 712.8 billion, down 14.1 percent year-on-year, of which current account income decreased by 14.1 percent and capital account income decreased by 12.3 percent. In terms of fiscal expenditure, current account expenditure (not including repayment of debt principal ) amounted to NTD 485.4 billion, up 21.7 percent year-on-year; capital account expenditure amounted to NTD 147.9 billion, up 20.7 percent; gross fiscal expenditure was NTD 633.3 billion, up 21.5 percent year-on-year. The second quarter saw net revenue of NTD 79.5 billion, but if the deficit of NTD 290 billion in the first quarter is added, the deficit in the first half of 2009 was NTD 210.5 billion, far above the annual deficit of NTD 101 billion in 2008.

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E. Prices and Employment Deflation still exists in Taiwan. The bulk sale price index declined by 10.85 percent in January and by 13.99 percent in July, but the rate of decline then shrank to 9.59 percent in September. CPI growth was 1.48 percent in January before turning negative with –2.33 percent in July, and –0.8 percent in August due to the impact of the rise in the prices of agricultural products after Typhoon Morakot, and –0.86 percent in September. The number of unemployed continued to rise in Taiwan, from 578,000 people in January to 672,000 people in August, and the unemployment rate rose from 5.31 percent to 6.13 percent over this period; both figures are record highs for recent years. Taiwanese employees suffered from an average decline in pay, with a year-on-year drop of 13.34 percent from January to July. The constant rise of the rate of unemployment and the drop in employee pay constitute uncertainties facing Taiwan’s economic recovery. F. Cross-Straits Economic Relations In 2009, the pace of cross-Straits economic and trade exchanges and cooperation accelerated, with the initial implementation of normalised cross-Straits economic relations. On December 15, 2008, Taiwan and the mainland started direct shipping, normal charter flights and direct mail services, thus officially launching the “three direct links”; on August 31, 2009, regular flights between Taiwan and the mainland were launched, thus completely opening up direct flights. On December 31, 2008, Hu Jintao made an important speech in celebration of the 30th anniversary of the publication of the “Message to Compatriots in Taiwan”, expounding on major concepts in the peaceful development of cross-Straits relations, and putting forward important proposals for the promotion of cross-Straits economic and trade exchanges and cooperation. In accordance with the consensus reached by the head of the mainland’s Association for Relations across the Taiwan Straits and his counterpart in Taiwan’s Straits Exchange Foundation at the third round of talks in Nanjing in April 2009, Taiwan opened up a total of 192 industrial projects to mainland capital by means of a “positive list”, thus opening up two-way investment across the Taiwan Strait. The “three direct links” and mainland investment in Taiwan marked the termination of the previous unusual status of indirect links and one-way investment, and the initial implementation

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of normalised direct links and two-way investment. Furthermore, cross-Straits financial exchanges and cooperation are developing at a rapid pace, the signing of a cross-Straits economic cooperation agreement has already been put on the agenda, under which cross-Straits economic relations are to be institutionalised and strengthened, thus opening up a brand-new development phase. Cross-Straits trade and investment took on a recovery trend. According to Ministry of Commerce statistics, cross-Straits trade from January to August amounted to USD 62.29 billion, down 33.1 percent year-on-year. Of this, mainland Chinese exports to Taiwan amounted to USD 11.85 billion, down 34.5 percent year-on-year; mainland Chinese imports from Taiwan amounted to USD 50.44 billion, down by 32.8 percent year-on-year. According to Taiwan statistics, crossStraits trade from January to July amounted to USD 43.474 billion, down 34.6 percent year-on-year; of this, Taiwan’s exports to the mainland amounted to USD 31.223 billion, down 34.0 percent; Taiwan’s imports from the mainland amounted to USD 12.251 billion, down 36.0 percent year-on-year; in terms of monthly statistical indicators, the rate of decline of cross-Straits trade shrank from 56.8 percent in January to 25.3 percent in July. In terms of investment, the mainland’s actually used Taiwan’s capital totalled USD 1.14 billion from January to August, down 12.8 percent year-on-year. As of the end of August 2009, the mainland had approved 79,029 Taiwan-funded projects and actually utilised USD 48.8 billion of Taiwan capital. In terms of statistics according to the actual use of foreign investment, Taiwan investment accounted for 5.4 percent of the mainland’s actual use of foreign direct investment. According to Taiwan statistics, Taiwan investment in the mainland totalling USD 3.12 billion was approved from January to August, down 49.1 percent year-on-year. Mainland Chinese investment in Taiwan made a breakthrough—a dozen enterprises including Fujian New World Group and a number of airlines were approved to invest in Taiwan, thus marking the first step for mainland Chinese investment in Taiwan. II. Economic Outlook for 2010 Based on a summary of the major Taiwan economic indicators in the first eight months of 2009, the Taiwanese economy has picked up since its bottoming out in the first quarter, and its recovery accelerated in

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the third quarter. The latest data, for September, shows that it should be beyond doubt that Taiwan’s economy will recover positive growth in the fourth quarter. In terms of the newly issued foreign trade data for September, Taiwan’s customs export value reached USD 19.07 billion, down 12.7 percent year-on-year; the decline was smaller than that of the preceding month, and the value of exports reached new high for the preceding 11 months; of this, Taiwan’s exports to the mainland and Hong Kong reached USD 8.22 billion, up 0.3 percent year-on-year, also marking the first positive growth after 12 consecutive months of decline. Taiwan’s exports are expected to reverse their downtrend and achieve single-digit growth in November, and double-digit growth in December. Taiwan’s National Central University published a consumer confidence index (CCI) of 56.45 points in September, in which its six indices all picked up and achieved record highs for the preceding 15 months, even though the CCI remained in the “pessimistic range”. The positive changes in these two data show that it is a foregone conclusion that Taiwan’s economy will bottom out and recover in the remaining months of 2009. Taiwan’s rate of unemployment however continues to rise. Uncertainties continue to affect Taiwan’s economic recovery, including uncertainty over the recovery of the world’s advanced economies, heavy losses incurred due to Typhoon Morakot, and the further spread of the H1N1 virus during the autumn and winter seasons. Overall, Taiwan’s economy will continue to decline substantially over the rest of 2009—a rare occurrence since the Second World War. Its negative economic growth of approximately 4 percent has however exceeded the pessimistic forecast of negative growth of 5–8 percent issued by a number of major institutions in the middle of the year. Looking forward to 2010, Taiwan’s economic recovery is expected to speed up under the impact of the global economic recovery and accelerated cross-Straits economic cooperation. In terms of the global economic recovery trend, the IMF in October forecast that the global economic growth rate would reach 3.1 percent in 2010, which is a more optimistic figure than the previous forecast of 2.5 percent. As the mainland is Taiwan’s largest trade and investment partner, its policy of expanding domestic demand will play an increasingly important role in pushing the Taiwan economy towards recovery. Furthermore, cross-Straits economic and trade exchanges and cooperation will be enhanced in 2010, particularly the accelerated development of financial cooperation and progress with an economic cooperation

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agreement between the two sides, and this will have an increasingly positive policy openness effect on Taiwan’s financial services industry and exports of relevant goods. Taiwan however remains greatly reliant on the acceleration of its economic transition and adjustments to its economic strategy in order to more efficiently utilise the mainland market to pull economic recovery. The Taiwan economy was one of the Asia-Pacific economies most affected by the global financial crisis, and this is closely linked to its excessive dependence on export trade, relatively few IT industries including semiconductors and LCD panels for export, and US and European export destination markets. Taiwan’s exports to the mainland account for over 40 percent of its gross exports, but these are dominated by processing trade, with the final markets remaining the US and Europe. General trade between Taiwan and the mainland accounts for a lower percentage, and Taiwan products therefore have little opportunity to enter mainland China’s huge domestic demand market, driven by the RMB 4 trillion investment plan, although it has benefited substantially from the mainland’s campaign to provide subsidies for household appliances and vehicles sold in rural areas. In order to respond to the profound changes and restructuring of the international economy in the wake of the global financial crisis and keep pace with the mainland’s economic restructuring and long-term economic strategy of expanding domestic demand, Taiwan’s economy must undergo deeper economic restructuring, industrial upgrading, restructuring of its external demand market and open-door policy. In general, Taiwan’s economy is expected to recover at a more rapid pace in 2010. DGBAS forecasts that the Taiwan economy will achieve positive growth of 3.9 percent in 2010. JP Morgan Securities and HSBC both have more optimistic forecasts for Taiwan’s economic growth in 2010, with 5.5 percent and 4.4 percent respectively. With the economic recovery, however, Taiwan should accelerate its economic restructuring and industrial upgrading so as to allow its recovery tendency could to stabilise.

ANALYSIS AND FORECAST OF HONG KONG’S ECONOMIC SITUATION Helen Chan I. Review of the Hong Kong Economy With the burst of the US real estate market bubble, America’s subprime mortgage issue emerged in 2007 and the global financial crisis that this triggered deteriorated in 2008, worsening considerably when Lehman Brothers, the US’s fourth largest investment bank, filed for bankruptcy in September 2008. With the continuing development of global integration, the financial crisis has spread to a wide range of financial assets, credit markets and economies. Governments have taken numerous unprecedented measures to prevent the collapse of the global financial system. The material impact of the global tsunami on global economies however only became noticeable in the second half of 2008—by the end of the year, most of the world’s advanced economies had entered recession, Asia’s economies worsened sharply and the world’s national economies spiralled downward in a relatively synchronised move. The global financial crisis has pushed the global economy into its deepest recession for the past six decades. Hong Kong, a minor open economy, was inevitably exposed to its severe impact. In 2008, Hong Kong’s year-on-year GDP growth slowed down considerably, from 7.3 percent in Q1 to 4.1 percent in Q2 and 1.5 percent in Q3, and even turned negative, registering –2.6 percent in Q4. Hong Kong’s annual GDP growth was 2.4 percent in 2008, lower than its growth trend for the preceding decade, but slightly better than the performance of relatively advanced neighbouring economies such as Japan (–0.7 percent), Singapore (1.1 percent), Korea (2.2 percent), or Taiwan Province (0.1 percent). By 2009, the global financial crisis and the serious global economic recession were continuing to affect the Asian economy, including Hong Kong. Hong Kong’s GDP declined substantially, by 7.8 percent year-on-year in Q1 2009—the sharpest decline in HK’s economy since the Asian financial crisis in Q3 1998. Hong Kong’s economy

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% 14 12 10 8 6 4 2 0 –2 –4 –6 –8 –10 Q1/2004

Year-on-year change in real terms

Seasonally adjusted quarter-to-quarter change

Q1/2005

Figure 21.1

Q1/2006

Q1/2007

Q1/2008

Q1/2009

Hong Kong’s Economy Improved in Q2 2009.

rebounded in Q2, however, benefiting from the rapid growth of the mainland Chinese economy and the alleviating downward pressure of the world’s advanced economies. Real GDP decline in Q2 2009 was only 3.8 percent. Following seasonal adjustments and when compared to the preceding quarter, GDP growth recovered by 3.3 percent in Q2 2009, reversing the shrinkage of the last four consecutive quarters. Foreign Trade Like many other Asian economies, Hong Kong is facing a sharp reduction in external demand and an overall decline in exports in Asia due to a sharp fall in demand from the world’s leading economies. Goods exports slowed down in 2008, with annual growth of 2.9 percent in real terms, and declined even more sharply, by 22.2 percent, in Q1 2009, registering the steepest decline since Q2 1954. With the relative improvement in the external environment, however, Hong Kong’s goods exports declined by 10.8 percent year-on-year in real terms in Q2 2009. After seasonal adjustment, goods exports rebounded strongly in Q2 2009 after three straight quarters of decline, rising by 13.0 percent compared to Q1 2009. In fact, Hong Kong’s exports performed continually better than many other Asian economies in Q2 2009. In July and August, however, Asia’s exports continued their downtrend due to the continuing weakness of the world’s major economies.

analysis and forecast of hong kong’s economic situation Table 21.1

303

Exports of Major East Asian Economies

(Year-on-year growth, calculated in USD) 2008 Hong Kong SAR Mainland China Japan Singapore Korea Taiwan Province Indonesia Malaysia Philippines Thailand Total for East Asia

2009

Q3

Q4

Q1

Q2

July

August

5.6 23.3 12.9 21.2 27.0 8.0 27.9 21.3 4.1 26.1 18.6

–1.8 4.4 –9.9 –13.9 –9.9 –24.7 –5.6 –12.6 –22.3 –10.7 –5.9

–21.5 –19.8 –40.6 –32.7 –25.2 –36.7 –31.8 –28.9 –36.8 –20.5 –28.1

–12.4 –23.5 –33.9 –30.8 –20.5 –32.0 –26.2 –33.2 –28.9 –26.2 –26.1

–19.4 –23.0 –28.1 –27.3 –21.9 –24.4 –23.0 –29.2 –25.4 –25.7 –24.4

–13.3 –23.4 –26.3 –20.8 –20.9 –24.6 n.a. n.a. n.a. –18.4 n.a.

Not available.

% 40

% –8 Total import demand of Hong Kong major markets (LHS)

30 20 10 0

–6 –4 –2

Hong Kong total goods exports (LHS)

–10

0 2

Weighted trade EERI in real terms (RHS)

–20

4

–30

6 8

–40

Q1 2004

Figure 21.2

Q1 2005

Q1 2006

Q1 2007

Q1 2008

Q1 2009

The Decline in Total Goods Exports Reduced Significantly in Q2 2009 (Year-on-Year Change in Real Terms).

304

helen chan

% 25 20 Imports of goods

15 10 5 0 –5 –10

Retained imports

–15 –20 –25 Q1 2004

Q1 2005

Figure 21.3

Q1 2006

Q1 2007

Q1 2008

Q1 2009

The Decline of Total Exports of Goods Narrowed (Year-on-Year Change in Real Terms).

The Mainland, the United States and the European Union are the three major markets for Hong Kong’s exported goods (including exports of Hong Kong-made products and re-exports), making up 48.5 percent, 12.7 percent and 13.7 percent respectively of the total in 2008. Other major markets include Japan (4.3 percent), Singapore (2 percent), Taiwan Province (1.9 percent) and South Korea (1.8 percent). Goods imports were also strongly affected by the global financial crisis and economic recession. Following a slowdown to 2.6 percent in 2008, real growth declined sharply in Q1 2009, falling by 22.2 percent year-on-year. With the slowdown due to the global recession, Hong Kong’s economic decline also slowed down to 12.3 percent in Q2. Retained imports fell from –1.4 percent in 2008 to –21.3 percent in the first half of 2009 in real terms. In terms of invisible trade, the output of services was also exceeded, albeit by a lesser extent. The output of services increased by 5.7 percent annually in 2008, remarkably slower than the figure of 14.1 percent in 2007. The output of services saw a particularly steep decline in Q1 2009, when it dropped by 6.3 percent. As financing and other financial market activities were weak, the output of financial services continued to slow remarkably. This was further affected by declining interregional trade, which resulted in a significant reduction in the output of trade-related services and even that of transportation services. However, output contracted to –5.7 percent year-on-year in

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% 40 35 30 25 20 15

Year-on-year change in real terms

10 5 0 –5 –10 Q1 2004

Figure 21.4

Seasonally adjusted quarter-to-quarter change Q1 2005

Q1 2006

Q1 2007

Q1 2008

Q1 2009

The Decline in Total Exports of Services Narrowed Due to an Improvement in the External Environment.

Q2 2009. This was due to the recovery in the trade of goods and the smaller decline in the output of trade-related services and transportation services. Furthermore, increasing risk in the financial markets since March also facilitated a recovery in financial services output. The spread of the H1N1 virus however resulted in a double-digit drop in the number of tourists visiting Hong Kong in May and June, which had a sharp impact on the tourist trade and affected the overall performance of the output of services in Q2. The output of services in 2008 saw mild growth of 3.3 percent in real terms, lower than the 12.1 percent figure in 2007. Growth for all trades slowed down. The input of tourist services soared in Q1 2008, but then dropped due to the decline in consumption demand. Growth in the contribution of transportation services likewise slowed down throughout 2008. Growth in the contributions of financial services, business services and other services all slowed down significantly in 2008 as the financial markets were hit by the global financial crisis. Because of the decrease in trade contracts among Asian regions in the later months of 2008, growth in the contribution of trade-related services also slowed down noticeably in the fourth quarter. The decline in the contribution of services expanded in Q1 2009, a fall of 9.6 percent in real terms over the same period for the preceding year, and the fall occurred in every link. This then declined by 5.6 percent in Q2. The contribution of tourist services recovered in Q2, but

306

helen chan

% 40 35 30 25 20 15

Year-on-year change in real terms

10 5 0 –5

Seasonally adjusted quarter-to-quarter change

–10 –15 Q1 2004

Q1 2005

Figure 21.5

Q1 2006

Q1 2007

Q1 2008

Q1 2009

The Decline in Total Imports of Services Narrowed.

that of transportation services continued to decline due to decreasing imports and tourist demand. In the meanwhile, the financial market and other commercial activities stabilised, narrowing the decline of financial, commercial and other service imports. Trade-related service imports saw a slight improvement with the stabilisation of the external trade environment. Hong Kong has achieved large amounts of consolidated surplus in visible and invisible trade accounts, reflecting its high competitiveness. In the first half of 2009, Hong Kong’s visible and invisible trade surplus amounted to HKD 70.8 billion, compared to HKD 181.7 billion for the entire year of 2008. Domestic Demand Domestic demand performed well in the first quarter of 2008 but its growth slowed remarkably in the subsequent three quarters. Private consumption in particular weakened in the second half of the year because of the negative wealth effect caused by the sharp correction in the local asset markets and deteriorating employment prospects. Over 2008 as a whole, private consumption expenditure rose by 1.5 percent in real terms, compared to 8.5 percent in 2007. Private consumption expenditure decreased by 6.0 percent yearon-year in real terms in the first quarter of 2009. During this quarter, however, the Hong Kong stock and property markets stabilised and

analysis and forecast of hong kong’s economic situation % 14 12 10 8 6 4 2 0 –2 –4 –6 –8 Q1 2004

307

Year-on-year change in real terms

Seasonally adjusted quarter-to-quarter change

Q1 2005

Figure 21.6

Q1 2006

Q1 2007

Q1 2008

Q1 2009

The Performance of Private Consumption Improved Markedly over the Preceding Quarter.

the government took a series of measures to address the situation, which promoted the consumption intention to a certain extent. Local consumer sentiment recovered to a certain extent in the second quarter, due to the favourable stabilised employment situation, a rebound in the assets market and numerous sets of relief measures implemented by the government. The year-on-year decline of private consumption expenditure therefore reduced substantially, to –1 percent, up 4 percent over the previous quarter. Total retail sales in July and August decreased by 3.1 percent year-on-year, an improvement over the yearon-year drop of 5.3 percent in the second quarter. In terms of overall investment, gross domestic fixed capital formation for 2008 as a whole decreased slightly by 0.5 percent, compared to growth of 3.4 percent in 2007. Machinery, equipment and software investment grew substantially for most of 2008 until the fourth quarter, when growth slowed noticeably. Overall investment expenditure in Hong Kong in the first quarter of 2009 decreased by 13.7 percent over the same period of 2008 due to the bleak global economic outlook, causing many companies to postpone their investment plans. As the global economic outlook remains uncertain, the business climate also remains cautious, and overall investment in the second quarter plunged by 14.0 percent over the same period of last year. Machinery and equipment investment in particular decreased sharply in the second quarter, by 18.0 percent.

308

helen chan Year-on-year change (%)

35 25

Machinery, equipment and computer software expenditure Overall investment expenditure

15 5 –5

Building and construction expenditure

–15 –25 Q1 2004

Figure 21.7

Q1 2005

Q1 2006

Q1 2007

Q1 2008

Q1 2009

Overall Investment Expenditure Declined Further as Business Sentiment Remained Cautious.

Labour Market Following the sudden escalation of the financial crisis in September 2008, the commercial climate worsened rapidly, resulting in a downtrend in the demand for labour at the end of the year, and the unemployment rate fell to a decade low of 3.2 percent last year before picking up. The unemployment rate soared to 5.2 percent in the first quarter and tended to stabilise in the second quarter, reflecting the relative economic rebound and the fact that the government’s policy of maintaining employment had achieved certain success. Job losses eased significantly in the second quarter, thereby slowing the rise of the unemployment rate. The seasonally adjusted unemployment rate in the second quarter was 5.4 percent, and remained at this level from June to August. Price Tendency Local inflation rose for most of 2008 due to soaring world food prices. As the economy remained in an upward cycle, strong demand from the domestic sector also generated a certain amount of inflationary pressure. However, the outbreak of the global financial and economic crises in September 2008 forced world food and energy prices quickly downwards. Coupled with a significant slowdown in consumer demand

analysis and forecast of hong kong’s economic situation

309

% 8 7 6 Seasonally adjusted unemployment rate 5 4 Underemployment rate

3 2 1

Long-term unemployment rate

0 Q1 2005

Q1 2004

Q1 2006

Q1 2007

Q1 2008

Q1 2009

Figure 21.8 The Rise in Unemployment Slowed Down Noticeably in Q2 2009.

% 10

8 6

CPI (A) CPI (B) CPI (C) Composite CPI

4 2 0 –2 –4 –6 Q1 2004

Q1 2005

Figure 21.9

Q1 2006

Q1 2007

Q1 2008

Q1 2009

Consumer Price Inflation Declined Further in Q2 2009 (Year-on-Year Change).

and the SAR Government’s measures to ease inflation, this contributed to an obvious decrease in inflationary pressure at the end of the year. Overall consumer price inflation averaged 4.3 percent in 2008. By 2009, inflationary pressure had decreased with the economic decline. The basic consumer price inflation index reflecting the inflation trend fell to 3.1 percent year-on-year in the first quarter, and then to 1.2 percent in the second quarter and –0.3 percent in July and August. Overall consumer price inflation dropped to a low level due

310

helen chan

to the various one-off relief measures, registering 1.7 percent and –0.1 percent in the first and second quarters and –1.5 percent in August. II. Policies to Respond to the Global Financial Crisis and Their Effect The global financial tsunami which broke out last year had an impact whose depth and breadth have not been seen in decades. In response to the global financial crisis, the SAR Government implemented a counter-cyclical fiscal policy as well as a policy of stabilising the financial system, supporting business, and maintaining employment. On the one hand, the SAR Government rapidly introduced full protection for deposits in order to stabilise the financial system. As the banking system itself is quite robust, Hong Kong has not suffered the financial unrest which struck Europe and the United States. On the other hand, in order to resolve the credit crunch issue caused by the financial tsunami, the SAR Government also launched a special credit guarantee scheme to help enterprises tide over this difficult phase. These credit guarantee measures have so far made good progress. By mid-August, over 10,000 small and medium-sized enterprises had benefited from the scheme, and total loans exceeded HKD 50 billion, indirectly guaranteeing the jobs of over 230,000 employees working for these enterprises. The major economies all implemented expansionary fiscal policies to revive their economies in accordance with their capacity, while no effort was spared to resolve the problems facing the financial system and credit market. The SAR Government was already aware of the risks generated by the global economic slowdown when it formulated its fiscal budget for FY 2008–2009 and announced the first round of relief measures; the Chief Executive also announced a second round of relief measures in July 2008. As the financial crisis worsened following the collapse of Lehman Brothers in September, Hong Kong’s economic situation deteriorated rapidly. The SAR Government therefore clearly indicated its intention to embrace a counter-cyclical fiscal policy in its fiscal budget for FY 2009–2010 in order to alleviate the economic contraction pressure and increase domestic demand as well as employment opportunities. The economic data for the first quarter of 2009 show that the economy worsened. The Financial Secretary then announced a fourth round of relief measures in May 2009 to help citizens and businesses to combat the financial crisis and prepare for economic recovery.

analysis and forecast of hong kong’s economic situation

311

Against a grim global economic background of this kind, it is necessary to use short-term fiscal measures to stimulate the economy. The expansionary efforts of the FY 2009–2010 fiscal budget can be assessed from the following three aspects: A. Public Expenditure The public expenditure budget for 2009 is HKD 319.4 billion, equivalent to 19.4 percent of GDP. The ratio of public expenditure to GDP rose significantly, from 16.5 percent last year to 19.4 percent this year, showing that the 2009–10 budget is having an expansionary impact on the economy. B. Public Revenue Total revenue in the 2009–10 budget is estimated at HKD 261.7 billion, a drop of HKD 54.8 billion over the provisional figure for 2008– 09 revenue and a drop of HKD 96.7 billion over 2007–08 revenue. Due to a reduction in government revenue and a rise in government expenditure, the 2009–10 fiscal deficit is budgeted to be HKD 39.9 billion, equivalent to 2.4 percent of GDP; public revenue and expenditure for 2008–2009 were generally balanced. The fiscal deficit also shows that the 2009–10 fiscal budget will basically have an expansive impact on the economy, and means that one of the functions this year’s budget is to stimulate the economy and combat the recession. C. The Hong Kong Government’s Fiscal Stimulus Measures Introduced in 2008 and 2009 Were No Weaker Than Those of Other Economies’ Fiscal Programmes The government implemented several rounds of fiscal relief measures from 2008 onwards, with total resources allocated amounting to HKD 87.6 billion, equivalent to 5.2 percent of GDP. A rough estimate shows that these measures alone may improve GDP by two percentage points in 2009. The SAR Government’s counter-cyclical fiscal policy under its guiding principles of stabilising the financial system, supporting business and maintaining employment indeed achieved a number of successes in stabilising the Hong Kong economy. This can be seen from the firm consumer sentiment and stabilised unemployment rate. While taking into account short-term needs, the SAR Government has also stressed the need to maintain a medium and long-term financial stability. In a report released in March of this year, the International Monetary Fund pointed out that local governments must ensure their long-term financial health as they apply incentive measures to

312

helen chan

boost demand to deal with the current crisis, and it therefore proposed that economic stimulus measures should have no long-term impact on the fiscal deficit. Bearing in mind that the recession might be longer and deeper than originally thought, the IMF also suggested that local governments focus on public construction and infrastructure projects as means of stimulating the economy rather than tax reductions and other short-term measures, as public construction and infrastructure projects have a more lasting impact on the economy and generate greater economic benefits. The economic stimulus measures adopted in the fiscal budget of 2009 focus on expanding large, medium and small-sized projects, accelerating infrastructure construction to create a large number of employment positions for the construction industry, which shed plenty of jobs due to the impact of the crisis, and also providing internship opportunities for the young; the budget also however requires that the government ensures that it has sufficient capacity to meet future economic variables. As part of its medium-term budget plans, the SAR Government will adhere to a principle of fiscal prudence. It is estimated that this year’s fiscal budget will create a deficit in the government’s current accounts for the next three years, but that there will be a surplus in the 2012–13 fiscal year. In addition, as construction projects get underway over the next few years, annual expenditure on such construction works will remain at very high levels for subsequent years, with an expected total amount of HKD 50 billion. Even if the external situation does not fully recover, these infrastructure projects will further provide Hong Kong’s economic recovery with major momentum. In general, the government will continue to take into account the long-term public finance situation and the long-term needs of society as it combats the financial tsunami. III. Comparing Hong Kong’s Economic Performance in the Asian Financial Crisis and the Current Global Financial Tsunami The only comparison with the current financial crisis in terms of the time length and depth of Hong Kong’s economic downturn is the 1997–1998 Asian financial crisis. The Asian financial crisis was caused by asset price bubbles bursting across most of Asia and serious imbalances in the international payments of a number of economies in

analysis and forecast of hong kong’s economic situation 7

313

Q3/1997

6 5 Q3/2008

4 3 2 1 0

–1 –2 –3 0

1

2

3

4

5

6

7

8

9

10

11

Number of quarters after the outbreak of the financial crisis

Note: The global GDP plotted here is weighted by Hong Kong’s total exports of goods.

Figure 21.10

World GDP during Two Recent Economic Crises.

the region, but the crisis was mainly restricted to Asia. The current financial crisis was triggered by over-borrowing in the world’s advanced economies, leading to a financial tsunami and a sharp decline in demand and international trade. Since the outbreak of the financial tsunami, the Hong Kong economy has remained relatively stable. In the Asian financial crisis, the global economy—excluding the Asian economies—continued to perform well, while in the current crisis, the global economy has reversed and economic recession has spread from the advanced economies to emerging economies. Generally speaking, the world faces its most serious economic recession in the past six decades, a much serious situation than the regional economic crisis a decade ago (see Figure 21.10). Affected by the sharp decline in demand from the world’s advanced economies, international trade declined more substantially during this crisis. Many Asian economies’ exports of goods were sharply down, by 20–40 percent, in the first few months of 2009, which can be attributed to the sharp decline in demand from the world’s advanced economies and the sharp decline in Asian intra-regional trade (see Figure 21.11a). Hong Kong’s exports of goods also declined substantially during this crisis (see Figure 21.11b).

314

helen chan 25

15 10

20

Oct 1997

15

5 0 –5 –10 –15 –20 –25 –30

Oct 2008

9th month after outbreak of crisis: July 1998: -10.2% July 2009: -24.4%

–35

Annual actual growth (%)

Estimated annual growth, in USD (%)

20

1998 Asian economic crisis

Current economic crisis

10 5

HK total exports

0 –5 –10 –15 –20 –25

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Number of quarters after the outbreak of the financial crisis

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 97 97 98 98 99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09

Figure 21.11a Effects of Economic Crises Figure 21.11b Hong Kong’s Goods Exports on East Asian Goods Exports. Decline Sharply in Global Economic Crises.

Global stock markets dropped substantially, both during the financial crisis and the economic crisis. In terms of the local stock market, the Hang Seng Index dropped by approximately 31 percent in midSeptember 2009 compared to its peak in 2007; similar to the drop during the Asian financial crisis (see Figure 21.12a). In the current external crisis, however, the local estate market remained relatively stable due to its increased affordability; residential property prices in July 2009 were only 4 percent lower than their pre-crisis levels, whereas during the Asian financial crisis, these fell by a total of 42 percent in November 1998 (see Figure 21.12b). The real estate market is relatively stable, helping to alleviate the negative impact of the wealth effect. Moreover, the monetary environment is very relaxed in the current crisis, an entirely different situation from that during the Asian financial crisis when the local currency was under speculative attack. In addition, Hong Kong interbank interest rates have remained low during the current crisis, whereas during the Asian financial crisis, interest rates rose on numerous occasions (see Figure 21.13a). Credit conditions are also relatively better (see Figure 21.13b). All of these factors, as well as the series of relief measures taken by the government since last year, have had a stabilising effect on the internal economy. Hong Kong’s domestic economy remained relatively stable in the current crisis. Retail sales decreased by less than 1 percent in comparison with the pre-crisis peak, whereas over a similar time period in the Asian financial crisis, there was a drop of more than 20 percent (see Figure 21.14a). Restaurant income also registered similar conditions (see Figure 21.14b). As the domestic economy is more stable, the local labour market has responded more flexibly to the crisis, with a relative reduction

analysis and forecast of hong kong’s economic situation Housing prices

Hang Seng Index Peak = 100

Peak = 100

110

110 June 2008

30/10/2007 (31 638)

100

315

Percentage reduction from peak: July 2009: -3.2% November 1998: -42.0%

95

90 85

80 70

75 October 1997

60

65

7/8/1997 (16 673)

50

23/9/2009: 21,596 Peak compared to 2007: -31.7%

40 30

55

45

0

30

60

0

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in the number of job losses. A wide range of measures were able to boost the economy and confidence, thus providing a stabilising effect on the labour market. In this way, only slightly more than 30,000 jobs were lost due to the financial tsunami to August 2009, far less than the loss of 100,000 jobs over the same period a decade ago during the Asian financial crisis, and the rising unemployment rate trend has recently tapered off. Employment after seasonal adjustment in the three months preceding August 2009 declined by 1 percent compared to the peak ten months ago, on the eve of the outbreak of the global financial crisis. Employment declined by 3.7 percent during the Asian financial crisis (see Figure 21.15). Generally, the Hong Kong economy has performed better in dealing with this crisis than in the Asian financial crisis, although it was more seriously affected externally—particularly in terms of international trade. The local property market is relatively stable, and the government has made numerous efforts to stimulate the economy, which has been particularly helpful. Hong Kong’s economic performance during this recent crisis was better than during the Asian financial crisis, reflecting Hong Kong’s stronger economic basis and approach to dealing with external impacts.

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IV. Economic Forecast for the Entire Year of 2009 With the implementation of effective policies and measures by governments worldwide, the global economy has finally stabilised and is tending to recover following a worsening shift during the first quarter, and the economic contraction in Europe and the United States has alleviated. In mainland China, the government’s energetic economic stimulus measures have boosted domestic demand and facilitated economic recovery, thus playing an important role in stabilising the Asian economy. Furthermore, numerous economies in Asia have picked up to different degrees. With the bottoming-out of the global economy and the fast-paced recovery of the mainland Chinese economy, the external aspects of Hong Kong’s economy are expected to improve further in the second half of 2009. Locally, consumption is expected to continue to benefit from slow job losses, low interest rates and the government’s numerous relief measures. Business sentiment remains cautious, however, even if this has improved slightly when compared to the beginning of the year. Private sector investment will continue to be restrained over the short term. However, public sector construction will continue to increase under the anti-cyclical strategy adopted by the government to offset the negative impact of weak investment in certain private sectors to ease the pressure from the global recession. As the economic rebound in the second quarter has been better than expected, the global economy is bottoming out and the government’s new round of relief measures issued in May will have a boosting effect, meaning that real GDP for the entire year of 2009 is estimated to shrink by 3.5–4.5 percent. The rebound in the second quarter is indicative of the vigorous flexibility of Hong Kong’s economy. Hong Kong has passed through the worst economic period, but its economic outlook still contains considerable uncertainties: the issue of the “toxic assets” of European and US financial institutions has yet to be completely resolved, negative factors between the financial markets and the real economy still exist, doubt persist as to the ability of the global stock markets to continue their uptrend after a sharp rise, and instability in economic operations still remains due to changes in capital flows. Hong Kong, a small and open economy, still requires a remarkable improvement in the external environment in order to ensure its continued, steady recovery. If

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the future pace of recovery of the global economy is unstable or slower than expected, this may also result in volatility in the asset markets. In addition, the unemployment rate is a lagging indicator: if the economy shows no signs of positive growth, the unemployment rate will still face upward pressure. However, large-scale infrastructure projects will gradually enter the construction phase over the coming year, and thus inject fresh energy into Hong Kong’s economic recovery, even if external demand remains sluggish. Local recovery efforts will need to depend on future employment and income conditions. To put it simply, volatility is still likely to occur as the recovery continues. In terms of price prospects, given the decline in import prices and local costs, underlying consumer price inflation (as a key indicator of the underlying inflation trend) may remain slightly negative over the next few months. This is however a global phenomenon, reflecting the inevitable adjustment process of cost price triggered by the global financial tsunami and the subsequent global recession. Taking into account the actual numbers so far in 2009, underlying consumer price inflation for the entire year of 2009 is forecast to reach 0.9 percent. If we incorporate the impact of the relief measures announced in May 2009, the overall CPI increase is forecast to be 0.5 percent. V. Promote Long-Term Development and Push Forward Six Advantageous Industries The Hong Kong SAR Government formulated a long-term economic development strategy as part of its 2009–2010 fiscal budget in order to provide a solid foundation for the next generation. Hong Kong needs to find a suitable position and role in China’s planning, as the former model, under which businesses strode ahead of government, has been unable to fully adapt to current circumstances. There is a need for participation in further, more complex planning, both for the regional economy as well as strategic positioning at the national level. The government’s role as a “forerunner” will become increasingly important. The SAR Government will become more spontaneous in terms of exploring economic opportunities, as well as more active in terms of promoting economic development. Hong Kong’s major strategies for sustainable economic development include:

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Regional Economy Further Strengthen Guangdong-Hong Kong-Macao Cooperation To cater to the Outline of Pearl River Delta Regional Plan on Reformation and Development《珠江三角洲地区改革发展规划纲要》(abbreviated to the Outline) released by the National Development and Reform Commission in January 2009, Guangdong and Hong Kong have agreed to prioritise four main areas of cooperation, i.e. the financial industry, service industry, infrastructure and urban planning, as well as innovation and technology in order to more effectively and rapidly promote the implementation and follow-up of the Outline. Meanwhile, Hong Kong will continue to enhance cooperation with the Mainland in infrastructure construction, accelerate research and push forward various major cross-boundary infrastructure projects including the Hong Kong-Zhuhai-Macao Bridge, Guangzhou-Shenzhen-Hong Kong Express Railway, Hong Kong-Shenzhen Airport Rail Link and the Liantang/Heung Yuen Wai port area. Hong Kong will strengthen cooperation with Macao in economic and other fields, and seek to combine the advantages of the two regions to create a win-win situation. “Three Links” and Communications with Taiwan Province The “three links” will provide greater freedom to cross-straits economic and trade exchanges, while Hong Kong will continue to occupy a strategic position in obtaining greater economic benefits from these. The SAR Government has established an inter-departmental steering committee to study and co-ordinate overall strategy and work planning for promoting Hong Kong’s economic and trade relations with Taiwan Province. Promoting Sustainable Economic Development The resilience and flexibility which Hong Kong has demonstrated in withstanding the global financial crisis demonstrate its sound economic fundamentals, high levels of adaptability as well as the competitive advantages that it retains—namely a sound structure, high-class talent base, solid business base and excellent location. Hong Kong will continue to strengthen these advantages and is committed to strengthening its four pillar industries—finance, logistics, tourism, business support and professional services—to promote overall economic development.

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Consolidating HK’s Financial Centre Status While global finance faces significant changes, Hong Kong must build on its existing strengths to improve the market efficiency, regulation and transparency of the financial industry, as well as improve its supervisory framework to enable greater financial cooperation with mainland China. Hong Kong will need to develop a pragmatic attitude and a far-sighted vision in order to proceed along a feasible long-term development road which will benefit both Hong Kong and China. Hong Kong must expand and deepen its financial cooperation with emerging markets so as to consolidate its status as an international financial centre. The SAR Government must take into account its own unique background and needs, global financial development trends, and the suggestions of international financial institutions (including the G20 and Financial Stability Forum) and review and implement improvement measures in a serious and pragmatic manner. In order to promote the bond market development, the SAR Government should gradually also issue government bonds in a relatively systematic manner based on market conditions and other factors, rather than merely providing the required financial infrastructure and appropriate preferential taxes. The government can issue a wide range of bonds to provide greater choice for investors, thus facilitating the promotion of the sustainable development of the local bond market. The SAR Government will also work with the financial industry to determine whether there is a need for further improvements to the existing financial infrastructure and mechanisms to promote the development of bond products. Furthermore, the signing of double taxation agreements with the world’s major economies will help to reduce the tax burden on businesses and individuals and eliminate tax uncertainties, and enhance Hong Kong’s status as an international business and financial centre. The SAR Government is preparing to make specific amendments during the current to meet those needs. The Tourist Economy In the face of the tough economic environment and competition from other regions, the SAR Government will adopt a more proactive approach to promoting the sustainable development of tourism in order to create more job opportunities for Hong Kong’s tertiary industry, including the retail, catering, and hotel industries. The SAR Government has also decided to finance the construction of a cruise terminal, which is expected to start within this year and will create over

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3,000 jobs over the next few years. The SAR Government has also reached an agreement with Walt Disney Company over the expansion of Disneyland Hong Kong. The Hong Kong Government has also launched the Hong Kong Wine and Dine Festival via the Hong Kong Tourism Board (HKTB), to be held this coming October, in order to generate cooperation with famous wine-producing regions to strengthen the promotion of Hong Kong as an Asian food and wine centre, thus attracting greater numbers of visitors to Hong Kong and stimulating consumption. In order to strengthen software and hardware development for event and exhibition tourism, the HKTB established “Meetings and Exhibitions Hong Kong” in November 2008, which is responsible for overseas publicity and the provision of onestop support services. In addition, the atrium link extension project of the Hong Kong Convention and Exhibition Centre was finished in the first half of 2009, enabling a 40 percent increase in dedicated exhibition area. Developing New Economic Sectors and Pushing Forward Six Advantageous Industries While consolidating the four pillar industries, Hong Kong must strive to establish new growth points and diversify its industries with greater sustainable growth and development capacity, and focus on a knowledge-based and high value-added strategic direction. The SAR Government is therefore actively boosting its efforts to promote long-term economic growth and development. Further efforts are being made to support the suggestions of the Task Force on Economic Challenges to adopt well-targeted policies and measures to assist the development of the following six knowledge-based industries, which have good potential and competitive advantages: A. Testing and Certification Hong Kong has a strict certification system, local testing and certification companies have a good reputation, and there is a huge mainland Chinese market, meaning that Hong Kong has sufficient capabilities to cope with competition from other international testing and certification brands.

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B. Medical Services Hong Kong offers high-quality medical personnel and equipment, high-level medical technology, and a strict regulatory regime for Chinese medicine, enabling it to attract residents from neighbouring areas to its medical services. The SAR Government will continue to provide land to promote the development of private hospitals and to encourage public and private medical institutions. C. Innovative Science and Technology Hong Kong has excellent software and hardware as well as a sound legal system, which are able to support applied research and development. Hong Kong is able to make use of the production advantages of the Pearl River Delta region and the vast mainland Chinese market to provide economies of scale for scientific payoffs. D. Cultural and Creative Industries Hong Kong is a meeting point of Eastern and Western cultures, and has a wealth of creative talent, as well as a sound intellectual property law to protect creativity; mainland China may also become a huge market for Hong Kong cultural creativity. Hong Kong has made achievements in fields such as design, film and digital entertainment. E. Environmental Protection Industry Hong Kong businesses have a wealth of experience in pollution prevention and control, and are good at commercialising environmental protection technologies. Mainland China has dedicated great energy to dealing with environmental pollution in recent years, thus providing numerous business opportunities for Hong Kong’s environmental protection technologies. F. Educational Services Hong Kong offers a suitable environment and an internationally recognised curriculum, and has made huge investments in higher education, with research funding and academic facilities now reaching international standards. Furthermore, strong demand from the mainland to pursue higher education in Hong Kong provides a wide scope for the development of education into an industry.

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Implementing the development program and investing in the future Pushing forward Public-Operated Construction One significant strategy of the SAR Government is to use capital construction to drive economic development. The major construction projects and other major projects to improve the overall competitiveness of Hong Kong that were proposed by the Chief Executive in his 2007 Policy Address have made good progress. The 2009–10 capital work expenditure budget will therefore reach as high as HKD 39.3 billion. Promoting Private Sector Development Government infrastructure projects cannot support all of the economic activities and employment opportunities of the construction industry. In order to achieve more effective coordination between the various government departments involved in development projects, the SAR Government this year set up a Development Opportunities Office in the Development Bureau to provide an effective platform for projects that are beneficial to Hong Kong’s development. In this way, the relevant bureaus and departments can perform joint studies and provide suggestions on the benefits of the proposed projects and provide a coordinated inquiry service. Assisting Community Infrastructure Construction The Development Opportunities Office will most likely provide onestop advisory and co-ordination services for certain community infrastructure projects. The government will also consider the provision of non-recurrent funding for certain projects, depending on their needs. VI. Medium-Term Economic Outlook of Hong Kong In response to the financial tsunami, the governments of all of the major economies implemented major, unprecedented policy changes. It remains to be seen whether these policies can bring about sustained global economic recovery. Even if the global economy is expected to recover during 2010, its initial pace of growth will be slow and low, meaning that Hong Kong’s economic growth will remain below the trend. However, as global economic growth returns to a more normal track, the Hong Kong economy is expected to recover fully. The

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accelerated construction of large-scale infrastructure projects will also increase the force driving the recovery process. Taking into account that growth in the early part of the medium term will be lower than the past trend growth, the average actual GDP growth rate from 2010 to 2013 is expected to be 3.5 percent annually. Domestic inflationary pressure is rapidly receding, and this trend will continue for some time. Although food and energy prices may still fluctuate from time to time when a sudden shock occurs to the supply, external price pressure will also be relieved during the current global economic downturn. Based on the above inference, underlying Composite CPI growth should be relatively moderate over the medium term, and is expected to reach 2 percent annually. As the global financial crisis dissipates, Hong Kong’s medium and long-term economic prospects remain positive. The government and the private sector will continue to intensify their efforts to make Hong Kong a knowledge-based economy with high value-added activities and strengthen Hong Kong as an international financial centre and major commercial hub, as well as further strengthen its integration with mainland China, particularly its strategic positioning in the Pearl River Delta so as to enhance its economic competitiveness. Furthermore, factors including a further expansion of CEPA, the central government’s support measures, strengthening cooperation with Guangdong and Macao and pushing forward the development of the six advantageous industries will create plenty of growth opportunities for Hong Kong and enable it to develop in a sound, sustainable manner. Other than the timing and strength of the recovery of the global economy, the following challenges in the external environment still remain for medium-term development. The financial tsunami will trigger the reform of global financial architecture, and Hong Kong must adjust and adapt quickly. Adjustments caused by global trade imbalances have already begun, making the global economic recovery process more complex and changeable. The US government implemented unprecedented policies to deal with the financial tsunami, and this is likely to bring about a number of uncertain factors in the future of the dollar, resulting in higher levels of volatility on the financial and foreign exchange markets. In addition, the political impact caused by the continued deterioration of unemployment in the world’s advanced economies due to the economic downturn cannot be ignored because trade protectionism in the United States and the EU against the Mainland may increase, resulting in increased risk in Hong Kong

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trade. Locally, Hong Kong’s transformation of its economic structure towards high-added value and knowledge-based activities will lead to greater uncertainty in income and wealth distribution. In addition, in the medium and long terms, the aging of the population will have a significant impact on Hong Kong’s medical and social welfare systems and public finances. Taking these possible challenges into account, it is very important that a prudent fiscal policy be pursued. After experiencing the challenges of the financial tsunami, Hong Kongers better understand the importance of enhancing competitiveness. In order to ensure sustained economic growth, medium and long-term planning with a broad vision is required for Hong Kong’s economy. Apart from further consolidating the existing four pillar industries, the six advantageous and promising industries must be developed to make Hong Kong into a comprehensive knowledgebased economy. Hong Kong’s economic system performed better in resisting the impact of the current financial tsunami compared to the Asian financial crisis, companies were more adaptable and the labour market responded more rapidly, reflecting the more consolidated foundations of the Hong Kong economy. With the indomitable spirit of the Hong Kong people and the community working together, the territory’s economy will be able to escape the plight of the financial crisis, and continue to move forward with greater strength to create a brighter future.

ANALYSIS AND FORECAST OF MACAO’S ECONOMIC SITUATION “Macao Economy Analysis and Forecast” Research Group, Huaqiao University1 2009 will mark the tenth anniversary of Macao’s return to China and the establishment of the Macao Special Administrative Region. Since this reunification, Macao has witnessed a steady increase in economic strength and effective improvement of popular living standards through the implementation of principles including “one country, two systems”, “Macao people governing Macao” and “high degree of autonomy”. Macao’s average annual economic growth rate over the past nine years reached double-digit figures, and Macao’s Gross Domestic Product (GDP) totalled MOP 171.8 billion in 2008, with real growth of 13.2 percent. Macao’s total public finances revenue exceeded MOP 51 billion in 2008, tripling the 1999 revenue of MOP 16.9 billion. Macao’s total foreign currency reserves have increased from MOP 22.9 billion in 1999 to more than MOP 137 billion at present. Macao residents’ median monthly employment earnings have increased to the current figure of MOP 8,600, approximately 1.8 times the 1999 figure; Macao’s residents’ total deposits have increased to over MOP 192 billion, 2.2 times the 1999 figure; Macao’s Human Development Index has risen from 0.867 in 1999 to 0.943 in 2006 and Macao’s Gini coefficient has decreased from 0.43 in 1999 to 0.37 in 2008. The Blue Book on Urban Competitiveness《城市竞争力蓝皮书》published in 2009 compared the overall competitiveness of 294 cities at the prefecture level or above and found that Macao ranked sixth for economic efficiency competitiveness, ninth for industry-level competitiveness, and third for quality of life competitiveness. A comparison of the competitiveness of 51 key cities on 12 sub-items found that Macao ranked sixth for talent competitiveness, ninth for capital competitiveness, ninth for structural competitiveness, eighth for infrastructure

Project Leader: Wu Chengye; Participating Units: Institute of Quantitative Economics, Huaqiao University; Macao Development Strategy Research Centre. 1

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competitiveness, ninth for integrated location competitiveness, tenth for institutional competitiveness and fourth for government management competitiveness. In “Ranking List of Chinese Cities by Classification Advantage, 2009”, Macao ranked ninth in the Top Ten Provinces and Regions of China on Overall Competitiveness; it also ranked third in China’s International Cities List for the second consecutive year. Macao was listed for the first time in the 2009 Global Index of Economic Freedom, ranking 21st among 179 economies worldwide and 6th in the Asia-Pacific region; it is rated as “relatively free”, reflecting Macao’s active efforts to attract foreign investment, closer communication with the outside world and increasingly transparency. Supplementary Agreement V of the Closer Economic Partnership Agreement between the Mainland and Macao《补充协议五》(CEPA Supplementary Agreement V for short), signed on July 30, 2008, was put into implementation on January 1, 2009, providing more open measures governing medical treatment and distribution, etc. CEPA Supplementary Agreement VI《补充协议六》was signed on May 11, 2009, qualifying a further 475 Macao commodities under the CEPA for zero duty as of July 1, and further relaxing market access conditions in the tourism, banking, securities, conference and exhibition, law, creative industries, and research and development sectors, facilitating the promotion of appropriate diversification as part of Macao’s economic development. I. Macao’s Overall Economic Situation Macao’s GDP growth declined on a quarterly basis in 2008, recording 32 percent, 22 percent, 10 percent in the first, second and third quarters respectively; in the fourth quarter in particular, economic growth turned negative, registering –7.6 percent in real terms due to a decline in gambling service exports, investment and exports of goods, also marking the first quarterly negative growth in almost five years. The global financial tsunami broke out in 2008 and triggered a decline in the real economy in the second half. The impact of the financial crisis and the reduction in the number of individual visitors from the Mainland to Macao emerged, the growth in gambling tourism begun to slow down and overall investment continued to fall, resulting in a marked economic contraction. Macao’s economy grew by –12.8 percent in real terms in the first half of 2009. The negative growth of the

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third quarter is expected to narrow, and the expectation to strive for an annual single-digit negative growth rate remains unchanged. A. The Macao Economy Experienced Negative Growth in the First Half of 2009 Affected by the financial tsunami, Macao’s GDP continued its negative growth of the fourth quarter of 2008 into the first quarter of 2009, reaching MOP 32.085 billion, a year-on-year drop of 11.9 percent. Negative growth over two consecutive months declared that the Macao economy had entered recession. This was the first time that Macao had seen a double-digit decline in quarterly GDP growth since its return to China in 1999. GDP grew by –13.7 percent in real terms in the second quarter, widening the decline of the first quarter and also marking the sharpest decline since quarterly GDP was included in statistics. Macao’s economic growth was –12.8 percent in real terms in the first half of 2009. Private consumption expenditure increased by 3.4 percent in the first quarter of 2009, lower than the 9.4 percent figure in the fourth quarter of 2008. Personal final consumption expenditure in the Macao market rose by 1.8 percent, while consumption expenditure in other markets rose by 4.4 percent, with consumption of MOP 766 million in mainland China. Personal consumption expenditure rose by 0.7 percent in the second quarter, lower than the 5.8 percent figure in the first quarter. Personal final consumption expenditure in the local market decreased by 0.8 percent, while consumption expenditure in other markets rose by 5.3 percent, with total consumption of MOP 763 million in mainland China. The Macao SAR government’s final consumption expenditure increased by 7.1 percent in the first quarter, reversing the downtrend of the third and fourth quarters of 2008, of which, employee compensation and the net purchased worth of goods and services rose by 5.5 percent and 22.4 percent respectively. The Macao SAR government’s final consumption expenditure increased by 6.2 percent in the second quarter, lower than the figure of 15.8 percent for the first quarter; of this, employee compensation and the net purchased worth of goods and services rose by 3.0 percent and 15.8 percent respectively. Gross fixed capital formation reduced by 32.1 percent in the first quarter as a number of large-scale construction projects were suspended or slowed down, and then reduced by 27.4 percent in the second quarter, a slightly smaller decline. Private investment declined

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by 30.6 percent as a number of large-scale construction projects were suspended or slowed down, of which investment in construction and equipment decreased by 32.7 percent and 23.2 percent respectively. Government investment increased by 163.5 percent with construction investment rising sharply by 286.9 percent and equipment investment decreasing by 23.1 percent. A combination of private and public sector data shows that overall construction investment decreased by 28.7 percent in the second quarter, a lower reduction than the first quarter; overall equipment investment decreased by 22.6 percent, narrowing slightly over the first quarter. In terms of visible trade, total exports of goods declined further from 49.2 percent in nominal terms in the first quarter to 58.3 percent in the second quarter, and the decline in real terms expanded to 58.3 percent. In terms of export markets, Macao’s exports to the United States, the European Union, mainland China and Hong Kong fell by 84.1 percent, 57.1 percent, 48.2 percent and 9.4 percent respectively in nominal terms. Its imports of goods also declined substantially, with a nominal decline of 24.4 percent, larger than the decline in the first quarter; its real decline was 22.4 percent, the same as the figure for the first quarter. In terms of invisible trade (exports of services), exports of gambling services fell by 12.7 percent, and overall consumption by visitors also fell by 20.6 percent as the number of visitors and visitors’ per-capita consumption decreased by 13.1 percent and 5.3 percent respectively. In order to integrate major service exports, overall invisible trade exports fell by 14.6 percent, the same as for the first quarter; while the decline of service imports expanded slightly from 21.5 percent in the first quarter to 22.9 percent in the second quarter. B. Fiscal Revenue Fell The Macao SAR Government’s fiscal surplus was MOP 25.133 billion in 2008; its public revenues in the first half of 2009 totalled MOP 25.5254 billion, a year-on-year drop of 0.3 percent, exceeding 62 percent of the annual budget. From January to June, the SAR Government’s current account revenues totalled MOP 22.0502 billion, down 13 percent over the same period of 2008. Of this, gambling tax revenue in the first half was MOP 18.5135 billion, down 10.3 percent year-on-year. Affected by the financial tsunami, the H1N1 virus and other factors, passenger traffic continued to fall, and consumer senti-

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ment remained weak. In the first half of 2009, indirect tax revenue was MOP 590.8 million, down 44 percent; estate revenue was MOP 613.2 million, down 49.1 percent. As the land premiums for hotels or casinos approved by the SAR Government have basically been recovered, and market conditions remained unfavourable, investment slowed. Other current account revenue fell by 8.2 percent, to MOP 1.6392 billion. Revenue from “other direct taxes” however rose by 6.8 percent, to total MOP 693.6 million. In terms of expenditure, the SAR Government’s total expenditure in the first half of 2009 was MOP 13.2361 billion, a substantial increase of 46.7 percent over the same period of 2008. The SAR Government began to spend large sums of public funds on public works in order to honour its administration commitments. Due to the decrease in public fiscal revenue, the balance was MOP 12.2892 billion in the first half of 2009, a year-on-year drop of 25.9 percent. C. Gambling Revenue Recovered Relatively Rapidly The gross revenue of the gambling industry reached MOP 109.83 billion (USD 13.73 billion) in 2008. Macao’s gambling revenue in the first quarter of 2009 was MOP 26.052 billion (USD 3.256 billion), a year-on-year drop of 12.7 percent and a month-to-month rise of 7.7 percent. Gambling revenue in the second quarter totalled MOP 25.619 billion, a quarter-to-quarter drop of MOP 633 million, indicating a narrowing decline. Gross revenue from gambling items was MOP 51.871 billion in the first half of 2009, a year-on-year drop of MOP 7.393 billion. The gambling industry therefore remains the main force supporting Macao’s fiscal revenue. D. The Unemployment Rate Remained Stable Overall Macao’s overall unemployment rate was 3 percent in 2008, down 0.1 percent over 2007; the local annual unemployment rate was 3.6 percent. The unemployment rate from January to March of 2009 was 3.8 percent, a year-on-year rise of 0.9 percent. The current labour population is 333,000, of which 320,000 comprise the working population and 13,000 the unemployed population, an increase of 800 persons over the previous period (December 2008 to February 2009). By industry, the construction and retail trade industries saw substantial increases in unemployment. If non-local employees are excluded from these

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statistics, the local unemployment rate was 4.8 percent, a rise of 0.8 percent over the fourth quarter of 2008. From April to June 2009, Macao’s unemployment rate was 3.6 percent, and its underemployment rate was 1.8 percent, a slight rise of 0.1 percent over the previous period (March–May). The current labour population is 333,000 including a working population of 321,000 and an unemployed population of approximately 12,000. By industry, employment in the construction and gambling industries decreased compared to the previous period, but employment in the hotel and restaurant industry increased. Compared with the same period of 2008, the unemployment rate and the underemployment rate for April to June 2009 rose by 0.8 percent and 0.2 percent separately, whereas the labour force participation rate fell by 0.2 percent. The local unemployment rate was 4.5 percent, a drop of 0.3 percent over the first quarter. As the financial tsunami affected Macao in a relatively gentle manner, the industry most affected was the gambling industry, but after salary cuts were implemented in gambling enterprises through communication and negotiation, this did not impose any significant impact on the employment market. The overall unemployment rate is expected to maintain a rate of approximately 3.5 percent in 2009. E. The Number of Tourists Fell but Tourist Prices Continued to Rise A good many large comprehensive hotels have been established in Macao in recent years, and these attract high numbers of international tourists. Macao’s tourist trade grew steadily over all of 2008, although growth slowed down in the second half due to the impact of a good number of factors. There were a total of 30.18 million visitors and non-resident arrivals to Macao in 2008, of which there approximately 22.90 million were visitor arrivals, with per capital consumption of MOP 1,729, up 6 percent over 2007. Tourism in 2008 became increasingly diversified, with international tourists accounting for over 10 percent of the total, a relatively rapid growth. There were a total of 10.37 million visitor arrivals to Macao in the first half of 2009, a yearon-year drop of 11.4 percent. Affected by the extended duration of the H1N1 viral epidemic, there were a total of 1.45 million visitor arrivals to Macao in June 2009, a year-on-year drop of 16 percent. These included 680,000 visitor arrivals from mainland China, a year-on-year drop of 20 percent; there were 230,000 individual visitor arrivals from the mainland, a sharp drop of 50 percent.

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Macao’s Tourist Price Index (TPI) was 147.91 in the first quarter of 2009, a slight rise of 1.45 percent year-on-year. The broad categories which registered notable rises were clothing & footwear, food, alcohol and tobacco, and restaurant services, recording 12.11 percent, 9.71 percent and 7.55 percent respectively. This was mainly reflected in the rise in prices of men’s and women’s apparel, and alcohol, as well as the general rise in restaurant service charges, but the accommodation price index decreased by 5.95 percent year-on-year. Macao tourism has for a long time no longer been in the “moderate price” range, and now pursues advantages in terms of service instead of pricing. The TPI was 146.09 in the second quarter of 2009, a year-on-year rise of 1.77 percent; the broad categories which recorded notable rises were restaurant services and food, alcohol and tobacco with 6.29 percent and 6.10 percent respectively due to an upward revision in restaurant service charges and food prices. On the other hand, a reduction in hotel room prices resulted in a year-on-year drop of 4.75 percent in the accommodation price index. The TPI in the second quarter of 2009 fell by 1.23 percent over the first quarter, with a particularly sharp decline in accommodation, clothing and footwear price indices, dropping by 14.95 percent and 5.72 percent respectively. On the other hand, the price indices of miscellaneous goods and leisure activities in Macao rose by 2.39 percent and 1.94 percent respectively. The TPI in the first half of 2009 rose by 1.61 percent year-on-year. In the second quarter of 2009, the average TPI over the latest four quarters rose 5.33 percent year-on-year. F. The Composite Consumer Price Index (Composite CPI) Rose Significantly Macao’s inflation rate was 8.61 percent in 2008, an increase of 3.04 percentage points over the figure of 5.57 percent for 2007. Macao’s Composite CPI in the first quarter of 2009 rose by 3.3 percent over the same period of the preceding year. In the 12 months as of March, Macao’s Composite CPI rose by 7.11 percent year-on-year. The composite CPI in the second quarter of 2009 rose by 1.79 percent yearon-year, and the price indices of clothing and footwear, alcohol and tobacco, food and non-alcoholic beverages rose more significantly, by 10.75 percent, 9.76 percent and 6.11 percent respectively. In the first half of 2009, Macao’s Composite CPI rose by 2.53 percent over the same period of 2008; the Composite CPI over the 12 months as of June rose by 5.31 percent year-on-year.

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G. Retail Trade Increased As a Whole Macao’s retail sale revenue was MOP 18.99 billion in 2008, a substantial rise of 34 percent over 2007. Sales of watches, clocks & jewellery, and goods in department stores increased more significantly, by 65 percent and 45 percent respectively. Retail sales totalled MOP 4.97 billion in the first quarter of 2009, a quarter-on-quarter drop of 2 percent and a year-on-year rise of 9 percent. The most significant increases in retail items occurred to goods in department stores, watches, clocks & jewellery, and adult clothing; sales of motor vehicles, vehicle fuel and fuels for household use fell by 35 percent, 28 percent and 26 percent respectively. Retail sales totalled MOP 5.13 billion in the second quarter of 2009, a rise of 11 percent over the figure of MOP 4.63 billion for the second quarter of 2008; the retail items which recorded the most notable rises remained goods in department stores, watches, clocks & jewellery, up 34 percent and 22 percent respectively; sales of automotive fuel, motor vehicles and fuels for household use fell by 24 percent, 19 percent and 18 percent respectively. Retail sales in the second quarter rose by 3 percent over the first quarter, and retail sales for the first half of 2009 totalled MOP 10.1 billion, a year-on-year rise of 10 percent. H. The MICE (Meetings, Incentives, Conventions & Exhibitions) Industry Developed Nicely A total of 41 commercial and trade exhibitions were held in Macao in 2008, with an increase in exhibition area of 69 percent over 2007, a historical best. Macao became one of Asia’s three fastest developing regions in the convention and exhibition sector. In 2006 and 2007, Macao hosted less than 30 commercial and trade exhibitions. Now, it hosts approximately 200 international conferences annually. The Macao SAR Government allocated almost MOP 100 million to the MICE industry in 2009, higher than the financial support of other Asian regions. Macao’s Statistics and Census Service released MICE data for the first time in 2009. A total of 387 seminars, conferences and exhibitions held in Macao in the first quarter of 2009, including 17 exhibitions and 370 seminars and conferences with a total of 154,034 participants and visitors and an average duration of 2.2 days. Each exhibition ran for an average of 4.2 days and attracted 116,218 participants and visitors; each seminar ran for an average of 2.1 days

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and attracted 37,816 participants and visitors. In terms of MICE event themes, the top three were Commerce, Trade & Management (113), Education & Training (62), and Information Technology (48). Divided by type, the top three were Corporate Seminars (183), Association Seminars (96) and Government Seminars (42). In the second quarter of 2009, there were 347 MICE events, including 19 exhibitions and 328 seminars and conferences, with a total of 57,423 participants and visitors, a drop of 63 percent over the previous quarter. The average duration fell to 1.8 days. The average exhibition duration was 3.4 days and there were a total of 25,376 participants and visitors; the average seminar and conference duration was 1.8 days and there were a total of 32,047 participants and visitors. In terms of MICE event themes, 105 focused on Commerce, Trade & Management, 60 on Tourism & Culture, and 52 on Education & Training. Divided by type, these focused on Corporate Seminars (131), Association Seminars (94) and Government Seminars (47). In the first half of 2009, Macao held 730 MICE events, with a total of 211,287 participants and visitors, and an average duration of 2.0 days. I. Real Estate Transactions Picked Up Quarter by Quarter Macao continued to see sluggish real estate transactions in the first quarter of 2009, with 1,664 entities paying stamp duty on property transfers and total turnover of MOP 2.13 billion, a drop of 16.9 percent and 20.5 percent over the fourth quarter of 2008 respectively; of this, new buildings accounted for 28.0 percent (466 buildings) with a total amount of MOP 930 million, a drop of 37.8 percent and 39.2 percent over the fourth quarter of 2008 respectively. Real estate transactions in the second quarter increased in comparison with the first quarter, with a total of 3,713 units paying stamp duty on property transfers and a total turnover of MOP 4.57 billion, a significant 1.2–fold increase over the first quarter. This included 1,103 new buildings (29.7 percent of the total ) with a total turnover of MOP 2.49 billion, 1.4–fold and 1.7–fold increases over the previous quarter respectively. The average transaction price per square meter of usable building area was MOP 17,112 in the first quarter of 2009, down 5.3 percent over the previous quarter. The average transaction price in Macao Peninsula was MOP 14,436 per square meter, down 7.0 percent; Taipa housing prices in the first quarter were similar to those in the fourth quarter of 2008, at MOP 24,871 per square meter. The average

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transaction price of residential units for intermediate transfer of title was MOP 29,123 per square meter, down 1.3 percent over the previous quarter. The average transaction prices of office building and industrial units were MOP 22,228 and MOP 6,421 per square meter respectively, up 16.8 percent and 21.5 percent respectively. The average transaction price of residential units was MOP 18,928 per square meter in the second quarter of 2009, up 10.6 percent over the previous quarter; the average transaction price in the Macao Peninsula was MOP 17,794 per square meter, down 23.3 percent; the transaction price for residential units in Taipa was MOP 22,366 per square meter, down 10.0 percent. The average transaction price of residential units for intermediate transfer of title was MOP 31,184 per square meter, down 7.1 percent over the previous quarter. The average transaction prices of office building and industrial units were MOP 19,556 and MOP 5,815 per square meter respectively, up 12.0 percent and 9.4 percent respectively. J. Trade and Investment Fell Sharply From January to June 2009, trade between the Mainland and Macao totalled USD 990 million, down 29.1 percent year-on-year. Of this, Mainland exports to Macao amounted to USD 780 million, down 38.1 percent year-on-year; the Mainland’s imports from Macao amounted to USD 210 million, up 51.9 percent year-on-year. From January to June 2009, the Mainland approved a total of 142 Macao-invested projects, a year-on-year drop of 35.2 percent, and actually used Macao capital of USD 310 million, a year-on-year drop of 6.1 percent. As of end-June 2009, the Mainland had approved 12130 Macao-invested projects and actually used Macao capital of USD 8.54 billion. From January to June 2009, the Mainland signed 3,391 contracting project and labour service cooperation agreements with a total contracted value of USD 230 million and completed turnover of USD 460 million; by the end of June, Macao had a population of 53,278 Mainland labourers. As of end-June 2009, the Mainland had achieved turnover of USD 9.56 billion in Macao.

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II. Macao Demonstrated Noticeable Evidence of Economic Recovery in the Second Half of 2009 and Expectations of Single-Digit Negative Economic Growth for the Entire Year Remain Unchanged A. The External Economy Declined As a Whole in 2009 and Is Expected to Grow in 2010 In its World Economic Outlook published on October 1, 2009, the IMF forecasted that the global economy would grow by 3.1 percent in 2010 after shrinking by 1.1 percent in 2009. Of the major advanced economies, the US economy was expected to expand by 1.5 percent in 2010 after a shrinkage of 2.7 percent in 2009; the Eurozone economy was expected to grow by 0.3 percent in 2010 after a shrinkage of 4.2 percent in 2009; the UK economy was expected to shrink by 4.4 percent in 2009 and grow by 0.9 percent in 2010; Japan’s economy was expected to decline 5.4 percent in 2009 and grow by 1.7 percent in 2010. Of the major emerging economies, China’s economy was expected to grow by 8.5 percent and 9.0 percent in 2009 and 2010 respectively; India’s economy was expected to grow by 5.4 percent and 6.4 percent in 2009 and 2010 respectively; the Russian economy was expected to grow by 1.5 percent in 2010 after a shrinkage of 7.5 percent in 2009; and Brazil’s economy was expected to decline 0.7 percent in 2009 and grow by 3.5 percent in 2010. B. Macao’s Economy Showed Evidence of a Pickup in the Second Half of 2009 Macao’s gambling revenue was MOP 9.5 billion in July, up 3.1 percent year-on-year, reversing its previous downtrend. On the one hand, the City of Dreams succeeded in developing guest sources for both VIP facilities and the mass market, and achieve market share via appropriate marketing strategies, and this contributed substantially to gambling revenue. On the other hand, the opening of new casinos has aggravated competition in the gambling sector; gambling business therefore rolled out a wide range of preferential measures and marketing strategies in order to attract visitors, which directly drove up gambling revenue. Gross income from the gambling industry in Macao exceeded MOP 11.2 billion in August, a year-on-year increase of 15.28 percent; it exceeded MOP 10.8 billion in September, a year-on-year increase of 52.4 percent. The Mainland relaxed restrictions on individual visits to

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Macao by Guangdong residents in September 2009, replacing its “one visa every two months” policy with “one visa every one month”. This will encourage increased numbers of Mainland tourists to visit Macao and drive up the region’s housing prices and associated industries, thus promoting a pickup in its economy. Goldman Sachs released a research report revising its previous estimates for Macao gambling revenue growth for 2009 from –5 percent upward to –2 percent, and it issued a new figure of 10 percent for 2010. There was a total of 2,329,381 visitor and non-resident arrivals to Macao in July, of which 1,755,103 were visitor arrivals, down 14.9 percent year-on-year; there was a total of 2,621,326 visitor and nonresident arrivals to Macao in August, of which 2,065,336 were visitor arrivals, down 6.4 percent year-on-year. The relaxed “individual visit scheme” policy formally implemented in September will promote a further recovery in the number of visitors. In the meanwhile, the TPI for the third quarter rose by 2.76 percent year-on-year, and by 1.08 percent over the second quarter, continuing the uptrend. The pickup in gambling tourism will be certain to drive up associated industries in Macao during the second half of the year. Francis Tam Pak Yuen, Macao’s Secretariat for Economy and Finance, estimates that “the negative growth amplitude will narrow in the third quarter and expectations of striving toward single-digit negative growth for the entire year remains unchanged.” C. The “Moderate Diversification” of Macao’s Economy Brings New Opportunities The year 2009 is a crucial year for Macao, as it marks the tenth anniversary of the foundation of the Macao Special Administrative Region, and the year in which elections will be held for the third chief executive and the fourth Legislative Assembly of Macao. The State Council formally promulgated the Outline for the Pearl River Delta Regional Reform and Development Plan《珠江三角洲地区改革发展规划 纲要》in early 2009, which plans to develop the Pearl River Delta region into one of the world’s most competitive metropolitan areas by 2020, covering Guangdong, Hong Kong and Macao through an appropriate division of labour and complementation of advantages, and makes clear the position of Macao as a global tourism and leisure hub. On August 14, 2009, the State Council approved the Hengqin Overall Development Plan《横琴总体发展规划》, raising the development of the Hengqin area to the national strategic level and making

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it the third national-level New Area approved by the State Council in the wake of Shanghai’s Pudong and Tianjin’s Binhai New Areas. This new planning highlights the provision of support for Macao’s expansion of its development space and the diversification of its economy in an appropriate manner. The development of Hengqin will drive the appropriate diversification of the Macao economy. Firstly, a new campus of the University of Macao will be established in Hengqin; the Hong Kong-Zhuhai-Macao Bridge will break ground at the end of 2009 and complete construction within five years, and the Pearl River Delta Urban Rail Transit will gradually be put in place, enabling millions of people in the region to achieve large-scale rapid movement. The proper connection of the Pearl River Delta transport network and capital construction will bring great changes to Macao.

ANALYSIS OF GLOBAL ECONOMIC SITUATION IN 2009 AND OUTLOOK FOR 2010 Zhang Yuyan and Tian Feng 2009 is destined to be a crucial year in global history. During the year, the global economy recorded its first negative growth since 1960, and the rate of decline is likely to exceed 1 percent. Fortunately, the US subprime mortgage crisis and financial crisis which triggered the global recession have so far largely been brought under control. The global economy has also begun to show a variety of signs of recovery in the second half of 2009. As many uncertainties still remain, it is still too early to assert that the global economy has fully recovered from the recession in 2009, and the fulfilment of a series of conditions is also required for a strong global recovery to occur in 2010. This article will focus on global growth, employment, trade, investment, finance, oil and other primary products in order to not only determine the overall global economic situation in 2009 as well as an overall outlook for 2010 in the conclusion. I. Economic Growth The global recession has the following seven characteristics: A. The global economy has registered negative growth for the first time in almost half a century. According to the recent World Economic Outlook released in October by the International Monetary Fund (IMF), global economic growth is projected to reach –1.1 percent, with advanced economies registering –3.4 percent and developing economies 1.7 percent. This is almost entirely consistent with the estimates of US non-governmental organisation Peterson Institute for International Economics (IIE) for 2009 (see Table 23.1). Even in the relatively serious economic recession which occurred in the early 1980s, the global economy maintained positive growth of almost 1 percent. This is enough to demonstrate the enormous destructive power of the current crisis.

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B. The advanced economies, and Japan and Europe in particular, have been severely affected. Japan and the Eurozone’s economies are expected to shrink this year by 5.4 percent and 4.2 percent respectively. C. The source of the crisis, the USA, did not perform worst with an economic growth rate of –2.7 percent. D. Of the developing economies, China and India performed outstandingly, with expected growth exceeding 8 percent and 5 percent respectively, while Brazil and Russia generally performed poorly. E. Developing economies with close relations with advanced economies, both geographically and institutionally, such as Mexico and the central and eastern European countries, have been more severely affected by the financial crisis than on average for developing economies. F. The Middle East and Africa have seen a certain decline in economic growth due to the outbreak of the financial crisis, but these have not been severely affected, which is related to the relatively low overall openness of their economies and the stabilisation of petroleum prices following sharp fluctuations. G. The growth rates of developing economies and advanced economies are in synchronism, but the amplitudes of change differ widely. This trend, which began at the start of this century, has continued during the current crisis. The US economy, after experiencing a sharp decline over two consecutive quarters, saw a reduced decline of 1 percent in the second quarter of 2009. Compared with the negative growth of 6.4 percent in the first quarter, the improvement in US economic growth in the second quarter can be attributed to a slowdown in the decline in private investment, and an increase in government expenditure. Gross private investment (including inventories) in the second quarter declined by 24.4 percent, a quarter-to-quarter shrinkage of 26.1 percentage points, and its impact on economic growth improved from –8.98 percent to –3.2 percent accordingly. Government expenditure over the same period increased by 6.4 percent, and its contribution to GDP improved from –0.52 percent in the first quarter to 1.27 percent in the second quarter. On the other hand, net exports dragged down economic growth by 1.6 percent, a quarter-to-quarter drop of nearly one percentage point, as the increase in imports impaired the contribution of the improvement in exports to economic growth. In addition, the cut-back in spending by US consumers on durables and

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Forecast Global GDP Growth Rates in Real Terms, 2009–2010 (%)

Country/Region

2008

IMF 2009

IMF 2010

IIE 2009

IIE 2010

World Advanced economies United States Japan United Kingdom Canada Eurozone Developing economies Asia China India Brazil Mexico Central and eastern Europe CIS Middle East Africa

3.0 0.6 0.4 –0.7 0.7 0.4 0.7 6.0 7.6 9.0 7.3 5.1 1.3 3.0 5.5 5.4 5.2

–1.1 –3.4 –2.7 –5.4 –4.4 –2.5 –4.2 1.7 6.2 8.5 5.4 –0.7 –7.3 –5.0 –6.7 2.0 1.7

3.1 1.3 1.5 1.7 0.9 2.1 0.3 5.1 7.3 9.0 6.4 3.5 3.3 1.8 2.1 4.2 4.0

–1.1 –3.3 –2.4 –5.2 –4.0 –2.0 –3.7 1.9 6.0 8.3 6.4 nil –5.8 –3.5 –4.8 2.0 2.0

4.2 3.3 4.0 2.5 2.5 3.4 2.3 5.4 7.8 9.0 7.5 3.6 3.0 2.6 2.6 4.0 4.0

Sources: IMF, World Economic Outlook: Update, October 2009; Michael Mussa, Global Economic Prospects as of September 2009: Onward to Global Recovery, September 17, 2009, Peter G. Peterson Institute for International Economics.

non-durable goods had a consumption expenditure affect on GDP of –0.69 percent. The Eurozone economy followed almost the same track as the United States, but its tone seems to be gloomier. By the second quarter of 2009, the Eurozone had recorded negative quarter-to-quarter economic growth for five quarters, and its quarter-to-quarter GDP growth continued to decline by 4.7 percent year-on-year. Investment volatility is the most reliable indicator reflecting economic cycle and economic vitality within the Eurozone. Like the United States, the Eurozone also saw positive changes in investment, i.e. a reduced decline in fixed asset investment and a rise in inventory investment in the second quarter of 2009, but the extremely low capacity utilisation will remain a constraint for investment growth in the Eurozone. In contrast to the United States, the Eurozone achieved net exports of EUR 19.4 billion in the second quarter of 2009, an increase of EUR 11 billion over the first quarter, thus reversing the shrinking trend of net exports since the third quarter of 2007. The Eurozone also saw

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an improvement in year-on-year private consumption, from –1.4 percent in the first quarter to –0.8 percent in the second quarter of 2009. The key issues impeding economic recovery in the Eurozone include a high unemployment rate and uncertain macro-economic conditions. Member governments’ fiscal stimulus schemes have effectively curbed the Eurozone’s rapid economic decline, but the prevailing financial difficulties and the constraints on budget deficits caused by the Union Treaty mean that it is difficult to count on further stimulus policies. Similar to the Eurozone, Japan experienced negative growth over the four consecutive quarters preceding the second quarter of 2009, but in contrast to the Eurozone, the Japanese economy rebounded in the second quarter with quarter-to-quarter growth of 0.9 percent, attributable to an increase in exports and domestic private consumption. Export is always one of the main factors driving Japanese economic growth. In this rebound, net exports contributed 1.6 percentage points, with export growth and a decline in imports contributing 0.8 percentage points separately. Japan’s domestic private consumption growth turned positive, contributing 0.5 percentage points to economic growth. In addition, capital formation has improved but continues to extend the negative growth trend which started with the recession, contributing –1.1 percentage points in the second quarter. The world economic recovery, Japan’s proactive adjustment of its export destinations (primarily intensifying its exports to Asia) and relatively strong economic growth in Asia will provide support for Japan’s economic recovery. The outlook for Japan’s economy still does not look optimistic, however, due to the serious decline in domestic investment in mechanical equipment, worsening employment and increasingly fierce economic competition in Asia. Furthermore, the global economic recovery has yet to gain a solid foothold, and global financial capital markets are likely to fluctuate; all of these factors will increase uncertainties in Japan’s economic growth. China’s economic performance remains dazzling: not only has the country maintained a relatively high economic growth rate, but its economic recovery trend is also increasingly strong. China’s GDP grew by 6.1 percent and 7.1 percent in the first and second quarters of 2009 respectively. Investment provided the greatest contribution to economic growth, by 6.2 percent, while consumption contributed to GDP growth by 3.8 percent, and net exports by –2.9 percent. By the second half of the year, China began to record improved economic growth. From January to August, urban fixed asset investments

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amounted to RMB 11.2985 trillion, a year-on-year increase of 33.0 percent, and total retail sales of social consumer goods amounted to RMB 7.8763 trillion, a year-on-year increase of 15.1 percent. Both figures are 0.1 percentage points higher than that for the January–July period. In September, the value of exports rose substantially by 11.8 percent month-on-month, and declined by 15.2 percent year-on-year, an improvement over the year-on-year drop of 23 percent in August. It is a foregone conclusion that China will achieve GDP growth of more than 8 percent for 2009 as a whole. But how can economic restructuring be achieved while sustaining economic growth? This remains a basic issue that has to be resolved in order for the Chinese economy to achieve sustainable growth. II. Unemployment Rates Unemployment is a prominent issue that must be resolved in order for the world economy to emerge from the current crisis and resume growth. A review of a range of indices for the major economies including the United States, the European Union and Japan for the first two quarters of 2009 shows that their economies have bottomed out with different degrees of performance achieved in consumption, investment, government expenditure and net exports, but their policymakers still face a common issue, i.e. the rising unemployment rate. The US unemployment rate was 9.8 percent in September, a record high for the past 26 years, with an unemployment population for that month of 263,000. The United States has shed 7.40 million jobs since its economy started to decline in December 2007. The Eurozone’s unemployment rate reached 9.5 percent in July, a record high since the foundation of the Eurozone. The unemployed population has so far increased to 14.745 million. Japan’s unemployment rate was 5.5 percent in August, a month-to-month drop of 0.2 percentage points, the first drop in the previous 7 months. In its first monthly report since coming to power, however, the Japan Democratic Party government has commented that “the employment situation is still serious, and is worsening”, indicating that Japan’s unemployment rate is likely to rise over the remaining months of 2009. Unfortunately, these depressing unemployment figures for the major advanced economies are set to worsen. The IMF forecast (see Table 23.2) indicates that the US unemployment rate is estimated to

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reach 9.3 percent in 2009 and increase to 10.1 percent in 2010; the Eurozone’s unemployment rate is estimated to rise up to 11.7 percent in 2010, an increase of 1.8 percentage points over 2009, and its major members, Germany, France and Italy, will face high unemployment rates exceeding 10 percent; Japan’s annual unemployment rate is estimated at 5.4 percent for 2009 and 6.1 percent for 2010. As a whole, the unemployment rate of the advanced economies is estimated at 9.3 percent for 2010, an increase of 1.1 percentage points over 2009, meaning that the unemployment rate will rise by 13.4 percent yearon-year. These high unemployment rates will not only result in severe social problems but also damage the fragile basis of the economic rebound, and hinder global economic recovery. First, in terms of consumption, the high unemployment rate will directly affect residents’ disposal income growth, impede consumption intent and increase saving intent, while on the other hand, pessimism over future employment prospects will affect employment expectations and wage growth, thus further impairing current consumption. Second, in terms of investment, private consumption stability and growth is a significant point which firms consider when making investment decisions in economies such as the United States and European countries, whose development Table 23.2

Unemployment Rate in the Advanced Economies, 2009–2010 (%) Unemployment rate (unemployed population to total labour force ratio)

Advanced economies United States Eurozone Japan United Kingdom Canada Korea Australia Singapore Major advanced economies Newly industrialised Asian economies

2008

2009

2010

5.8 5.8 7.6 4.0 5.5 6.2 3.2 4.2 2.2 5.9 3.4

8.2 9.3 9.9 5.4 7.6 8.3 3.8 6.0 3.6 8.2 4.5

9.3 10.1 11.7 6.1 9.3 8.6 3.6 7.0 3.7 9.4 4.4

Source: IMF World Economic Outlook: Update (October 2009).

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are driven by domestic consumption. High unemployment rates will hinder any increase in business expenditure by affecting companies’ expectations with regard to consumption, economic growth and profitability. Furthermore, if there is no growth in business investment, it will at the very least remain difficult to improve weak employment conditions. Third, with regard to imports and exports, the high unemployment rate will increase the tendency toward trade protectionism in certain countries due to their domestic political circumstances. China will undoubtedly bear the brunt of such a trend. In the first three quarters of 2009, a total of 19 countries and regions initiated 88 trade remedy investigations against Chinese products, including 57 antidumping investigations and 9 countervailing investigations, involving a total sum of approximately USD 10.2 billion. In terms of the financial amount involved, the United States accounted for 57 percent of the total. The pessimistic expectations with regard to the future labour market are also the result of the lack of an effective solution to address employment problems. Wage adjustments will help achieve labour market equilibrium on a new basis, that of price. But changes in the pattern of corporate employment is hindering the completion of this adjustment. After sharp cutbacks in employees and spending during the recession period, during this early stage of economic recovery, companies are more inclined to extend working hours and take on temporary employees to expand production. This situation continued for an extended period during the United States’ economic recovery in 2001–2003. Moreover, capacity utilisation remains low in the Europe and the United States, and as a result, firms lack the motivation to hire more staff. Overlapping unemployment due to periodic factors and economic restructuring further increases the difficulty of solving this problem. A number of traditional US industrial sectors are losing competitiveness due to the impact of the financial crisis, and new innovative industries that could promote economic growth have yet to mature, as the new energy or green sectors remain far from able to support the economy due to their low percentage of GDP, extended development cycles, high levels of risk and extreme dependence on the supply and prices of traditional energy forms. The creation of new job opportunities and assistance to help the unemployed adapt to new jobs will remain a long-term issue for policymakers.

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III. International Trade The financial crisis has resulted in a sharp reduction in international trade. According to the IMF World Economic Outlook published in October, global trade volumes will shrink by 11.9 percent over 2009 as a whole, and imports and exports of advanced economies will decline by 13.7 percent and 13.6 percent respectively, while developing economies’ imports and exports will decline by 9.5 percent and 7.2 percent respectively (see Table 23.3). A simple summary of the trading conditions of major advanced economies and developing economies in the first half of 2009 is given below. According to US Department of Commerce statistics, total US imports and exports of goods amounted to USD 1.21347 trillion in the first half of 2009, down 29.2 percent over the same period for the previous year. Of this, exports decreased by 23.8 percent, imports decreased by 32.5 percent, and the trade deficit amounted to USD 216.99 billion, a decrease of 46.6 percent. EU foreign trade data for January–July 2009 released by the European Commission on September 17 shows that the total foreign trade volume of the 27 EU member countries and the 16 countries in the Eurozone decreased by 25 percent and 20 percent over the same period for the previous year respectively. According to Japanese customs statistics, Japan’s imports and exports of goods over January-July 2009 amounted to USD 601.15 billion, a year-on-year decrease of 34.2 percent; exports Table 23.3 World Trade Situation and Medium-Term Outlook, 2007–2014 2007 2008 2009 2010 2011–14 (average) World trade (annual change in rate) 7.3 3.0 –11.9 2.5 Imports Advanced economies 4.7 0.5 –13.7 1.2 Developing economies 13.8 9.4 –9.5 4.6 Exports Advanced economies 6.3 1.9 –13.6 2.0 Developing economies 9.8 4.6 –7.2 3.6 Trading conditions Advanced economies 0.3 –1.8 2.0 –0.2 Developing economies 0.7 4.1 –6.3 4.6 Current account balance (ratio to GDP) Advanced economies –0.9 –1.3 –0.7 –0.4 Developing economies 4.3 3.9 2.0 2.8 Source: IMF World Economic Outlook: Update (October 2009).

6.4 5.3 8.1 5.7 7.7 –0.3 –0.1 –0.4 3.5

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decreased by 35.9 percent, imports decreased by 32.4 percent, and the trade deficit was USD 3.36 billion, down by 88.5 percent. According to statistics from Brazil’s Ministry of Development, Industry and Foreign Trade, the value of the country’s imports and exports amounted to USD 175.902 billion, a year-on-year decrease of 27.7 percent; exports decreased by 24.7 percent and imports decreased by 31.1 percent, and the trade surplus stood at USD 19.968 billion, a year-on-year increase of 18.7 percent. In the first fiscal quarter (April–June), India’s total exports amounted to USD 35.432 billion and total imports amounted to USD 50.936 billion, a year-on-year decrease of 31.3 percent and 36.5 percent respectively. The latest data released by the State Committee of the Russian Federation on Statistics shows that the value of Russia’s foreign trade totalled USD 250.7 billion, a year-on-year decrease of 44.1 percent; exports decreased by 46.4 percent and imports decreased by 40.1 percent, while the country’s trade surplus was USD 53.7 billion, far lower than the surplus of USD 119.8 billion over the same period for the previous year. China became the world’s largest exporter in the first half of 2009, but according to customs statistics, the value of its imports and exports combined during January– August 2009 was USD 1.33865 trillion, a year-on-year decrease of 22.4 percent with the value of exports down by 22.2 percent and that of imports down by 22.7 percent. In addition to a substantial drop in the volume of trade, a number of further points were worthy of attention in the area of international trade in 2009. First of all, developing economies saw a serious deterioration in their trading conditions, from 4.1 percent in 2008 to –6.3 percent in 2009, while the corresponding figure for advanced economies increased from –1.8 percent to 2.0 percent. This reflects to a large extent the ability of the two groups to resist the impact of the financial crisis. Secondly, the declining amplitudes of both the imports and exports of advanced economies were sharper than those of developing economies; developing economies were affected to varying degrees, and the foreign trade of the BRIC nations declined more sharply than the average level for developing economies. Finally, actual data for the first half of 2009 shows that the trade decline in advanced economies and major developing economies was far more rapid than the annual rates forecasted by the World Trade Organisation and the International Monetary Fund for 2009. This means that world trade needs to pick up in the second half of 2009. This however appears to be on the way with economic recovery. According Bureau of European Policy Advisers (BEPA) statistics, the world’s trading volumes started to turn

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upward in June, with a month-to-month increase of 2.5 percent, the largest monthly increase since July 2008. The volume of trade in May declined by 1.4 percent compared to April, but with the pickup in the trade volume in June, the April–June trade volume declined by a mere 0.7 percent compared to the previous quarter, far lower than the quarter-to-quarter decline of 11.2 percent for the first quarter of 2009 and the 7.1 percent figure for the fourth quarter of 2008. The increase in global trade should be seen as a signal that the global economy is emerging from the recession. IV. Foreign Direct Investment Worldwide inflows of foreign direct investment (FDI) reached a total of USD 1.98 trillion in 2007, a record high. For 2008, however, worldwide FDI inflows totalled a mere USD 1.7 trillion, a year-on-year decrease of 14 percent, thus reversing the growing trend of the four previous years. By 2009, the negative effect of the global financial crisis on FDI had become increasingly serious. According to United Nations Conference on Trade and Development (UNCTAD) tracking of the statistical data of 96 countries, total FDI inflows in the first quarter of 2009 declined by 44 percent over the same period for 2008. Against this background, both UNCTAD and OECD revised their FDI forecasts for 2009 by a large margin and forecast that global FDI inflows for 2009 overall would drop below USD 1.2 trillion. Table 23.4

FDI Flows in Advanced Economies (USD million) FDI Inflows

FDI Outflows

Q3 2008 Q4 2008 Q1 2009 Q3 2008 Q4 2008 Q1 2009 Advanced economies European Union France Germany Netherlands United Kingdom North America United States Australia Japan

205920 111411 38629 4548 79 –4531 79793 64244 10156 1744

207271 71357 9469 5692 –34847 28244 100358 92048 19634 5934

Source: UNCTAD, World Investment Report 2009.

157435 109556 9243 2550 4950 63177 33543 33312 4118 2347

328888 193944 56657 13504 –2457 31661 80819 55819 –8089 21887

337086 166628 28917 29761 27914 12364 75517 61980 –6128 58164

248386 176684 44345 17898 11155 59945 28918 25022 11959 17196

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The decrease in advanced economies’ FDI flows is the direct cause for the magnitude of the drop in global FDI. UNCTAD data shows that in terms of the three chief components of FDI, i.e. equity investment, intra-company loans and reinvestment of earnings, advanced economies all saw a sharp decline in FDI during 4Q 2008 and 1Q 2009, while the outflow of FDI from developed countries declined by 46 percent in 1Q 2009. The United States’ inflow of FDI totalled USD 92 billion in 4Q 2008 but then dropped sharply to USD 33.3 billion in 1Q 2009 (see Table 23.4). The FDI inflows and outflows of OECD member countries will drop down from USD 1 trillion and USD 1.65 trillion in 2008 to USD 0.5 trillion and USD 1 trillion in 2009 respectively. Inward FDI flows for developing economies are likely to drop by differing degrees in 2009. In the first half of 2009, China actually utilised FDI of USD 43 billion, a year-on-year decrease of 17.8%. China’s actual utilised FDI achieved monthly growth in August for the first time in 2009, reaching USD 7.5 billion. Over the January–July 2009 PERIOD, Brazil’s inward FDI was a mere USD 14 billion, a decrease of 60 percent over the same period for the previous year. According to the estimates of the Central Bank of Brazil, Brazil is likely to absorb FDI of USD 25 billion for 2009 as a whole, a decrease of 44.5 percent compared to the record high of USD 45 billion in 2008. Russia’s inward FDI declined sharply by 45 percent to only USD 6.1 billion in the first half of 2009. India’s inward FDI was only USD 3.52 billion over the January–July 2009 period, a year-on-year decrease of 56.5 percent. Vietnam attracted FDI of USD 10.4 billion in the first eight months of 2009, a sharp decline of 81.6 percent year-on-year. Hand in hand with the global decline in FDI has come a depression in cross-border mergers and acquisitions. Over the January–August 2009 period, the globally announced M&A transaction value dropped to USD 1.4 trillion, down by 32 percent over the same period for the previous year. As the world’s most important M&A market, the United States saw a remarkable reduction in M&A size. Dealogic Data figures show that turnover in the United States decreased by 35 percent to only USD 448.2 billion from January to August 2009. Japan achieved a record high of USD 76 billion in overseas M&A deals in 2008, but this rising trend reversed in 2009, with overseas M&A turnover decreasing by 66 percent from January to July compared to the same period for the previous year.

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Two issues relating to FDI deserve attention in 2009. The first is the emergence of noticeable vitality in merger and acquisition (M&A) activity in the United States and Europe with the global economic situation’s improving trend, and the partial recovery of investor confidence in 3Q 2009, and the number of large-scale M&A deals exceeding USD 1 billion has increased. The second is the boom in Chinese businesses seeking foreign M&A for resource sourcing purposes in 2009, which has generated widespread concern in the international community. During the year, although Aluminium Corporation of China failed to achieve its proposed USD 19.5 billion stake in Rio Tinto at the start of the year, Chinese energy companies such as PetroChina, Sinopec and Minmetals have made frequent bids on the international markets and completed a number of acquisitions. For example, Sinopec successfully completed a tender offer for Canada’s Addax in August 2009, for a total transaction amount of up to USD 7.5 billion. This marked not only the largest successful instance of a Chinese company acquiring overseas assets so far, but also the largest M&A deal in the global energy sector in 2Q 2009. An UNCTAD survey of hundreds of multinational companies shows that most of the companies surveyed have a positive attitude towards the international direct investment environment in 2010. if the fact that major economies such as United States, Europe, Japan have halted their decline and started to pick up is also taken into account, it is possible to estimate that FDI will probably see a mild recovery in 2010 after the sharp decline of worldwide FDI flows in 2008–09, and that worldwide inward FDI will exceed the FDI aggregate of approximately USD 1.2 trillion in 2009. In terms of the direction of regional flows of international capital, China and other emerging Asian economies will remain the most attractive countries and regions. V. International Financing The normalisation of worldwide financial markets and progress with the reform of international rules governing the financial sector have been two major topics in the international financial sector in 2009. The crisis has had a huge impact on global financial markets, and market confidence was at one point at the brink of collapse. Promoting the normalisation of the financial markets is a top priority of all relief measures. In fact, in the absence of a functioning financial market, any

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measures to stimulate economic growth will be inefficient or ineffective. The financial crisis also highlights two major flaws in the existing international system of rules governing the financial sector, i.e. the lack of a reserve currency under the constraint in the US dollar-based system, and the marginalisation of international financial institutions represented by the IMF. Working to reform the international financial system of rules has therefore become a focus of international cooperation. Due to the joint intervention of central banks, ministries of finance, and international financial institutions, the worldwide financial markets have basically stabilised. The scale of problem loans issued by banking institutions has reduced, liquidity shortages have been alleviated, systemic financial risk has decreased, and investor confidence has gradually restored. In the United States, the financial sector’s capital adequacy ratio rose to 10.56 percent in 2Q 2009, a record level since the outbreak of the sub-prime crisis. The credit spreads between business and government have seen a further remarkable decline, and most of the indicators reflecting the risk of default such as credit default swaps have come down significantly from their previous peak values. The three major stock indices have rallied with fluctuations since March. Corporate bonds issuance has once again reached record levels. The improvement in international financing is another major feature of the stabilisation of the global financial markets. Globally, the shrinking of the credit scale of financial institutions has reduced. In 1Q 2009, global financial institutions’ financial claims against non-banks decreased to only USD 258 billion quarter-to-quarter, compared to the USD 1 trillion figure in 4Q 2008. In the international bond market, international financial organisations’ net issuance of international debt securities doubled in the first half of 2009, thus becoming a major driving force in the recovery of the international debt securities market. Derivatives markets, after shrinking dramatically for two consecutive quarters, recovered somewhat with turnover amounting to USD 2411 trillion in 2Q 2009 (see Figure 23.1). Like the real economy, the financial markets remain in the early stages of normalisation, with extremely weak foundations. The number of problem banks in the United States increased by 111 in 2Q 2009, up to a total of 416, a record level since June 1994. In addition, a number of factors will further impair the quality of the assets of banks and other financial institutions. These factors include: I order to dispose of toxic assets, financial institutions in the United States and

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3000 2500 2000 1500 1000 500

1986 1989 1992 Sep. 1993 Jun. 1994 Mar. 1995 Dec. 1995 Sep. 1996 Jun. 1997 Mar. 1998 Dec. 1998 Sep. 1999 Jun. 2000 Mar. 2001 Dec. 2001 Sep. 2002 Jun. 2003 Mar. 2004 Dec. 2004 Sep. 2005 Jun. 2006 Mar. 2007 Dec. 2007 Sep. 2008 Jun. 2009

0

Source: Bank for International Settlements database.

Figure 23.1

Derivatives Market Turnover (Futures, Options and Commodity Contracts, USD Trillion)

Europe will write down a total of USD 2 trillion of assets over the next year or two; of a total of USD 1.914 trillion in consumer debt in the United States, approximately 14 percent is estimated to be bad debt; in the United States, the commercial mortgage default rate rose to 7.9 percent in 2Q 2009, a 15-year record high. In Europe, monetary and financial institutions’ financing for other financial institutions and nonfinancial business has grown slowly, and loans to households saw only a slight increase, while these institutions have accelerated their intake of government bonds. This indicates that the European Central Bank’s monetary expansion has not fully been passed on to the real economy through the business activities of monetary and financial institutions. There are mainly two basic options to reform the global reserve currency system: Creating a super-sovereign reserve currency, and strengthening the multi-polar reserve currency system. The main advantage of the former is that it cuts off the relation between the issuance of reserve currency and any one country’s monetary policy, thus solving the difficulty in balancing confidence and liquidity under the single-currency reserve system. The Special Drawing Right (SDR) created by the IMF has the necessary characteristics and potential to grow into a super-sovereign reserve currency, but to enable this to come true, the IMF must: (1) Expand the SDR basket to fully

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reflect the relative pattern of global economic growth; (2) Expand the applicability of SDR beyond liquidation between IFM members and between IMF member countries and the IMF; (3) Expand the SDR issuance size; (4) Implement the necessary reforms within the IMF, the organisation issuing and administering SDRs, so as to give it broader representativeness and legitimacy. In comparison to creating a supersovereign reserve currency on the basis of SDRs, the multi-polarisation of the international reserve currency is however more practical and feasible. It is possible to discern three pillars in the future international monetary system—the US Dollar, Euro and an Asian currency (the Renminbi or a basket of major Asian currencies); these three currencies would be able to float freely during the initial stage, after which fixed exchange rates would be employed to connect these once the currency was mature, thus ultimately forming the prototype for a single global currency. It can be seen that IMF reform and the internationalisation of the RMB are two key points which are impossible to ignore as part of this evolution of the international monetary system. In 2009, progress with IMF reform has primarily been reflected in the increase in available resources and improved lending functions. These reforms have improved the ability of the IMF to cope with the global crisis, accelerated the speed of its response to the crisis and enhanced its ability to develop well-targeted loan conditions. However, there have so far been few visible achievements in the more critical reform of the IMF’s allocation and monitoring functions due to fierce opposition from vested interests. The outbreak of the global financial crisis has not only brought about new urgency to accelerate the internationalisation of the RMB, but it has also provided a rare opportunity for China to push forward the process. The urgency has various sources: (1) Doubt over the stability and rationality of the existing international currency system which is focused on the US Dollar; (2) Concern over the security of the immense amount of foreign exchange assets; (3) Reflection over past economic growth patterns and the requirements for the continuous promotion of reform in all areas. Furthermore, the consensus over the need to reform the existing international currency system worldwide, the strong desire of a number of countries to own non-USD foreign exchange assets in order to maintain a stable balance of payments, and China’s favourable economic growth trend provide a significant opportunity for the internationalisation of the RMB. Positive progress

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was made in this initiative in 2009 by entering into bilateral swap agreements, implementing pilot RMB settlement for cross-border trade, promoting overseas personal Renminbi business development, increasing participation in the international monetary system, issuing Renminbi national bonds in Hong Kong and providing support measures for China’s capital market. Limited by the state of development of this financial market, however, the internationalisation of the RMB is bound to be a long-term, gradual and systematic task. VI. Price Volatility of Oil and Other Primary Products In 2009, the international prices of primary products extended the downward trend of 2008, but this decline has reduced substantially. The international prices of primary products rose and then fell in 2008. According to the price index of primary commodities established by the IMF (see Figure 23.2), nearly all major primary products saw their prices peak in the second quarter of 2008. These prices then declined sharply in the third quarter due to the impact of the international financial crisis, and in particular saw a panicked plunge in the fourth quarter. After dropping to a trough in 1Q 2009, the prices of energy, metals, foods, beverages and agricultural raw materials began to rebound fully. From peak to trough, the international prices of primary products fell by an average of up to 55.6 percent. Of this, oil declined most severely, by 68.7 percent, driving an overall decline in the prices of energy products of 64.1 percent. The decline in the prices of non-energy products was relatively small, but still reached 35.5 percent. After experiencing a rapid, substantial decline, the international prices of primary products began a full recovery in the second and third quarters of 2009. Over these six months, the international prices of primary products rose by 27 percent, with oil up 54 percent, energy up 12 percent, metals up 37.3 percent, agricultural raw materials up 14 percent, beverages up 12 percent, and foods up 7 percent. Overall, the international prices of primary products generally returned to their pre–2Q 2007 levels, when the crisis broke out. The rapid recovery of the international prices of primary products in recent months is partly restorative, but a greater impetus has come from confidence in world economic growth. Of key importance is the

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240

240

220

220

200

200

180

180

160

160

140

140

120

Real 2/

120 100

100 In SDR

80

80

60

60 2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

In U.S. Dollars

40

40

Note: Index deflated by US CPI. Sources: IMF, IFS.

Figure 23.2

Primary Product Price Index (2005=100).

fact that this confidence is built on a common implementation and maintenance of an extremely loose monetary policy and the largescale fiscal stimulus plans of a good number of national governments. Once the major countries begin to phase these out and “weak” world economy data is unable to support this kind of confidence, the international prices of primary products are likely to experience a short-term pullback. US Dollar depreciation is another significant factor for the rise in the international prices of primary products, and oil in particular. The “dollar index” fell to 75.836 on October 13, the lowest for the preceding 14 months. Depreciation of the dollar means that dollar-denominated oil and other primary products are relatively cheap. When the short-term supply is relatively stable, the substantial increase in demand in turn pushes up the dollar price of oil. Furthermore, the straight decline of the dollar causes its holders to prefer converting the paper currency into “hard currency” oil to evade risk. VII. Conclusion As a summary of the aforementioned conditions, it is possible to make an overall assessment of the current global economic situation: the global economy has begun to pick up, but its full recovery still lacks

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sufficient impetus. In comparison with the IMF’s global economic growth estimate of 3.1 percent in 2010 and average growth of 4.4 percent over 2011–2014, our estimates are relatively conservative, as we estimate that the world economy will probably enter a phase of low-speed growth (of approx. 3 percent) over the next one to three years. The rebound of the world economy in 2009 has mainly been reflected in the following: (1) A series of indicators in major advanced economies all show that the recession has ended, and the economy has begun to rebound significantly, and this trend will continue into 1Q or even 2Q 2010; (2) The growth tendency of emerging economies such as China and India undoubtedly plays a very positive role in promoting global economic recovery. While paying attention to the evidence of a rebound, it is important to emphasise that the current rebound is merely at the technical level, or a restoration. This does not therefore necessarily mean that the global economy has entered a cyclical recovery phase. Overall, we believe that a full recovery of the world economy remains lacking in impetus because: (1) a number of short and medium-term factors inhibit the full recovery of the global economy. These factors include the still-high unemployment rates of the United States and Europe and other major advanced economies; the sharp decline of net assets of US homes, and rising savings ratio affect consumption; the major advanced economies’ banking systems remain reduced in capacity, leading to slow investment growth; capacity utilisation in Europe and the United States remain low, and the macro-economic policies of major advanced economies remain disorganised. (2) The long-term conditions for cyclical growth are not yet available. The collapse of the Berlin Wall, and China and India’s reform and opening-up led to a surge in the number of workers participating in the world division of labour and a rapid expansion of the global market size. This situation however no longer prevails, and to the contrary, the cost of labour is slowly rising. The world lacks a burgeoning innovative industry such as the IT industry, which can drive economic growth. In the current circumstances, the new energy or green sectors are insufficiently developed to undertake this task, and no major breakthrough in technology has occurred which can provide new hubs for economic growth through the reform and innovation of traditional industries. As the financial sector may have suffered huge and as yet undisclosed losses, global financial regulation will be strengthened; as high levels of pro-

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duction capacity remain idle and increasing commercial expenditure is accompanied by high risk and low profitability, excess liquidity is more likely to enter the oil, metals and other primary product markets as well as the stock, real estate and other asset markets. Large amounts of capital cannot be expected to play a supportive role in promoting the recovery of the real economy or in incubating a new leading industry. There has been no reduction in the US Dollar’s recent weakness. The US dollar index dropped to 75.14 on October 20, the lowest since August 8, 2008, and the Euro hit a 14–month high against the US Dollar, of 1.499 US Dollars. The factors underlying this dollar depreciation include: the historically low federal funds rate (0–0.25 percent); the record-high budget deficit for FY 2009 of USD 1.417 trillion; the US government’s laissez-faire attitude towards the US dollar in order to promote exports and effectively deal with deflation; and the reduced role of dollar-denominated assets as a safe haven following the stabilisation of the global economy. Although we believe that the depreciating US Dollar trend will continue over the medium term, but the US Dollar will see a rebound in the coming months, once the undervaluation of the currency is taken into account. Our relatively less optimistic estimates with regard to the mediumterm development of the world economy indicate that China cannot heavily depend on strong external demand to drive its economic growth as before; changing the pattern of economic growth is costly, but it is vital, as China has no other choice. References 倪月菊 Ni Yueju, Guoji maoyi zengzhang dafuxiacuo 国际贸易增长大幅下挫 [The Sharp Decline in the Growth of International Trade], working paper of the Institute of World Economics & Politics, Chinese Academy of Social Sciences (2009). 张金杰 Zhang Jinjie, Guoji zhijie touzxingshi huigu yu zhanwang 国际直接投资形 势回顾与展望 [International Direct Investment Review and Outlook], working paper of the Institute of World Economics & Politics, Chinese Academy of Social Sciences (2009). 高海红, 黄薇 Gao Haihong, Huang Wei, 2009 nian guoji jinrong shichang huigu he zhanwang 2009 年国际金融市场回顾和展望 [International Financial Market Review and Outlook, 2009], working paper of the Institute of World Economics & Politics, Chinese Academy of Social Sciences (2009). 谭小芬 Tan Xiaofen, Meiguo jingji: Huanman fusu 美国经济: 缓慢复苏 [The US Economy: Slow Recovery], working paper of the Institute of World Economics & Politics, Chinese Academy of Social Sciences (2009).

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姚枝仲 Yao Zhizhong, Ouyuanqu jingji: Jieshu shuaitui 欧元区经济: 结束衰退 [The Euro Area Economy: End of the Recession], working paper of the Institute of World Economics & Politics, Chinese Academy of Social Sciences (2009). 李 敏 Li Zhongmin, Riben jingji: waixu yu zhengfu zhichu daidongxiade weiruo huisheng 日本经济: 外需与政府支出带动下的微弱回升 [ Japan Economy: Slight Pickup Driven by External Demand and Government Spending], working paper of the Institute of World Economics & Politics, Chinese Academy of Social Sciences (2009). 张明 Zhang Ming, Jinrong weiji beijingxiade guoji jinrong tiji gaige 金融危机背景 下的国际金融体系改革 [International Financial System Reform in the Context of Financial Crisis], working paper of the Institute of World Economics & Politics, Chinese Academy of Social Sciences (2009). 徐奇渊, 张明 Xu Qiyuan, Zhang Ming, Quanqiu jinrong weijixiade Renminbi guojihua 全球金融危机下的人民币国际化 [Internationalisation of the RMB during the Global Financial Crisis], working paper of the Institute of World Economics & Politics, Chinese Academy of Social Sciences (2009).

APPENDIX: STATISTICS

Year

GDP growth rate (%)

Growth rate of added value of primary industry (%)

Growth rate of added value of secondary industry (%)

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

11.7 7.6 7.8 5.3 9.0 10.9 15.2 13.5 8.9 11.6 11.3 4.1 3.8 9.2 14.2 13.9 13.1 10.9 10.0 9.3 7.8 7.6 8.4 8.3 9.1 10.0 10.1 10.4 11.6 13.0 9.0 8.3 9.1

4.1 6.1 –1.4 7.0 11.5 8.3 13.0 1.8 3.3 4.7 2.5 3.1 7.4 2.4 4.7 4.7 4.0 5.0 5.1 3.5 3.5 2.8 2.4 2.8 2.9 2.5 6.3 5.2 5.0 3.7 5.5 5.6 5.1

15.0 8.2 13.6 1.9 5.5 10.4 14.5 18.6 10.3 13.7 14.5 3.8 3.2 13.9 21.1 19.9 18.4 13.9 12.1 10.5 8.9 8.1 9.4 8.4 9.8 12.7 11.1 11.7 13.0 14.7 9.3 8.6 9.4

Growth Growth rate of rate of added added value of value of heavy light industry (%) industry (%) 18.4 8.6 7.9 –5.2 7.4 11.4 15.9 15.7 7.5 12.5 13.0 4.9 2.8 13.6 21.1 21.1 17.5 11.9 12.2 10.7 8.6 8.9 11.1 7.6 10.3 14.4 13.1 12.5 14.5 16.0 9.7 8.9 9.7

13.1 8.8 20.6 12.2 3.8 7.5 13.5 21.7 12.6 14.1 18.1 5.2 4.0 15.4 21.3 18.9 20.6 16.5 12.9 11.9 9.2 8.1 8.3 9.8 9.6 11.0 9.7 10.5 10.9 13.6 9.2 8.5 9.3

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Table (cont.)

Year

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Growth Growth rate of Growth Total Nominal rate of the added rate of investment growth the added value of the added in fixed rate of value of transport, value of assets total the tertiary postal and commerce (current investment industry telecom- and services price, in fixed (%) munications (%) RMB 100m) assets (%) (%) 13.7 7.9 5.9 10.4 13.0 15.2 19.3 18.2 12.0 14.3 13.2 5.4 2.3 8.9 12.4 12.2 11.1 9.8 9.4 10.7 8.4 9.3 9.7 10.3 10.4 9.5 10.1 10.5 12.1 13.8 9.5 8.7 9.5

9.8 8.3 4.2 1.9 11.4 9.4 14.9 13.8 13.9 9.6 12.5 4.2 8.3 10.6 10.0 12.6 8.5 15.1 7.0 9.2 10.6 12.2 8.6 8.8 7.1 6.1 14.5 11.3 11.1 13.0 7.6 5.1 8.1

23.1 8.7 –1.8 29.5 –0.7 21.2 24.7 33.6 9.5 14.7 11.8 –10.7 –5.3 5.2 12.3 6.9 8.2 8.2 7.6 8.8 6.5 8.7 9.4 9.1 8.8 9.9 6.6 7.8 11.9 16.3 15.1 12.8 13.6

899.0 977.0 910.8 961.0 1230.4 1430.1 1832.9 2543.2 3120.7 3791.2 4746.8 4410.3 4517.6 5594.6 8080.4 13072.3 17042.9 20019.3 22974.0 24941.1 28406.2 29854.7 32917.7 37213.5 43499.9 55566.6 70477.4 88773.6 109998.2 137323.9 172291.1 227402.4 281744.4

19.9 8.7 –6.8 5.5 28.0 16.2 28.2 38.8 22.7 21.5 25.2 –7.1 2.4 23.8 44.4 61.8 30.4 17.5 14.8 8.6 13.9 5.1 10.3 13.1 16.9 27.7 26.8 26.0 23.9 24.8 25.5 32.0 23.9

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Table (cont.)

Year

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Real Share of growth total rate of investment total in fixed investment assets in in fixed GDP (%) assets (%) 19.5 4.7 –8.5 2.9 25.1 13.3 23.9 30.1 15.8 14.1 10.0 –12.9 –3.0 15.0 25.3 27.8 18.1 10.9 10.3 6.7 14.1 5.5 9.1 12.6 16.7 25.0 20.1 24.0 22.1 20.2 15.2 34.4 22.3

24.7 24.0 20.0 19.6 23.1 24.0 25.4 28.2 30.4 31.4 31.6 26.0 24.2 25.7 30.0 37.0 35.4 32.9 32.3 31.6 33.7 33.3 33.2 33.9 36.1 40.9 44.1 48.5 51.9 53.4 57.3 69.6 77.5

Growth Growth rate of rate of capital retail price goods price index (%) index (%) 0.7 2.0 6.0 2.4 1.9 1.5 2.8 8.8 6.0 7.3 18.5 17.8 2.1 2.9 5.4 13.2 21.7 14.8 6.1 0.8 –2.6 –3.0 –1.5 –0.8 –1.3 –0.1 2.8 0.8 1.0 3.8 5.9 –0.8 1.8

0.3 3.8 1.9 2.5 2.4 2.6 3.4 6.7 6.0 6.4 13.9 6.7 5.6 7.6 15.3 26.6 10.4 5.9 4.0 1.7 –0.2 –0.4 1.1 0.4 0.2 2.2 5.6 1.6 1.5 3.9 8.9 –1.8 1.3

Growth rate of consumer price index (%) 1.5 2.1 7.0 2.6 1.9 1.2 1.7 7.6 6.5 7.3 18.8 18.0 3.1 3.4 6.4 14.7 24.1 17.1 8.3 2.8 –0.8 –1.4 0.4 0.7 –0.8 1.2 3.9 1.8 1.5 4.8 5.9 –0.5 2.1

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Table (cont.)

Year

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Real growth Real growth Real growth Real growth rate of rate of rate of rate of urban per rural per urban rural capita capita consumption consumption disposable net income (%) (%) income (%) (%) –2.4 19.6 6.2 1.6 5.8 4.3 12.5 0.1 13.8 2.4 –2.3 0.0 8.5 7.2 9.7 9.5 8.5 4.9 3.9 3.4 5.8 9.3 6.4 8.5 13.4 9.0 7.7 9.6 10.4 12.2 8.4 9.2 9.1

6.7 17.6 18.2 10.7 21.1 14.7 12.7 11.7 3.2 5.2 6.4 –1.6 1.8 2.0 5.9 3.2 5.0 5.3 9.0 4.6 4.3 3.8 2.1 4.2 4.8 4.3 6.8 6.2 7.4 9.5 8.0 6.8 7.1

11.5 13.0 8.6 6.6 7.4 14.1 17.8 11.8 11.0 14.3 4.1 11.3 13.8 19.8 13.9 7.6 10.4 8.1 8.2 11.8 12.7 13.2 8.2 9.0 11.0 10.6 9.5 10.8 16.4 13.6 10.8 11.7

6.0 9.0 10.6 9.6 11.1 13.1 13.2 2.9 5.5 6.0 –0.8 0.2 6.4 9.0 4.8 3.4 7.2 14.0 2.1 0.0 3.7 3.1 2.9 3.5 –1.4 1.7 6.0 7.0 5.7 5.1 4.5 5.4

Real growth rate of government consumption (%) 26.9 1.6 5.6 8.6 9.0 21.2 9.3 9.9 2.9 –1.1 1.1 8.8 23.2 17.5 13.8 8.6 –3.3 9.8 9.5 11.0 12.6 13.7 12.0 9.1 6.5 8.3 12.7 11.5 11.5 9.3 9.2 9.6

appendix: statistics

365

Table (cont.)

Year

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Gross retail sales of consumer goods (RMB 100m) 1558.6 1800.0 2140.0 2350.0 2570.0 2849.4 3376.4 4305.0 4950.0 5820.0 7440.0 8101.4 8300.1 9415.6 10993.7 14270.4 18622.9 23613.8 28360.2 31252.9 33378.1 35647.9 39105.7 43055.4 48135.9 52516.3 59501.0 67176.6 76410.0 89210.0 108487.7 125055.2 148076.1

Nominal growth rate of gross retail sales of consumer goods (%)

Real growth rate of gross retail sales of consumer goods (%)

Fiscal revenue (RMB 100m)

Growth rate of fiscal revenue (%)

32.7 15.5 18.9 9.8 9.4 10.9 18.5 27.5 15.0 17.6 27.8 8.9 2.5 13.4 16.8 29.8 30.5 26.8 20.1 10.2 6.8 6.8 9.7 10.1 11.8 9.1 13.3 12.9 13.7 16.8 21.6 15.3 18.4

31.8 13.2 12.2 7.3 7.3 9.2 15.2 17.2 8.5 9.6 7.9 –7.6 0.3 10.2 10.8 14.7 7.2 10.5 13.2 9.3 9.7 10.1 11.4 11.0 13.3 9.2 10.2 12.0 12.6 12.5 14.8 16.3 16.3

1132.3 1146.4 1159.9 1175.8 1212.3 1366.9 1642.9 2004.8 2122.0 2199.4 2357.2 2664.9 2937.1 3149.5 3483.4 4349.0 5218.1 6242.2 7408.0 8651.1 9876.0 11444.1 13395.2 16386.0 18903.6 21715.3 26396.5 31649.3 38760.2 51321.8 61316.9 66327.5 78472.7

29.5 1.2 1.2 1.4 3.1 12.8 20.2 22.0 5.8 3.6 7.2 13.1 10.2 7.2 10.6 24.8 20.0 19.6 18.7 16.8 14.2 15.9 17.0 22.3 15.4 14.9 21.6 19.9 22.5 32.4 19.5 8.2 18.3

366

appendix: statistics

Table (cont.)

Year

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Growth Balance of Fiscal rate of Fiscal urban and expenditure fiscal balance rural savings (RMB 100m) expenditure (RMB 100m) deposits (%) (RMB 100m) 1122.1 1281.8 1228.8 1138.4 1230.0 1409.5 1701.0 2004.3 2204.9 2262.2 2491.2 2823.8 3083.6 3386.6 3742.2 4642.3 5792.6 6823.7 7937.6 9233.6 10798.2 13187.7 15886.5 18902.6 22053.2 24650.0 28486.9 33930.3 40422.7 49781.4 62427.0 74418.9 88938.0

33.0 14.2 –4.1 –7.4 8.0 14.6 20.7 17.8 10.0 2.6 10.1 13.3 9.2 9.8 10.5 24.1 24.8 17.8 16.3 16.3 16.9 22.1 20.5 19.0 16.7 11.8 15.6 19.1 19.1 23.2 25.4 19.2 19.5

10.2 –135.4 –68.9 37.4 –17.7 –42.6 –58.2 0.6 –82.9 –62.8 –134.0 –158.9 –146.5 –237.1 –258.8 –293.4 –574.5 –581.5 –529.6 –582.4 –922.2 –1743.6 –2491.3 –2516.5 –3149.5 –2934.7 –2090.4 –2281.0 –2162.5 1540.4 –202.1 –9501.4 –11875.3

210.6 281.0 399.5 523.7 675.4 892.5 1214.7 1622.6 2238.5 3081.4 3822.2 5196.4 7119.8 9241.6 11759.4 15203.5 21518.8 29662.3 38520.8 46279.8 53407.5 59621.8 64332.4 73762.4 86910.6 103617.3 119555.4 141051.0 161587.3 172534.2 217885.4 255862.8 290307.5

Growth rate of balance of urban and rural savings deposits (%) 15.7 33.4 42.2 31.1 29.0 32.1 36.1 33.6 38.0 37.7 24.0 36.0 37.0 29.8 27.2 29.3 41.5 37.8 29.9 20.1 15.4 11.6 7.9 14.7 17.8 19.2 15.4 18.0 14.6 6.8 26.3 17.4 13.5

appendix: statistics

367

Table (cont.)

Year

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Money and near money (RMB 100m)

15293.4 19349.9 25402.2 34879.8 46923.5 60750.5 76094.9 90995.3 104498.5 119897.9 134610.4 158301.9 185007.0 221222.8 254107.0 298755.7 345603.6 403442.2 475166.6 599951.7 694332.0

New loans (RMB 100m)

Total imports (USD 100m)

Growth rate of total imports (%)

Total exports (USD 100m)

Growth rate of total exports (%)

186.7 189.6 374.7 445.9 320.4 409.3 1176.2 1139.4 1684.9 1442.0 1518.9 3808.8 3320.6 3657.1 4985.1 6620.2 7032.9 10568.1 10612.5 13757.5 11610.0 7210.2 5636.8 12943.6 18979.2 27702.3 19201.6 16492.6 30656.8 36343.7 41703.7 101697.3 83995.3

108.9 156.8 200.2 220.1 192.9 213.9 274.1 422.5 429.0 432.2 552.8 591.4 535.5 637.9 805.8 1039.6 1156.1 1320.8 1388.3 1423.7 1402.4 1657.0 2250.9 2435.5 2951.7 4127.6 5612.3 6599.5 7914.6 9559.5 11330.9 8948.8 10619.9

51.0 44.0 27.7 10.0 –12.4 10.9 28.1 54.1 1.5 0.7 27.9 7.0 –9.5 19.1 26.3 29.0 11.2 14.2 5.1 2.5 –1.5 18.2 35.8 8.2 21.2 39.8 36.0 17.6 19.9 20.8 18.5 –21.0 18.7

102.0 135.8 181.2 220.1 223.2 222.3 261.4 273.5 309.4 394.4 475.2 525.4 620.9 718.4 849.4 917.4 1210.1 1487.8 1510.5 1827.9 1837.1 1949.3 2492.0 2661.0 3256.0 4382.3 5933.2 7619.5 9689.4 12177.8 14285.5 11496.8 13485.4

34.4 33.1 33.4 21.5 1.4 –0.4 17.6 4.6 13.1 27.5 20.5 10.6 18.2 15.7 18.2 8.0 31.9 22.9 1.5 21.0 0.5 6.1 27.8 6.8 22.4 34.6 35.4 28.4 27.2 25.7 17.3 –19.5 17.3

Note: Incremental credit since 1989 covers all financial institutions. Data for 2009 and 2010 are projections. (Compiled by Shen Lisheng)

INDEX

air pollution 284 Aggregate production 144 agricultural economy 257, 261, 264 agricultural income 33, 261 Agricultural policy(ies) 261, 263 Agricultural product prices 84, 180, 192–193, 259–260, 262–263, 265–267 agricultural production 22, 72, 112, 137, 258, 261, 263, 265–266, 293 agricultural production prices 263 agricultural products 17, 66, 90, 189, 237–238, 257–260, 263–266, 297 agricultural workers’ income 23, 112, 122, 189, 257, 261–264, 267 agriculture 27, 76, 89, 196, 252–253, 255, 257–259, 261–267 A-share market 162, 166–167, 219–222, 231–232 asset market 89, 213, 306, 318, 359 Asset prices 28, 65, 187 backward production 4, 80, 188, 281 Bad loans 115, 178, 213, 215 balance of payments 75, 83, 88, 217, 355 Banking and finance 295 bond market 161, 167 bond spot transactions 170 business confidence index 134 capital market 81, 90, 127, 161, 172–173, 176–178, 198, 221, 248, 275, 294, 344, 356 cement production 2, 80, 94, 100, 120 China’s economic 2, 9, 21, 28–29, 41, 43, 50, 52, 56–57, 64, 76, 83, 87, 93, 134, 137, 139–140, 142, 144–145, 149, 155, 158, 160, 192, 225, 227–229, 238, 257, 267, 269, 344 climate index 93–95, 101, 113, 269 Coincident composite index 94–95, 97–99, 101, 110, 113, 201 Coincident diffusion index 98–99 Commerce and Services 362 commercial and trade exhibitions 334

commodity(ies) 16–18, 31, 65, 111–112, 133, 186–188, 192–193, 197, 201, 228, 238, 356 company expansion 4 company registration 156 competitiveness 4, 34, 65, 295, 306, 323–325, 327–328, 347 composite index 78, 94–95, 97–99, 101, 104, 110, 113, 162, 168, 190, 201, 224 construction industry 253, 293, 312, 323 consumer confidence index 134, 299 consumer goods 23, 62, 66, 76, 85, 94, 101 n. 4, 103, 106, 112, 122, 153, 174, 193, 201, 291, 345 Consumer Price Index 22–23, 28, 40, 109, 333 Consumption 1, 3, 9, 23, 27, 33–34, 48, 56, 62–66, 68–69, 71, 76–77, 81, 84–89, 100, 104, 106, 111, 115–117, 119–122, 125–126, 129–132, 134–137, 140, 144, 153–157, 174, 176, 184, 187, 191–196, 201–202, 215, 228–229, 232, 250, 253, 269, 273–274, 277, 279, 281, 288, 290–291, 305–307, 317, 321, 329–330, 332, 343–347, 358 consumption demand 9, 23, 27, 48, 86, 135–137, 140, 174, 191–192, 195, 305 consumption structure 48, 63–66, 69, 134, 184, 196 corporate deposits 177 corporate expansion 4 CPI 17, 40–41, 66, 75, 77–78, 83, 86, 88, 97, 104, 108–114, 150–152, 157–158, 174–176, 180, 184, 186, 192–193, 201–202, 232, 297, 318, 324, 333 credit 10–11, 13–15, 17, 19, 31, 63, 67–68, 71, 81–82, 84–85, 88–89, 104, 108, 115, 121, 125–126, 129, 131, 150, 157, 160, 168, 171, 176–178, 185–188, 190, 196, 199, 202, 204, 208, 210–215, 217,

370

index

219–221, 224–225, 229–230, 233, 242, 245, 259, 274–275, 282, 294–295, 301, 310, 314, 353 credit growth 10–11, 13, 108, 115, 178, 186, 196, 210, 214, 295 credit structure 71, 89, 160, 196 credit supply 10–11, 15, 17, 68, 121, 202 credit supply growth 10–11 Cross-Straits Economic Relations 296–298 cross-Straits financial exchanges 298 Cross-Straits trade and investment 298 Crude steel 80, 120 CSI enterprise bond composite index 168, 224 Cultural and creative industries 322 deficit rate 32 deficit ratio 32–33 demand 2–3, 9, 16–17, 22–24, 26–27, 29–36, 41, 48, 54, 61–66, 68, 70–73, 75–78, 80–81, 83–88, 90, 103, 106, 107, 111–112 , 114–117, 119–120, 122, 124–126, 131–132, 134–137, 139–140, 144–145, 147–150, 154, 159–160, 162, 174–175, 178, 188–189, 191–195, 197, 199–202, 212–213, 215, 219, 227–228, 237–240, 242–245, 247–250, 253–255, 259–260, 265–266, 269, 272–274, 276–280, 286–287, 290–296, 299–300, 302, 305–306, 308, 310, 312–313, 317–318, 322, 357, 359 deposits 10–11, 13, 84, 167, 177, 206, 213, 310, 327 deposits and loans 10 Derivatives market 353 Developing economies 341–342, 348–349, 351 development mode 70, 73, 119, 122, 126 diffusion index 98–99 domestic demand 22–24, 26–27, 29–30, 32–33, 35, 41, 54, 62–63, 65, 70, 75–76, 78, 80, 85, 87, 103, 106–107, 114–116, 119, 131, 136, 139, 150, 155, 159, 162, 191, 197, 199–202, 213, 219, 227, 239, 260, 269, 273, 277–278, 280, 286, 290–291, 295–296, 299–300, 306, 310, 317 domestic investment 62, 86, 134, 148–149, 344 double taxation agreements 320 drought 112, 257–258

economic climate 93–94, 101, 104, 112–113, 142, 148, 200, 203, 250 economic construction 19, 37 economic control policy 29, 35, 88, 269 economic cycle(s) 33, 37–42, 50, 52–58, 93, 95–99, 104, 109 economic development 1–3, 21, 32–35, 42–43, 48, 50, 52–53, 55, 57, 61, 63–64, 73, 75, 77, 82, 87–89, 114, 116, 122, 125–126, 131–132, 134, 159, 183, 187, 192, 194, 197, 229, 238, 264, 279–280, 288, 318–319, 323, 328 economic growth 1–3, 9, 17, 21–22, 24–34, 37–41, 46, 48, 50, 52–56, 58, 61–64, 68–70, 75–78, 82–83, 86–87, 89, 93, 97, 101, 103, 105–106, 108–109, 114–117, 121, 123–125, 128, 131–134, 136, 139–140, 142–144, 148, 150, 153, 156, 158, 160, 173, 175–176, 179, 183–184, 186–188, 192–194, 196, 200–201, 210, 219, 227–229, 232, 244, 249–250, 252–254, 256–257, 267, 269, 271, 273–274, 276–277, 280, 282, 289–291, 299–300, 321, 323, 325, 327–328, 341–345, 347, 353, 355–356, 358–359 economic indicators 50, 140, 248 n. 1, 298 economic indices 24, 93–94, 105, 179, 219, 247, 249 economic policy 100, 115, 213, 282, 287 economic recovery 17, 20–21, 24, 26, 28–29, 31, 35, 50, 64, 66–67, 79, 85–89, 97, 111, 115, 119–121, 133, 141, 155, 160, 168, 188, 192, 194, 199–200, 213, 219, 227–229, 232, 244, 253, 289, 297, 299–300, 310, 312, 317–318, 323–324, 344, 346–347, 349, 358 Economic restructuring 1–3, 21, 34, 88, 135, 159, 280–281, 295, 300, 345, 347 economic stimulus policies 9, 21–22, 75, 82–83, 86, 115, 133, 155, 159, 168, 173, 187, 253, 296 economic structure 2, 15, 21, 34, 43, 50, 56, 69, 70, 75, 116, 120, 129, 131, 148, 155, 285, 325 Educational services 322 Employment 5, 18, 26, 28, 35, 43, 45, 55, 65, 68, 75, 79, 82–84, 88,

index 116, 121, 123, 130, 132, 136–137, 143, 148–149, 155, 160, 185, 187, 190–191, 195–196, 199, 229, 244, 247–255, 260–262, 276–277, 297, 306–308, 310–312, 316, 318, 323, 327, 332, 341, 344–347 employment indices 249 energy conservation 35, 73, 89, 189, 233, 280, 282 energy conservation and emissions reductions 35 energy efficiency 73 Enterprise profitability 190 environment 3, 5, 26, 31, 64, 66, 68, 73, 83–84, 86, 117, 126–127, 131–135, 137, 155, 159–160, 192, 194, 197, 219, 227, 232, 243, 245, 271, 275, 280, 283–284, 286–287, 293, 302, 306, 314, 317, 320, 322, 324, 352 environment policy 282 environment protection 286 environmental economic policy 282, 287 environmental facilities 281 environmental problems 283–284 environmental protection 33, 35, 57, 73, 76, 90, 279–288, 322 environmental protection facilities 57, 286 environmental supervision 282, 288 Eurozone economy 337, 343 excess capacity 2, 16, 30, 196 excess production capacity 2–3, 30, 57, 84, 86–87 excess reserve rate 208 exchange rate formation mechanism 196 export 24, 62, 64, 68, 69, 73, 79, 85, 103, 107, 117, 119–120, 125, 129, 154–156, 159, 184, 229, 232, 235–237, 240–245, 250–252, 259–260, 277, 282, 299–300, 330, 344 export demand 125, 135, 139 export tax rebate(s) 240, 245, 282 export-oriented economic development 73 export-oriented economy 70, 262 exports 5, 9, 19, 23–24, 30, 61, 65, 75, 83, 85, 94, 100, 103–104, 107, 117, 199–122, 125, 131, 133, 135, 139, 144, 153–154, 156, 159, 174, 176, 184, 188, 192, 201, 217, 227–228, 235–237, 239–245, 259, 290–292,

371

294, 298, 300, 302, 304, 313, 328, 330, 336, 342–345, 347–349, 359 external demand 3, 29–30, 61–63, 73, 75, 80–81, 85, 111, 117, 131, 134–135, 139–140, 154–155, 188–189, 191–192, 199, 243, 245, 290–291, 300, 302, 318, 359 external economic environment 117 FDI 20, 213, 350–352 financial bond transactions 171 financial centre 320, 324 financial crisis 21–23, 26, 28–33, 41, 48, 50, 52, 54–55, 61, 70, 73, 75, 79, 82, 85, 93–94, 97–98, 100–101, 103, 107, 109, 115–117, 119, 122, 124, 127–128, 131–132, 135, 153, 159, 161, 165, 168, 172–174, 179, 183, 187, 191–192, 194, 199, 201–203, 213, 216–217, 221, 228, 235, 240–242, 247–249, 251–252, 256–263, 269, 271, 277, 279–280, 285, 289, 291–292, 295, 300–301, 304–305, 308, 310, 312–314, 316, 319, 324–325, 328, 341–342, 347–350, 353, 355–356 financial industry 294, 319–320 Financial innovation 15, 198 financial markets 15, 26, 71, 82, 127, 305, 317, 352–353, 356 Financial risk 126, 128, 160, 191, 199, 218, 353 financial system 14, 27, 66, 121, 126, 134, 187, 202, 213, 301, 310–311, 353 financing platforms 19, 82, 191, 214, 218 fiscal expenditure 33, 71, 88–89, 186, 193, 195, 229, 240, 296 fiscal policy(ies) 22, 29, 32–33, 35, 50, 67–68, 71, 75, 87–88, 102, 104, 115, 121, 128, 139, 154, 179, 183, 186, 193–195, 199, 219, 229–230, 310–311, 325 fiscal revenue 33, 55, 104, 186, 193, 296, 331 fixed asset investment 22, 63, 180, 215, 276, 290, 343–344 food prices 17, 66, 111, 152, 188, 266, 308, 333 foreign direct investment (FDI) 184, 213, 292–293, 298, 350 foreign exchange reserves 14, 125, 131, 209, 213, 217

372

index

foreign trade 23–25, 73, 85, 103, 107, 111, 117, 127, 174, 180, 189, 228, 235, 240–245, 291–292, 299, 348–349 funds 76, 82, 89, 121, 154, 171–172, 176, 206, 217, 221–222, 225–226, 231, 331, 359 gambling 328, 330, 337–338 gambling industry 331–332, 337 gambling revenue 331, 337–338 GDP 9, 26–28, 32, 37, 46, 75, 77, 88, 117, 119, 122–123, 131, 140–141, 146–147, 150, 154, 158, 173, 175, 183, 187, 200–201, 211, 227, 301, 311, 317, 327, 329, 342–344, 347 GDP growth 1, 9, 22, 24, 28–29, 42, 55–56, 62, 65, 88, 97, 109, 114, 119, 139–141, 144–145, 150, 153, 155, 180, 186–188, 191, 209–210, 228, 247, 250, 301–302, 324, 328–329, 343–345 global economy 9, 24, 26, 31, 83, 107, 133, 159, 165, 172, 187, 219, 228, 244, 264, 301, 313, 317–318, 323–324, 337, 341, 350, 357–359 global economic recovery 17, 85, 155, 188, 192, 244, 289, 299, 323–324, 344, 346, 358 global recession 132, 192, 304, 317–318, 341 global reserve currency 354 “go global” development strategy 159 government financing channels 19 government investment 32, 65, 67–68, 71, 81–82, 84, 87, 120, 140, 190–191, 194–195, 197, 214, 218, 225, 228–229, 244, 291, 295, 330 government policy(ies) 6, 61, 103, 258, 264, 274 grain crops 183, 264 grain prices 17, 30, 112, 151, 263–266 Guangdong-Hong Kong-Macao cooperation 319 health system reform 195 Hong Kong 44, 215, 235, 251, 292, 299, 301–302, 304–307, 309–314, 316–325, 330, 338–339, 356 household registration system 72, 252–254, 256 housing 56–58, 63, 65, 69, 71–72, 76, 84, 88–89, 110, 115–116, 124–125, 180, 185, 190–191, 194, 205, 211–212, 227, 269–278

housing construction area 270 housing prices 32, 57–58, 65, 71, 81, 115–116, 125, 185, 190, 193, 211–212, 227, 271–272, 274, 277–278, 335, 338 Housing security 58, 272, 278 housing security system 273, 278 housing social security system 272 housing supply 65, 277 IMF reform 355 import 17, 19, 23–24, 85, 103–104, 107, 125, 135, 184, 188, 193, 201, 228, 235–236, 238–240, 242–245, 259–260, 265–266, 291–292, 298, 304, 306, 318, 330, 336, 342, 344, 347–349 income distribution 1, 34, 81, 88–90, 116, 122, 126, 137, 145, 148, 195 income distribution mechanism 81, 90, 137 income distribution system 88, 116, 126 individual income 122, 135, 137, 177 industrial growth 64, 78, 86, 277 industrial overcapacity 69 industrial production 48, 51, 78, 94, 101–102, 104–105, 154, 183, 293 industrial profits 185 industrial restructuring 3, 5, 87, 253, 286 industrial structure 35, 48, 56, 70, 176, 217 industry access 90 inertia 54, 58, 83, 130–131, 133, 142 inflation 15, 17–18, 28–32, 41, 56, 58, 64–67, 70, 83–84, 86–87, 93, 110–112, 114–116, 131–133, 139, 145, 147, 149–152, 155, 157–158, 160, 168, 175–176, 178, 180, 187, 192–193, 196, 199, 209, 211, 213, 225, 229, 232–233, 269, 274, 308–309, 318, 324, 333 infrastructure projects 20, 82, 312, 318–319, 323–324 innovation 15, 27, 33–34, 71, 82, 89, 123–124, 131, 179–180, 194, 196, 198, 218, 242, 286, 319, 358 Innovative science and technology 322 institutional structure 43 interbank credit market 233 interest rate 12, 31–33, 63, 70, 90, 160, 178, 180, 198, 207, 220, 225, 230, 233, 295, 314, 317 international economic environment 83, 127, 132

index international financial crisis 1, 3, 21–23, 26, 30–33, 41, 48, 50, 52, 54–55, 61, 70, 72, 75, 79, 82, 97–98, 100–101, 103, 116–117, 127–128, 135, 179, 183, 187, 191–192, 194, 199, 201–203, 213, 216, 235, 240–242, 257–263, 271, 279, 289, 292, 295, 356 international financing 252–253 International trade 23, 227, 239, 241, 260, 313 internationalisation of the RMB 355–356 investment 1, 3, 9, 19–22, 26–28, 30, 32–33, 38, 40, 43, 45, 50, 62–65, 67–73, 75–76, 80–84, 86–89, 102, 104, 106, 115, 119–121, 124–125, 128–132, 134–135, 140–141, 144, 148–149, 154, 156–157, 159–160, 167, 171, 173, 176–177, 180–181, 184, 187–189, 191–195, 197, 200, 202, 212–221, 225–229, 232–233, 244, 248 n. 1, 251, 260, 264, 269–270, 272–274, 276–278, 286–287, 290–293, 295–301, 307, 317, 322, 328–331, 341–347, 350–352, 358 investment in fixed assets 22, 27, 38, 48–49, 58, 62, 76, 84, 102, 106, 111, 119, 128, 130–131, 134–135, 153–154, 156–157, 173, 184, 188, 200, 215–216, 277 investment project approval list 197 investment structure 26, 76, 159 Investor confidence 166–167, 352–353 IPOs 65, 161–162, 169, 171, 177, 196, 198, 222–223 Japanese economy

344

knowledge-based economy

324

labour market 149, 247–248, 250–254, 255 n. 4, 256, 308, 314, 316, 325, 347 lagging composite index 97 leading composite index 78, 98–99 leading diffusion index 98–99 Lewisian Turning Point 254–255 listed companies 4, 161–162, 165–166, 180, 219–223, 231 loan(s) 10–11, 14, 19, 31–32, 63, 65, 67–68, 71, 82, 89–90, 104, 108, 115, 119, 121, 123, 126, 131, 155,

373 157, 160, 176–178, 180, 185–186, 190, 196, 198, 204–205, 210–211, 213–215, 218, 220–221, 271, 274–275, 277, 295, 310, 351, 353–355

M&A 351–352 Macao(’s) 44, 251, 319, 324, 327–339 macro-economic control 5, 14, 18, 21, 29, 33, 35, 42, 50, 54, 61, 64, 73, 87–88, 93, 114, 119, 127, 135, 158, 194, 200, 267, 269 macro-economic indicator(s) 139–140 macro-economic indices 105, 219, 247, 249 macro-economic policy 1, 14, 18, 21, 26, 87, 140, 148–149, 156, 161, 179–180, 229 macro-prudential regulation 15–16 market access 27–28, 69, 81, 90, 229, 328 market exit mechanism 69, 72 market interest rate 12, 178, 207 Market liquidity 13, 202, 207, 220 Market mechanism 3, 43, 46, 63, 69, 71–73 Marketisation reform 90, 197 Medical services 322 merger and acquisition (M&A) 352 MICE (Meetings, Incentives, Conventions & Exhibitions) 334–335 micro-economic structure 15 migrant workers 56–57, 124, 189, 247, 250–256, 260–262, 264, 267 Monetary and fiscal policy 67–68 monetary liquidity 203 monetary policy 10–15, 17–20, 22, 31–32, 35, 50, 67–68, 70, 75, 81, 87, 89, 104, 115, 120–121, 128, 139, 150–151, 154, 168, 170, 176, 178–179, 183, 188, 196, 199, 201–202, 207, 215, 217, 219–221, 225, 229–230, 269, 274–275, 295, 354, 357 Monetary system 90, 126, 355–356 money supply 10–11, 13–14, 31, 70, 104, 108, 115, 150, 158, 199, 203, 209, 211, 229–230, 295–296 monopoly industries 6–7, 28, 88, 90, 126, 197 net income 23, 189, 260 noise pollution 284 non-government investment 291, 295

120, 197,

374

index

operating income of agricultural households 120, 197, 291, 295 outward investment 159 overcapacity 16, 64, 69, 75, 80–81, 100, 111, 120, 135, 157, 188–190, 215, 229, 244, 279–280, 290 overproduction 149 ownership structure 43, 45–46, 87 pattern of ownership 43, 197 people’s well-being 35, 75, 81, 87–88, 90, 191, 193–194, 229, 283 personal housing mortgage loans 205 personal income 34, 88, 185, 191 PMI 78, 134, 154, 220, 227, 249 Policy 1, 5, 9–15, 18–23, 26, 29, 31–33, 35, 50, 61, 63, 65–68, 70–71, 73, 75–76, 81, 83–84, 86–89, 93, 97, 100, 102–104, 106, 114–115, 117, 119–123, 125, 128, 139–140, 148–151, 153–154, 156, 159, 161, 168, 170, 172, 176, 178–180, 183, 186–188, 191–196, 199–203, 207, 213, 217, 219–221, 224–225, 227, 229–230, 240, 243–245, 247, 257, 259–260, 262–265, 267, 269, 272–275, 277, 279, 282, 287, 295–296, 299–300, 308, 310–311, 323, 325, 338, 345, 347, 349, 354, 357 pollutant 24, 73, 89, 117, 279–286 pollutant emission reductions 117 pollution 3, 34, 56, 120, 196, 279–288, 322 population structures 48 PPI 17, 40–41, 46, 61, 66, 77–78, 86, 97, 110–111, 113–114, 185, 192–193, 201 price(s) 12, 16–18, 22–23, 28–32, 34, 40, 43, 57–58, 65–66, 71, 73, 76–77, 84–86, 88, 90, 93–94, 103, 106, 109–117, 125, 131, 145–146, 149, 151–152, 155, 158, 160, 166, 175–176, 180–181, 185–190, 192–193, 196–197, 201, 210–213, 217, 227, 237–238, 257–267, 271–274, 277–278, 294, 297, 308, 312, 314, 318, 324, 333, 335–336, 338, 342, 347, 356–357 Price determinants 16 price formation 145–146 price inflation 17–18, 31, 58, 86, 110, 116, 152, 193, 309, 318

price levels 16–17, 22–23, 86, 106, 193, 259, 265 Price reforms 34, 197 price stability 151, 265 private income 23, 55 private investment 27, 81–82, 87, 89, 106, 111, 121, 135, 140, 160, 188, 228–229, 277, 329, 342 processing trade 85, 125, 239–240, 292, 300 production 2–5, 18, 20, 22, 28, 30–31, 48, 51, 57–58, 63, 65–66, 68–69, 72, 77–78, 80, 84–87, 94, 100–102, 104–105, 112, 120, 123, 125, 134, 137, 144–145, 154, 176, 183, 188–189, 197, 242–243, 257–258, 261–267, 281–282, 286–287, 293–294, 322, 347 production capacity 2–4, 18, 20, 30, 57, 66, 68–69, 72, 80, 84, 86–87, 134, 188 protection of resources 73 Public expenditure 311 Public revenue 311, 330 raw materials, fuels and power 94, 176, 193 real estate 17, 48, 65, 68, 71–72, 81, 84, 90, 106, 115, 120, 126, 131, 184, 204–205, 211, 228, 269–272, 274–275, 294, 335, 359 real estate developers 270–272, 275 real estate industry 22, 56, 63, 68, 71, 125, 269, 273, 276–277 Real estate investment 63, 65, 83, 270 real estate market 67–68, 71, 106, 115–116, 155, 190, 205, 269, 271–278, 301, 314 Real estate prices 84, 125, 217, 271–272 real estate transactions 335 reform 6–7, 9, 28, 32, 34–35, 39–43, 45–48, 50, 56, 66, 70–73, 75–76, 84, 87–88, 90, 97–98, 107, 114, 116, 121, 126, 131, 134–137, 148–149, 159, 186, 193, 195, 197, 210, 214, 222–223, 229, 254, 256, 276, 278, 286–287, 319, 324, 352–355, 358 reform of trade associations 7 regional structure 1, 176 relief measures 258, 307, 310–311, 314, 317–318, 352 reserve currency 12, 187, 353–355 Resource pricing 90, 287

index resource supply structure 46 restructuring 1–5, 9, 21, 24, 26, 34–35, 54, 70, 87–90, 114, 135, 159, 189, 194, 196, 253, 280–282, 286, 295, 300, 345, 347 Retail sales 23, 62, 76, 85, 94, 101 n. 4, 103, 106, 122, 153, 174, 184, 201, 307, 314, 334, 345 Retail trade 331 RMB exchange rate 199, 217, 228 savings 13, 84, 148–149, 191, 217, 346 Savings Deposits 84, 167, 177, 206 savings ratio 13–14, 16–17, 85, 215, 217, 358 securities market 94, 162, 222, 227, 353 separately managed accounts 226 service industry 35, 123, 195, 252, 277, 295, 319 service sectors 72, 123, 197 services 6–7, 27–28, 33, 72, 88, 90, 123, 125–126, 175, 195, 197, 217, 242, 253–256, 262, 294, 297, 300, 304–306, 319, 321–323, 329–330, 333 small and medium-sized enterprises 5–6, 27, 137, 229, 242, 252, 262, 310 small and micro-sized enterprise 2–3, 5–6 small-sized enterprises 5–6 Social Security Housing 273, 275, 278 social security system reform 195 solid waste 284 stimulus measures 290, 312, 317 Stock Exchange 223, 225, 232 Structural adjustments 87, 89, 114, 132, 229, 286 summer grain 183, 258 supply 10–17, 30–31, 34, 43, 46, 56–57, 61, 65–66, 68–71, 73, 78, 82–83, 89–90, 103–104, 108, 112, 115, 121–122, 124, 126, 134–135, 137, 144–145, 147–150, 158, 175,

375

180, 193, 199, 202–203, 209, 211–212, 222, 225, 229–230, 233, 242–243, 247–248, 253–255, 257, 259, 264–266, 271–272, 277–278, 287, 295–296, 324, 347, 357 systemic financial risk 353 Taiwan 44, 251, 289, 290–301, 304, 319 tax 23, 63, 71, 73, 88–89, 121, 123, 128, 137, 154, 186, 191, 193, 197, 240, 245, 271, 274, 282, 312, 320, 330–331 tax exemptions 88 tertiary industry 22, 26–27, 46–47, 121, 123, 184, 229, 294–295, 320 Testing and certification 321 tourism 319–321, 328, 332–333, 335, 338 trade associations 7 trade protectionism 23, 26, 85, 174, 227–228, 236, 241, 324, 347 trading conditions 348–349 trading volumes 161–162, 166, 170–171, 180–181, 190, 296, 349 unemployment 26, 82, 88, 132, 148–149, 155, 185, 187, 244, 247–249, 251–255, 277, 291, 297, 299, 308, 311, 316, 318, 324, 331–332, 344–347, 358 Urban and rural development 34, 72, 126 urbanisation 34, 48, 56–57, 63–64, 66, 68–70, 72, 84, 124–125, 131–132, 254–255, 276 US economy 41, 192, 228, 337, 342 vector auto-regression (VAR) model 112–114 warning composite index 101, 104 water quality 284 wind power 80–81, 135