Liu Shijin

I. "Two Replacements" in the Course of Economic Rebounds

1. Economic rebounds and market-driven investment and consumption begin to play greater roles

This year and especially since the second quarter, the central economic stimulus package has begun to show policy effects. As a result, more positive factors have appeared in economic performance and a rebound has become visible. Specifically, the economy has shown the following tangible features.

One, the government has been swift in intensifying investments and in enforcing policies. While the rate of the investment fund disbursement from the central finance has been high, the rate from regional finance has been slightly low but remains above the level of an average year. Government investments have been the leading force to foster the recent economic rebound, which is a central expression of the institutional advantage. Estimates indicate that if without the push of the central stimulus package, the country's economic growth in this round of restructuring could have fallen to about 1%.

Two, social investments have begun to follow up, at a faster growth rate. The signs are that the two major industries, real estate and auto making, have posted a faster sales growth and an investment rebound. In the first seven months, commodity housing sales nationwide rose 37.1%. In particular, the real estate industry has expedited its inventory digestion and quickened its monthly investment growth. The investment growth in real estate development nationwide rose from 1% in January and February to 11.6% in the first seven months. During the same period, auto production and sales respectively rose 20.23% and 23.38% year-on-year to 7.1009 million units and 7.1844 million units respectively. In particular, auto production and sales in July rose 52.15% and 63.57% respectively year-on-year. Social investments in other sectors have also begun to pick up.

Three, consumption has been on a steady rise. It had been expected that after a downturn in economic growth, personal income would drop and pull down the consumer demand. But this scenario did not appear. After the falling prices were taken into account, the total retail of consumer goods went up by over 16% in the first seven months.

Four, the decline of export in kind has become less dramatic if the price factor is deducted, although the total export has slid down considerably. What is noteworthy is that while global trade has dropped steeply, China's export to the main countries and regions has been rising in terms of market share. Estimates indicate that in the first four months, China's share in the total import of the United States and Japan has risen 2.3 and 5.6 percentage points respectively over last year. In the first quarter, China's market share in the European Union has also become 1.9 percentage points higher over last year. The rise in market share proves that China's export products have been competitive.

The first three of the above four changes involves the domestic demand and the final one involves the external demand. Most changes are better than expected. In observing the economic situation, statistical data are important. But what is more important is to see what the driving forces behind these data are, whether these forces are sustainable, and how they influence each other. In other words, we should understand the "logic" of this round of economic rebound and use this logic to explain the changes already happened and forecast the changes expected to happen. From this perspective, the main factors influencing the recent economic rebound can be summarized as "two replacements". The "first replacement" means that when a short-term huge demand gap appeared and the economy slid down rapidly due to the shock of the international financial crisis and the impact of the domestic economic cyclic downturn, a stimulus package was introduced mainly to increase government investments to narrow this demand gap so that the downturn can be eased and gradually stabilized. The "second replacement" means that when the economy began to rebound due to the implementation of the stimulus package but mass government investments cannot last long and will produce a degressive effect, the ensuing demand gap should be covered by market-driven investment and consumption and the latter will gradually become the main forces for economic rebound and sustained growth. An analysis of the growth changes since the second quarter indicates that the second replacement is gradually taking place. If people still feared in the first quarter that the economy would reach a second bottom, this possibility now seems to have become much smaller. If the ongoing growth momentum can be maintained and strengthened, it is possible that China's growth rate will reach 8% or even slightly higher.

2. Economic rebound is unstable and uneven and has some uncertain and unsustainable factors

At the same time, we need to note that the ongoing rebound is still unstable or even quite weak.

Internationally, the financial system begins to stabilize after the attack of the crisis, but cannot rule out a possible reversal. The real economy is still in the process of a downturn. While some countries have shown signs of bottoming out, great uncertainties still exist. Even if the developed economies such as the United States, Europe and Japan can post positive growths at the end of this year or some time next year as most people expect, their recovery will be a long and tortuous process. A recovery cannot replicate the original economic structure, but will be accompanied with dramatic restructuring and reforms. For example, the consumption rate of the United State will decline while its saving rate will go up. These changes can cause short-term shocks and pose long and medium-term structural constraints to the space of China's external demand.

Domestically, the rebound is still unstable and uneven and still has some unsustainable factors. It is unstable, because the social investment in the real economy has just begun to pick up and the confidence is still unstable, because the hiking asset prices on the real estate and stock markets have attracted some funds and in turn affect the rebound of the real economy and this short-term price hiking also contains the risk of sharp rise and fall, because the consumption growth has been bolstered by policy support and as the time goes on, declining employment and income will have negative impacts on consumption. It is uneven, because the recovery of the export-oriented coastal regions and enterprises in the southeast region has been slow and only the rebound of infrastructure construction and related industries has been strong, because the large enterprises and projects directly funded or supported by the government have sufficient funds, but the vast numbers of small and medium-sized enterprises still have financing difficulties. The unsustainable factors mean that the mass government fiscal investments cannot last long and the space will gradually become smaller as the time goes by, and mean that the mass release of credit funds since the end of last year is an expedient measure to cope with a special case and cannot last long.

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