Yu Bin & Zhang Liqun

Since the beginning of this year, the Chinese economy has maintained a steady growth momentum despite a marked slowdown in the world economy. The growth of domestic investment demand has been strong, the growth of consumer demand has been steady, the structure of supply has improved, and the quality and efficiency of economic operation have been improved further. Economic growth is expected to reach about 7.5 percent for the whole year. In the year 2002, the following issues concerning economic operation should receive special attention if the sustained and steady economic growth is to be maintained.

I. The Impact of the Sluggish World Economy on China’s Economic Development Should Not Be Underestimated.

In 2001, the world economic growth has visibly slowed down due to the recession in the United States and the prolonged downturn in Japan. The September 11 Event aggravated the situation, making the economic prospect of the United States and the world in general even gloomier. Morgan Stanley believes that the September 11 Event delayed the U.S. economic recovery and the global economy may have to face the biggest recession since World War II. The International Monetary Fund also warns of a longer and more severe global economic recession. In light of the conditions in major countries and regions, the world economy can hardly expect a visible recovery in 2002. Therefore, the impact of clearly increased uncertainties on China’s economic development should not be underestimated.

The U.S. economic downturn appeared after a 10-year prosperity and the burst of the new economy bubble, and an adjustment and recovery will take a fairly long period of time. The September 11 Event has severely weakened the confidence of both consumers and investors and boosted the risk-averting consciousness of the people, which will have a profound indirect impact on the U.S. economy. As the consequences of the event are still unfolding, it is still difficult to determine their impact on the United States and the world political and economic order. The recovery of the U.S. economy is expected to delay for at least one year. Whether a recovery can appear at the end of next year still depends heavily on how the U.S. war against terrorism will develop and how the domestic consumers and investors will regain their confidence.

The European economy is still at a low ebb. Germany reported a zero economic growth in the second quarter, and Italy reported a 0.1 percent negative growth. In France, investment began to decline and the government expects the growth to be around 2.1 percent. Although the European Union countries have set the goal for a mid-term growth recovery, their economies can hardly expect a visible recovery due to the bleak U.S. economic prospect. The IMF forecasts that the GDP growth of the Eurozone countries would be about 2 percent in 2001 and 2002.

Japan’s economic recession will deepen further. Its economic growth in the second quarter was negative 0.8 percent and its unemployment rate in July reached 5 percent, the highest level since World War II. As large numbers of enterprises went bankrupt and corporate debts rose, the bad assets of financial institutions remained high and investment confidence was extremely weak. In addition, consumption shrank and deflation sped up. The IMF forecasts that Japan’s economic growth this year will be negative 0.5 percent. Because of their close links with the U.S. economy, the economies in Southeast Asia were adversely affected. As these economies have lots of inherent structural and systematic problems and their foundation for recovery was not solid, their future development trend allows no optimism. The Asian Development Bank believes that the economies in East Asia have no hope of recovering this year and its growth is expected to be around 5.7 percent. Compared with this region’s 7.5 percent actual growth in 2000, the trend of an economic downturn is quite obvious.

In general, the world economy will continue to be sluggish and uncertainties will increase. This will have a considerable negative impact on the development of the Chinese economy. First, export environment will deteriorate further. In the first three quarters of this year, export grew only by 7 percent over the same period a year ago, the increase was 26.1 percentage points lower. A continuing fall in export growth is inevitable next year, with its pulling effect on economic growth weakening further. Next, the problem of global overproduction, price fall and excessive competition will become even more conspicuous. All these will spread to China more visibly through price changes on the international market, import and other channels after China’s WTO accession. This will increase the pressure of domestic deflation. Third, the sagging world economy, the sluggish stock markets and the increased financial risks will adversely affect the overseas fund raised by the Chinese government and enterprises. Fourth, the war against terrorism could aggravate regional conflicts, increase the uncertainties in the world political and economic order, and impair China’s import of oil and other essential materials and its economic security.

On the other hand, we should also see that the changes in the international economic environment have created favorable opportunities for China to attract technologies and equipment and promote industrial restructuring and upgrading. Worldwide deflation, overproduction and fiercer competition have reduced the cost of China’s imports. The Chinese currency RMB is in a state of relative appreciation against other foreign currencies except the U.S. dollar. The continuous increase in foreign exchange reserves has offered a favorable condition for China to import major technologies and equipment. China’s excellent momentum of economic development and its enormous market potential have further increased its appeal to foreign capital and technologies. In the meantime, China is at a critical juncture in industrial restructuring and upgrading. Strengthening economic and technological cooperation and exchanges with energetic foreign enterprises and importing technologies and equipment for key areas and links will be of vital importance to enhancing the international competitiveness of the Chinese industries, narrowing their technological gap with foreign counterparts, meeting the challenges arising from WTO accession and easing bilateral trade frictions. At this moment, therefore, China should work out strategic plans for the import, the digestion of major technologies and equipment, the establishment of joint ventures and the cooperation by taking full advantage of the favorable opportunities arising from the changes in the international economic environment. China should not confine itself to realizing annual trade surplus and import-export balance. Instead, it should expand imports to promote the adjustment and upgrading of the industrial structure.

II. The Foundation for Sustained Expansion of Domestic Demand Is Still Not Solid.

Since the beginning of this year, while the contribution to economic growth by foreign demand has visibly weakened, the expansion of domestic demand has become the main driving force for economic growth. In the first three quarters, the total amount of fixed asset investment and the total amount of retailing consumer goods increased respectively by 15.8 percent and 10.1 percent, or 2.9 and 0.2 percentage points, over the previous corresponding period. Under the circumstance of continued sluggish world economic growth, China’s economic development next year will continue to rely on the expansion of domestic demand. In view of the present conditions, there are both factors promoting and restraining the growth of investment and consumer demand. As a result, the foundation is still not solid for a continued expansion of domestic demand.

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