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Current Economic Performance: Issues and Policy Options1
2009-07-27
Liu Shijin, Yu Bin, Zhang Liqun, Yang Jianlong, Li Jianwei, Chen Changsheng & Fang Jin
There were signs that economic performance started bottoming out in January and February 2009. With the implementation of economic stimulus package proposed by the government and its gradual effect, the environment for economic development was expected to improve continuously. At the same time, we should attach great important to issues such as sharpening employment contradictions related to economic operation, dramatic decline of enterprises performance, inflationary pressure related to the swift growth of credit funds as well as risks and challenges facing overseas assets and investment. In light of future work, macroeconomic policies should focus on promoting the rebound of market-driven domestic demand, while maintaining the scope and effectiveness of government investments, avoiding a second round of economic slowdown and reducing fluctuations in economic recovery.
I. Signs of Preliminary Bottom-out Appeared in Current Economic Operation
Since the second half of 2008, economic growth in China has shown a trend of accelerating decline. GDP growth rate declined to 6.8% in Q4 from 10.4% in the first half. Decline of economic growth got accelerated, which was not only due to the impact of international financial crisis and a conspicuous slower growth of world economy, but also related to the fact that domestic leading sectors, such as real estate and auto industries, entered a cyclical adjustment phase after a rapid growth during the previous period. At the same time, the development pattern on which economic growth has been relying for a long period of time was bolstered by low price and high investment of elements, such as labor force, land and resources, so it becomes difficult to keep it sustained when significant changes take place in international and domestic situation, which also add difficulties to economic performance in the short run.
The dramatic decline in economic growth continued from last year to now. In January and February, the growth rate of industrial production hit the lowest record for the past decade. There are also several specific reasons besides the pile-up effect of the above-mentioned factors. First, the change in market expectations and reflection of enterprises' stock adjustment. Under the continuous decline of market demand and price, the over-pessimistic expectations were gradually multiplied, and the market got further shrunk by enterprise production suspension and destocking. Second, heavy industry which holds a considerably significant position in current growth showed an accelerated upward or downward trend. Owing to the long industrial chain, lots of intermediate products and large investment demand, once the ultimate demand shrinks, its effect will spread along the industrial chain and further amplify its negative impact on the whole national economy. Third, with a high foreign trade dependence ratio, prices of commodities against the background of financial speculation in international markets dramatically declined and imposed severe impacts on domestic price system, which generated the phenomenon of "over-adjustment" to a certain extent. What is worth mentioning is that the adjustment, different from previous ones, was based on the conditions of China's entry into WTO and basic formation of market economy system. Once the market changes, enterprises respond more promptly than before in reducing their stock and output. The phenomenon that enterprises keep the same output and stock, lacking of care for market changes, are rarely seen. It shows that some positive changes have taken place in China's micro-economic mechanism.
The CPC Central Committee and the State Council put forward the economic stimulus measures according to the changes in international and domestic economic situation, including dramatically increasing financial input and implementing structural tax reduction, establishing a massive plan for industry adjustment and reinvigoration, providing vigorous support to science and technology and significantly increasing social security benefits. Policy effects started to work and some economic indicators had gradually returned to normal in January and February. First, the credit scale has been continuously and rapidly expanding. New loans amounted to 3.46 trillion RMB from last December to February 2009. Past experience shows that expansion of M2 and credit scale are two important leading indicators of economic recovery. Second, PMI has been rising continuously. After hitting the lowest point of 38.8 in last November, it has been rebounding for the fourth successive month and it increased to 52.4 in March. Among them, some key indicators, such as new orders index and employment index have shown various recoveries. Third, the growth of fixed assets investment reached a considerably high level. In January and February, fixed assets investment increased by 26.5%. Fourth, the decline of output and sales volume of key products, such as power generation, raw coal, cement, steel, auto and commercial housing conspicuously slowed down. According to preliminary judgment, last Q4 and Q1 in 2009 might have witnessed the lowest point of this round of economic adjustment.
On the other hand, the situation of major economies such as the United States, Japan and EU is not stable and is possible to further deteriorate. In addition, domestic investment and consumption demands are to be further launched, and the downward pressure facing economic growth in China has not been fundamentally relieved. In January and February, the growth rate of industrial added value was only 3.8%, the profits of industrial enterprises above designated scale declined by 37.3% year on year, and foreign export posted a 21.1% negative growth. Recently, the result of a questionnaire conducted by Chinese Entrepreneur Survey System on over 1,000 entrepreneurs showed that over 50% of entrepreneurs were comparatively pessimistic about economic situation in 2009. Therefore, some economic indicators are returning to normal in the short run, overall economic operation is preliminarily stabilizing, but its sustainability still needs further observation
II. Recovery in Market-driven Domestic Demand Is the Key for Continuous Recovery of the Overall Economy
The factors influencing economic growth for the whole year can be observed from three aspects including foreign demand, market-driven domestic demand and government input. If economic growth tends to stabilize recently and recovers to a certain extent, it is mainly due to the effect of increased government input. It is difficult to expect foreign demand to make a positive contribution to economic growth in the short run. Therefore, the recovery of market-driven domestic demand is key to the continuous recovery of overall economy.
1. Decline of export tends to slow down, but the possibility of further slide is not excluded
Foreign demand dramatically declined owing to the impact of international financial crisis and economic recession, and it is inevitable for China's export to experience a dramatic negative growth in 2009. On the one hand, foreign importers dramatically compressed stock in order to lower market risks and reduce tied-up funds, which led to remarkable reduction of export orders. On the other hand, the exchange rate of some countries dramatically depreciated, which damaged the competitiveness of China's export products. Since China's export reported negative growth on a year-on-year basis in last November, the decline was expanding month by month. Among them, processing trade-oriented IT products became the main factor that dragged export slide, while the decline of export volume of light industry and textile products, such as garments, shoes, cases & bags and toys was comparatively small. Recently, both domestic and international markets see certain positive changes. First, thanks to the increased export rebate rates for labor-intensive products, there is a significant rebound in exports, and relevant adjustments may be made ahead of other items. Second, processing trade shows a steady downturn. In February, exports in processing trade dropped less than that in January as well as the overall exports for the first time in the past four months. Drop in gross export has slowed down recently due to the predominant role played by processing trade to a certain extent. Third, American market shows signs of stability in demand for consumer goods. In February, American commodities and other shops for daily necessities, exclusive boutiques for clothing, furniture stores and non-fuel commodities of Wal-Mart's sales rose by 1.3%, 2.8%, 0.7% and 4.5% month on month respectively. In addition, as developed countries have taken economic stimulus plans in succession, if private consumption ceases to slip, inventory adjustments of overseas retailers will be completed in the second quarter, and purchase orders will increase gradually. Based on the above analysis, while export growth dramatically slowed down in both January and February, exports will rebound gradually in the near future. Full year gross export is expected to be a negative growth rate of 10-15% year on year.
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1DRC task force on Analysis of Economic Situation. Leaders: Liu Shijin, Jin Renqing, Hou Yunchun and Lu Zhongyuan. Coordinator: Yu Bin. Director-Generals of relevant research departments from DRC and members of the task force participated in the discussion.
