BEIJING - Although
China's economy is expected to follow 2005's
steady and rapid growth this year, with imports
and exports growing rapidly, the broad money
supply increasing sharply and consumer prices
picking up slightly, there are numerous signs
indicating that growth could slow significantly in
2006 compared to last year.
The situation
analysis task group of the Macroeconomic Institute
under the National Development and Reform
Commission (NDRC), China's main economic planning
body, recently made an analysis of the major
leading macroeconomic indicators in China, and
found that the overall
economy is steady, but signs of a slowdown are
emerging.
Due to seasonal factors, some
major macroeconomic indicators rebounded and
picked up to a certain extent in January. However,
amid the steady performance, the group identified
the following signs of decelerated growth:
Though industrial
production has continued to grow steadily and
rapidly, the speed of production of raw materials,
with heavy industry as the representative, has
obviously dropped. While industrial production as
a whole maintained a growth of 16.4% in 2005,
China's heavy industry grew 18.6% in 2003, 18.2%
in 2004 and 17% in 2005, and the growth gap
between light and heavy industries has narrowed
from 4 percentage points in 2003 to 1.8 percentage
points in 2005. A decrease in the growth of heavy
industry is mainly attributable to a fall in the
growth of the raw materials industry. China's raw
coal output growth has been slipping since June,
from 12.9% to 11.5% currently; steel products,
from 35.5% to 17.4%; and power, from 14.9% in July
to 10.9% in November. Quantitative analysis shows
that the growth of raw coal, steel products and
power output usually leads the national economic
growth by about 12 months.
The growth in fixed
assets investment is slowing down. Quantitative
analysis shows that fixed assets investment of
more than 500,000 yuan (US$62,122) in urban area
in China has dropped from 29.4% in September to
24.2% in December. Once the downward trend is
established, the possibility for rebound of fixed
assets investment will be slim. Meanwhile, China's
investment in real estate development has dropped
from more than 40% at the beginning of 2004 to
about 20% now.
The rate of export growth is clearly dropping.
China's import and export value reached $120.49
billion in January, up 26.8% year-on-year. To be
specific, exports were $64.99 billion, up 28.1%,
which is 9.9 percentage points higher than in
December and 1.5 percentage points higher than in
January 2005; imports, $55.5 billion, up 25.4%,
3.2 percentage points higher than in December but
14 percentage points lower than in the same month
of 2005. It is expected that China's exports will
grow 15-20% this year. China's economic growth has
relied heavily on demand from the outside in the
past few years. While domestic demand can hardly
report breakthrough growth, if the demand from the
outside weakens, the economic growth as a whole
will inevitably slip.
All these factors indicate
that China's economy faces pressures this year
that will tend to cause a slowdown. In addition,
there are two structural issues that may cause an
abrupt downturn in economic growth in China which
merit attention:
Excessive production
capacity has become a serious barrier hindering
steady economic performance. In fact, the problem
aroused the attention of the country's economic
planning agencies some time ago, and they have
adopted and are implementing corresponding
measures to ease the situation. However, the
overproduction problem cannot be resolved in the
short term. If the situation is not tackled
properly and in a timely manner, it may result in
a price slump for industrial products and a slide
in enterprise profits, increased losses,
undercapacity operation of enterprises, lowered
investment expectations of enterprises and lowered
consumption anticipation on the part of consumers,
and increase the percentage of non-performing
assets at banks. In fact, enterprise losses have
increased by 38.8% year-on-year to reach 192.3
billion yuan in 2005, with a loss coverage rate
reaching 18%. Some enterprises have already had to
operate under capacity and cut payrolls.
The overall price level has dropped and
deflationary pressure is increasing. This topic is
a hot subject of debate in theory circles. Some
hold that there is neither inflation nor deflation
in China now; some suggest guarding against
inflation as well as deflation; some suggest
guarding against inflation; and some, guarding
against deflation.
The case for
fighting deflation The NDRC task group has
endorsed the opinion of those who argue for the
need to guard against deflation. Price hikes
triggered by price adjustments of resources do not
necessarily lead to inflation, only price hikes
caused by brisk demand and overly rapid increases
in the money supply can trigger inflation, and
these factors are obviously are not present
currently.
On the contrary, while the
growth of total supply has grown at a rate faster
than that of total demand, prices of various
products have sharply dropped. This is an obvious
sign that China's national economy faces
increasing potential for deflation.
First
of all, growth in the consumer price index (CPI)
has stayed below 2% for nine consecutive months,
and there is slim chance it will noticeably pick
up this year.
Second, the ex-factory
prices (the price before the buyer takes
possession of the purchase) of industrial products
and the purchase prices of raw materials, fuel and
power has significantly dropped: growth in the
ex-factory price of industrial products has
dropped from 5.9% in May to 3.1% in January; and
growth of the purchase price index of raw
materials, fuel and power has dropped from 9.9% in
May to 5% in December.
Meanwhile, an
investigation of the Ministry of Commerce predicts
that of the 600 kinds of major consumer goods,
71.7% will be oversupplied in the first half of
this year, and there will be no commodities
undersupplied. Of the 300 kinds of major capital
goods, 23% will be oversupplied; supply and demand
will be balanced for 72.7%; and only 4.3% will be
undersupplied or in tight supply. Most of the
latter are energy resources and nonferrous metals.
Considering all the foregoing, if China
wants to maintain the situation of high growth and
low inflation in 2006, it must wield macroeconomic
control levers properly.
