TUESDAY MAY 17, 2005 CHINA DAILY
World Bank ups China’s 2005 growth forecast
Investment rebound in early 13.7 per cent in the ﬁrst quarter year-
on-year, compared to an average of
Inflation slowed down. The in-
creases in the overall product price
part of year raises concerns 13.3 per cent in 2004.
Exports have continued to soar
index (PPI) and the PPI for raw
materials declined to 5.6 and 10.1
in 2004, while imports have slowed per cent year-on-year in January-
The World Bank has raised its 2005 now include improving the quality significantly. This has provided a March, from their peak in October
economic growth forecast for China of growth and the creation of a boost to industrial production and 2004 of 8.4 and 14.2 per cent. Tariff
to 8.3 per cent from the previous harmonious society. New areas of overall GDP growth, but the result- cuts, productivity gains, and intense
7.8 per cent, citing stronger-than- policy focus include: ing rise in the balance of payments competition continued to push down
expected exports and consumer s Agriculture and rural areas; surplus may complicate monetary many consumption goods prices,
spending, according to a recently including by increasing productivity, management. while prices of food and housing
published report. improving rural infrastructure, and Merchandise exports rose by 34.9 increased by 6.1 and 5.6 per cent
Consumer inﬂation will slow to speeding up the transfer of rural per cent in January-March 2005 year-on-year.
3.5 per cent this year from 3.9 per surplus labour. The latter is key year-on-year, whereas import growth CPI inﬂation reached 3.9 per cent
cent in 2004, while growth in the for boosting rural incomes and slowed to 12.2 per cent, reﬂecting an in February, boosted by the Spring
money supply has moderated to 14 mitigating urban-rural inequality. easing of domestic demand growth, Festival holiday, but then fell to 2.7
per cent, reducing pressure on the s “Weak links in social as well as a particularly high base in per cent in March.
government to tighten monetary development,” including education, early 2004.
policy, the report said. where a new initiative aims at As a result, the trade surplus Outlook remains favourable
China’s economy continues to ex- improving access in poor areas, and reached US$16.6 billion in the ﬁrst The macroeconomic outlook for
pand at a rapid pace, recording 9.5 support for counties and townships three months, compared with a 2005 remains favourable. Although
per cent growth in 2004. Investment in ﬁnancial difﬁculties. US$8.4 billion deﬁcit in the same world growth is likely to come down
in China has reached a record esti- s Changing the role of the period last year. from the record 3.8 per cent in 2004,
mate of 45 per cent of gross domestic government, with Premier Wen If current trends were to continue, with 3.1 per cent it is still above the
product (GDP), as the Chinese au- Jiabao emphasizing the need to the trade surplus in 2005 would reach trend.
thorities continue to take measures move toward a service-oriented well over US$100 billion, compared World trade is expected to grow
to cool down the economy, including government that withdraws from to US$32 billion last year. by 7.7 per cent, 2.5 percentage points
a small rise in interest rates. attracting business and investment However, a closer look at the below 2004 growth.
Following is the Washington- and intervening in production. driving forces of the turn-around On the back of moderate credit
based lender’s analysis on China’s in the trade balance indicate that a growth and sliding profitability,
economy in the ﬁrst quarter of this Recent developments and outlook signiﬁcant component is cyclical, and domestic demand is likely to ease,
year. Changing composition of demand should diminish in importance in the although it remains robust.
abates overheating concerns course of 2005. We expect moderate underly-
Overview A rebound in investment in early The turnaround in trade ﬂows was ing inﬂation pressures, and strong
Domestic demand is cooling 2005 raised concern among analysts, particularly pronounced in basic ma- fiscal and external positions. The
down, but external demand keeps but the trend remains one of a slow- terials. Domestic demand for these authorities’ targets for 2005 are a
GDP growth high. Real ﬁ xed asset down, and the changing composition products cooled off as sectors such as GDP growth rate of 8 per cent and
investment (FAI) growth was 17.2 per should give some comfort to policy construction and cars were affected average CPI inﬂation of 4 per cent.
cent year-on-year in the ﬁrst quarter makers that the policies introduced by the policy tightening, and, in the We project GDP growth of 8.3 per
of 2005, which is down from 24.9 per in 2004 are working. case of cars, by the prospects of re- cent and average CPI inﬂation of 3.5
cent in 2004, although up from the Fixed asset investment grew by duced tariffs next year. per cent, recognizing that the newly
15.5 per cent in the ﬁnal quarter of 17.2 per cent year-over-year in the In contrast, production capacity released data suggests upward risk
last year. ﬁrst quarter in real terms, which is up had expanded rapidly due to high to our projection.
Investment is shifting away from from the 15.5 per cent growth in the investment in previous years. Risks remain, domestically as well
sectors previously considered as last quarter of 2004, but still lower For example, crude steel output as on the international front. Domes-
overheated such as steel and ce- than the 24.9 per cent in 2004. capacity will have increased about 40 tically, risks are still on the upside,
ment. Retail sales growth is gaining Moreover, the number of new per cent between 2003 and 2005. With as a rebound in investment activity
momentum, although consumption projects declined in January-Febru- strong incentives to sell abroad, these remains a possibility as long as the
growth is still likely to lag GDP ary, with a 6.6 per cent fall in new industries suddenly turned from net incentives on local governments to
growth for the year. investment volume. The differences importers into large net exporters. pursue growth remain unaltered
Tax revenues also suggest a slow- in the pace across sectors reﬂect last A more secular improvement in the and real interest rates remain low.
ing in domestic demand, and trade year’s administrative tightening trade balance of “machinery and Internationally, the biggest risk is a
data confirm this trend. At the policies: investment in industries transport equipment” is related to slowdown in growth in key markets,
same time, the rising trade surplus considered bottlenecks, such as the rapid development of the elec- although China’s strong external po-
is boosting industrial production and coal mining, oil reﬁ ning and utili- tronics industry in China. sition (including low external debt)
kept GDP growth rate at 9.5 per cent ties, grew rapidly, while investment Sourcing an increasing share of provides a buffer.
in the ﬁrst quarter, the same as that in metals and non-metal mining components from domestic sup- Further, the rapidly increasing
in the fourth quarter of 2004. industries, which were considered pliers, this sector contributed over trade surpluses may yet compro-
Slower money growth indicates overheated in 2003 and 2004, actu- one-quarter to the total turnaround. mise monetary management, while
that external surpluses pose as of ally fell year-on-year in the ﬁrst few The increase in textile exports after it could also result in mounting trade
yet little risk to China’s monetary months of 2005. removal of the Multi-Fiber agree- tensions, especially in sectors such as
policy. Money growth in the first A sector that has attracted ment has made a more modest textiles, where China’s exports shift-
few months of 2005 is compatible the authorities’ attention is real contribution. ed to markets previously protected
with the 15 per cent growth target estate.Nominal investment in this In fact, growth in textile exports is under the Multi-Fiber Accord. A customer purchases seafood at a supermarket in Zhengzhou, Central China’s Henan Province. China’s economy continues to expand at a
for the year, and the record balance sector grew 26.7 per cent in the ﬁrst lagging that of overall exports, and In these circumstances, the pru- rapid pace, recording 9.5 per cent growth in 2004. SHA LANG
of payment surpluses seem as of quarter year-on-year, amidst price China’s trade surplus in this sector dent monetary and ﬁscal policies the
yet to pose little complications to increases of around 10 per cent for declined in the ﬁrst few months of government has announced remain broadly in line with the target of 4 assets abroad, and letting them keep surplus labour out of agriculture,
monetary control. The authorities rents and housing prices according to the year. appropriate, if this means that there per cent in 2005, pressures for further the capital raised abroad. and fuelled urban-rural inequality.
have announced measures encour- a recent survey by National Bureau But in markets previously pro- is f lexibility to adjust the policy tightening of the overall monetary In addition, companies are now al- A changing pattern of growth, with
aging capital outﬂows to dampen of Statistics and National Develop- tected by the Multi-Fiber Accord, stance to changing circumstances. policy stance have receded. lowed to keep their current account more growth of the services sector
upward pressure on the exchange ment and Reform Commission. China’s market share still grew Over time, implementing the In March the PBOC cut the inter- foreign currency receipts abroad and more urban employment growth,
rate, although this might result in In real terms, real estate in- rapidly. government’s goal of a more ﬂexible est rate paid on commercial banks’ longer. The government announced would have a favourable impact on
increased vulnerability down the vestment growth is thus broadly China’s terms of trade deterio- exchange rate regime would help in excess reserves from 1.62 per cent to it will take further steps to liberalize urban employment and urban-rural
road. The authorities have also taken in line with overall investment rated further in 2004. focusing monetary policy more on 0.99 per cent, leaving the interest rate outﬂows towards “full convertibility inequality.
steps to improve the operations of the growth.Moreover, possible regional Their deterioration by about 5 per domestic goals. paid on required reserve unchanged of the yuan.” As the heavy and chemical indus-
foreign exchange market. bubbles notwithstanding, double- cent translated to a 1.5 percentage at 1.89 per cent. While the decline So far these measures have not tries continued to outperform other
The macroeconomic outlook for digit growth in real estate is not point of GDP purchasing power Economic and social policies may induce more liquidity in the yielded signiﬁcant capital outﬂows. industries, a debate has ensued on
2005 remains favourable. Global necessarily excessive, particularly for loss. In 2004, fiscal policy started market, it facilitates the development Indeed, given the current favourable whether China should follow the ex-
growth is expected to slow down a rapidly growing economy in which This was in spite of an increase to withdraw stimulus from the of the currency market by establish- market sentiment, such policies are perience of Japan and South Korea
from its record 2004 level, but still housing services still take up a small in export prices of 5 per cent in economy. Of the 406 billion yuan ing a better-structured yield curve. It unlikely to be effective in reduc- by encouraging the development of
remain robust, barring sharp ad- share of household consumption. 2004.However, import prices, no- (US$48.9 billion and 3 per cent should also lower the cost of steriliza- ing net capital inﬂows or counter heavy and chemical industries.
justments in the US dollar, global Nevertheless, the authorities an- tably commodity prices, rose more of GDP) of higher than budgeted tion operations. pressures on the currency in the Local economists are divided
interest rates, and oil prices. nounced steps to help damp invest- rapidly, and China’s appetite for revenue, 248 billion yuan (US$30 The concerns about overheating of near term. In fact, the relaxation of on the issue: some argue that the
For China, we expect a further ment in this sector, including a tight- commodities was contributing to billion and 1.8 per cent of GDP) the real estate sector have, however, restrictions on capital outﬂows may development of heavy and chemical
easing of domestic demand growth, ening of credit and land supply. this trend. was spent, of which 128 billion yuan also led the PBOC to effectively raise encourage more inflows as inves- industries is unavoidable, and that
notably investment, on the back of Mortgage interest rates were Driven by strong external and to a (US$15.4 billion and 0.9 per cent of the interest rate for mortgage loans tors see that it has become easier to the market should decide. Others
limited credit growth and sliding increased, and the recommended lesser extent consumer demand, in- GDP) on repayment of arrears on by 20 base points, by changing the move the assets abroad in the future argue that their development
proﬁts. down payment on houses was in- dustrial production rose 15.1 per cent VAT rebates and the remaining 120 formula that links the mortgage rate if necessary, hence reducing the risk should be discouraged in light of
Inf lation is likely to remain creased from 20 to 30 per cent of year-on-year in January-March, up billion yuan (US$14.4 billion and 0.9 to the commercial lending rate from of speculating inﬂows. their unfavourable impact on natural
within the government’s target the price. from 14.4 per cent in December. per cent of GDP) in other spending. a level lower than the commercial Relaxing controls on capital out- resources and the environment, and
range, whereas China will retain its The city of Shanghai announced The metallurgical and electronic If the latter payment is consid- lending rate to no less than the lower ﬂows too fast could increase vulner- limited job creation. A third group
strong ﬁscal and external positions. that owners could only sell their industries grew particularly rapidly, ered to be a repayment of debt, band of commercial lending rate, or abilities down the road. In particular, argues for “smart” development
We project a GDP growth of 8.3 per property after they have paid off by 26.8 per cent and 19.1 per cent in and therefore a below-the-line item, 90 per cent of the benchmark lend- once the global economic situation of heavy and chemical industries
cent and inﬂation of 3.5 per cent. their mortgage. January-February, followed by the the deﬁcit was, with 0.6 per cent of ing rate. Bringing the long-term changes and market sentiment turns by introducing energy-saving and
Given the constellation of risks, While such steps will take time to chemical industry, electricity pro- GDP, considerably smaller than the mortgage rate to 5.51 per cent, – for example, with a sharp rise in the environment-friendly technologies.
prudent economic policies are ap- have effect, the announcement may duction, telecommunication instru- 2.8 per cent recorded in 2003, as well compared to targeted inﬂation of 4 US interest rates, or a weakening of The government intends to shift
propriate. Domestically, risks are already affect market expectations, ments and textiles industries, while as the planned 2.5 per cent of GDP per cent, this move has only limited China’s growth prospects – the re- spending from ﬁnancing infrastruc-
on the upside, particularly in invest- which in turn could help curb real automobile output was sluggish. for 2004. impact on the incentives for real laxation of capital outﬂows will make ture investment to providing public
ment. Externally, downside risks estate investment. The strong showing of exports Fiscal policy is to be “prudent” estate investment stemming from a it easier for capital to ﬂood out. goods and services.
appear to dominate, largely weaker Household consumption has re- and industrial production led to in 2005, as announced in Finance relatively low interest rate. The resulting increased variability In light of the above refocusing,
than expected world growth and mained buoyant in the wake of strong GDP growth in the ﬁrst quarter of Minister Jin Renqing’s report to the The PBOC also encouraged com- in capital ﬂows would increase the the 2005 budget identifies as key
complications stemming from the household income and employment. 2005 of 9.5 per cent, the same as the NPC plenum. mercial banks to raise the ratio of vulnerability of China’s currency targets: agriculture and rural areas;
large trade surplus. Urban per capita income increased fourth quarter of 2004. Neverthe- Targets for 2005 include a ﬁscal the initial down payment from 20 to and financial system. Given the counties and townships in difﬁcul-
The National People’s Congress 11.3 per cent in the year to January- less, with a signiﬁcant component deﬁcit of 2 per cent of GDP, and a 30 per cent. already existing vulnerabilities in the ties; and investment for weak links
(NPC)’s March session conﬁ rmed March, and rural per capita cash in- of the trade turnaround cyclical, decrease in the issuance of construc- In its 4th quarter 2004 monetary domestic ﬁnancial system, it may be in social development (education
a broadening of government policy come increased an even higher 15.9 its impact on GDP growth should tion bonds to 80 billion yuan (US$9.6 policy implementation report, the appropriate for China to move slowly and health); although many of the
objectives. Beyond growth, these per cent.Nominal retail sales grew by decline throughout 2005. billion), 30 billion yuan (US$36 bil- PBOC announced planned structural and cautiously in further liberalizing speciﬁed policy initiatives appear
lion) less than in 2004.Compared to and institutional reforms, including the capital account. modest in 2005.
the outcome in the deﬁcit in 2004, a building up pricing capacity among The government’s “rewards and
2 per cent deﬁcit still seems rather ﬁnancial institutions, developing the Broadening of policy objectives subsidy” initiative recognizes the
large for an economy that still faces ﬁnancial market, carrying forward The favourable macroeconomic signiﬁcant ﬁscal problems of coun-
considerable demand pressures. banking reform, and deepening for- outlook, on the back of an impres- ties and townships, it tries to struc-
However, with a growth assump- eign exchange management reform. sive growth record, allows policy ture a set of incentives and sanctions
tion of 8 per cent underlying the ﬁscal makers to broaden policy objectives. to improve local ﬁscal performance,
numbers there is again considerable Increasing exchange rate ﬂexibility As outlined by Premier Wen Jiabao and recognizes that local spending
potential for revenue growth higher In response to increasing pressures in his speech to the March National is often inefﬁcient and that counties
than budgeted. on the RMB, as China’s foreign ex- People’s Congress, the govern- and townships may be overstaffed.
Indeed, in the ﬁrst three months of change reserves rose by a record ment’s objectives are now to create Fifteen billion yuan (US$1.8 billion
the year, revenue growth amounted US$206 billion in 2004 and the a “harmonious society” and focus and 0.1 per cent of GDP) is allocated
to 20.4 per cent – lower than last trade balance has shifted into a large on the “five balances” including for central government transfers to
year’s 25.7 per cent, but still far surplus, the government is resisting the balance between economic and county-level government, based on
outpacing the projected 11 per cent rapid changes in the exchange rate human development, domestic and performance judged using criteria
even though the slowdown to a 17 per regime but has announced a series external economy, man and nature, including streamlining of the local
cent increase year-on-year in March of measures to encourage capital rural and development, and interior government.
reﬂects the expected slowdown in outﬂows. and coastal development. Nevertheless, expectations of their
domestic demand. Premier Wen Jiabao announced For 2005, the prime minister an- impact should be modest, given that
It would be prudent to refrain from that China would change its exchange nounced the policy priorities to be the size of the transfers involved is
spending these additional revenues, rate regime in an unexpected manner (i) the government’s function and limited and there is little interna-
or use them to pay off debt, either and at an unexpected time. organization; tional evidence that transfers have
directly, or indirectly, for instance Meanwhile, the experiment with (ii) SOEs and corporate govern- been used effectively as an incentive
by replenishing the Social Security market makers in the foreign ex- ance; to increase local revenue mobiliza-
Trust Fund. change wholesale market has been (iii) the ﬁnancial sector; tion.
widely viewed as part of a pragmatic (iv) rural ﬁ nance; and The initiative does also not
Monetary and exchange rate policy movement toward a more ﬂexible ex- (v) social security. address the deﬁciencies in the inter-
Though large and potentially volatile change rate regime. governmental ﬁscal system. Further
external surpluses have complicated The measures to encourage capital Modifying the pattern of growth reforms aimed at increasing local
monetary policy operations, they outﬂows include: encouraging Chi- Under the capital and resource revenues could usefully consider
have not affected the People’s Bank nese companies to invest overseas intensive growth strategy focused giving local governments more
of China’s (PBOC) ability to reduce through the “go global” initiative, al- on industry, since the early 1990s, local autonomy in taxation, reducing
money growth to 14 per cent year-on- lowing Chinese insurance companies urban job creation has been modest the overall level of transfers in the
year at end-March, below the year-end and pension funds to invest in over- despite strong growth, which has system and targeting them better to
The Chinese character for “tax” is seen at a taxation bureau in Zhengzhou. Tax revenues have greatly spurred China’s economic development. target of 15 per cent. seas stocks, giving companies more hampered the reduction in urban the poorest areas, and linking tax
SHA LANG With CPI inﬂation projected to be freedom to transfer foreign currency unemployment and the transfer of payments to services delivered.
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