By Zhang Liqun, Li Jianwei, Chen Changsheng & Lu Zhongyuan, Department of Macroeconomic Research, the DRC

In the first half of the year, the national economy continued to maintain a strong momentum of rapid growth. The aggregate demand boomed, the bottleneck restraints were alleviated, employment increased, the market prices were kept at a reasonable level, the overall economic benefit of the enterprises turned out good, and the financial revenues grew fast. However, issues like the excessively fast increase of investment, the excess of monetary aggregates, the aggravation of the balance of payments disequilibrium, and the soaring of housing prices by a big margin in some of the cities, existed in the course of the economic performance, which formed the underlying threats against the stability and the sustainable and healthy development of the macro-economy. Guided by the state macro-control policies, economy in the whole year will continue to maintain a steady growth at a higher level. It is estimated that GDP will score a growth rate of 10% or so and that household consumer price index will rise within the rate of 2%.

I. Basic Momentum of the Economic Performance in the First Half of the Year

1. The national economy maintained a strong momentum of rapid growth

According to preliminary calculation, the GDP amounted to 9144.3 billion yuan in the first half of this year, registering a growth of 10.9% year-on-year, an increase of 0.9 percentage points as compared with the same period of last year. Industries above designated size throughout the country fulfilled an added value of 3968 billion yuan, up 17.7% year-on-year, an increase of 1.3 percentage points. Fixed asset investment of the whole society amounted to 4237.1 billion yuan, up 29.8% year-on-year, an increase of 4.4 percentage points as compared with the same period of last year. The total retail value of the social consumer goods reached 3644.8 billion yuan, up 13.3% year-on-year, and actually up 12.4% with the price factor being deducted, an increase of 0.4 percentage points over the same period of last year. The foreign trade surplus amounted to 61.4 billion US dollars, increasing 21.8 billion US dollars as compared with the same period of last year.

In general, investment, consumption and external demand grew simultaneously and rapidly, thus bringing along the rapid growth of the economy. In terms of supply, supported by the high growth of investment over the years, heavy industries and infrastructure improved rapidly, bottleneck restraints such as iron and steel, cement, nonferrous metals, coal, electricity and transportation were gradually alleviated, and the supply was apparently enhanced. Affected by both the supply and the demand, the national economy stood at a high level of potential growth.

2. Market commodity prices were kept at a reasonable level

In the first half of the year, the household consumer prices raised a year-on-year increase of 1.3%; ex-factory prices of the industrial products rose 2.7% year-on-year; prices for raw materials, fuel and purchase of motive power rose 6.1% year-on-year, which remained at a reasonable level on the whole.

3. The overall economic benefit improved

In the first half of the year, industrial enterprises above designated size throughout the country fulfilled a profit of 810.7 billion yuan, up 28% as compared with the same period of last year. The composite index number of the industrial economic benefit was registered 182.75, rising 15.66 points over the same period of last year, but business profits were mainly concentrated on a few trades and professions. In the first 5 months, financial revenues throughout the country registered a year-on-year increase of 22.8%, adding a revenue of 309 billion yuan, remaining faster than the growth of GDP.

4. Employment turned out good

From January through May, the newly-employed people in cities and towns stood at 5.04 million. Number of the laid-off and unemployed people re-employed reached 1.79 million, fulfilling 56% and 36% of the year's planned target respectively.

II. The Conspicuous Contradictions in Current Economic Performance Conspicuous contradictions in current economic performance mainly appear as follows:

1. Investment increased too fast

In the first half of the year, fixed asset investment in cities and towns grew 31.3%, year-on-year, accelerating 4.2 percentage points. It can be seen from the relevant researches of the economic cycle that at present the Chinese economy is standing at the stage of medium and long-term expansion and the heavy chemical industry is developing fast. It is estimated that the fixed asset investment will reach the peak of its medium and long-term fluctuations by 2007. Although it can be seen from the short cyclical fluctuations that the investment growth is shrinking in 2006, it can be analyzed on the basis of the medium and long-term cyclical trends that investment growth will still remain at a higher level this year. As of the end of June, 98900 new projects were started, adding 18300 ones over last year; the planned total investment in the newly-started projects amounts to 3650 billion yuan, up 22.2% year-on-year, which makes the subsequent control more difficult. In view of the features of the economic development at different stages, the current high investment growth appears reasonable. However, attention should also be paid to the malpractices existing in the investment system and the investment mechanism. This year is the beginning of the "11th Five-year Plan", and is the year in which most of the local Party and government leaders change their terms of office. Local governments have still conducted an excess of direct participation in investment and economic activities, and they have been very enthusiastic in seeking projects and introducing investment in order to open up sources of wealth and increase employment. Combined with such factors as ample bank funds and strong motive power for real estate development, such enthusiasms are apt to form a government-led heat of investment.

2. Monetary aggregates were in excess and grew excessively fast

By the end of June, balance of the broadened money supply (M2) had amounted to 32280 billion yuan, rising 18.43% year-on-year, with the growth rate being 2.76 percentage points higher than the same period last year. Balance of the narrow money supply (M1) had amounted to 11230 billion yuan, rising 13.94% year-on-year, with the growth rate being 2.69 percentage points higher than the same period of last year. According to the growth rate of the M2 balance at the end of June, if the whole year's GDP grows 10%, then the proportion between the M2 balance at the end of the year and GDP will be 1.76: 1, an apparent increase as compared with that in 2005 (which was 1.62: 1). It suggests that money supply increases excessively fast against the economic growth.

The major cause for the acceleration of the increase in money supply was the continual and fast increase in foreign exchange reserve over the years. During 2002-2005, China's foreign exchange reserve increased fast from 286.4 billion US dollars to 818.8 billion US dollars. With the purpose of the credit funds being brought under strict control, the central bank, by using the hedging on public market, alleviated part of the pressure. However, as foreign exchange continued to flow in, control became more difficult to conduct. As time goes on, the large amounts of bank papers formed in the hedging will become the new factors for the monetary releases and will be released gradually. Currently, investments in various aspects have shown an upsurging enthusiasm and there is a booming demand for loans; banks pay more attention to the fund profit margin and their initiative in release of loans has become higher, all making the loans to increase faster. By the end of June, balance of the various kinds of RMB loans amounted to 21530 billion yuan, up 15.24% year-on-year, with the increase being 1.99 percentage points higher than the same period of last year. In the first 6 months of this year, the RNB loans increased by 2180 billion yuan, with an extra increase of 723.3 billion yuan over last year, of which, short-term loans and note financing increased by 931.5 billion yuan, with an extra increase of 278.6 billion yuan over last year, and the medium and long-term loans increased by 851 billion yuan, with an extra increase of 345.8 billion yuan over last year. On the whole, money supply grew excessively fast, with the medium and long-term loans in particular still showing a momentum of rapid development and, together with the high enthusiasm in investment, it exerted a non-negligible influence on the stability of the macro-economy.

…

If you need the full text, please leave a message on the website.