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Supply Gets a Bit Stable While Demand Weakens

Aug 31 , 2016
  • Niu Li

    Director of Macro-economy Studies, State Information Center

Since the beginning of this year, the international environment has become more complicated, and the world economic recovery has been weak, China’s economic structural problems have become worse and the hidden risks have accumulated.

How to view China’s economy in the first half of the year?

China’s economy remains in the expected growth range. In the first half of the year, GDP grew 6.7 percent and the supply side stabilized slightly while the demand side clearly got weak. In terms of supply, driven by such factors as the rebounding price of industrial products, expanded corporate profits and supply-side structural reform, industrial production stabilized and even edged up, and above-scale industrial output grew 6.1 percent in the second quarter, an increase of 0.3 percentage point over the first quarter. Promoted by the brisk real estate market, by the technological innovation, R&D and design, and by service sectors like tourism, the tertiary industrial output maintained a steady growth, up by 7.5 percent in the second quarter and only 0.1 percent lower than the first quarter. On the demand side, fixed asset investment continued to grow slowly and the private investment fell down sharply in particular. But the service sectors and the high-tech industries showed a fast investment increase; the consumer goods market remained stable and contributions from residential consumption to economic growth rose significantly to 73.4 percent in the first half of the year; export figures were still in the doldrums and imports further declined. Meanwhile, the rise of prices was moderate, the enterprise revenues bounced back somewhat, the financial market stayed stable in general and new jobs kept growing in cities.

Where will China’s economy go in the second half of the year?

The expected goal of economic growth for the whole year can be achieved. Looking to the second half of 2016, China’s economy will still be under a great pressure due to these factors: the complicated and uncertain international environment, the dramatic fall of private investment, the slow reduction of overcapacity, the rising financial risk, the slow growth of residential income and so on. But, backed by the proactive macro regulation policy and with the continuous release of dividends from the supply-side structural reform, China’s economy is expected to run smoothly. The GDP for the second half of the year and for the whole year is predicted to grow around 6.6 percent. The expected goal of 6.5-7 percent can be realized.

Fixed asset investment is expected to become stable. In the first half of the year, the obvious increase of new projects and the rise of enterprise revenues will boost investment in the next stage. The availability of funds has clearly improved because of the current relative easing of credit, special construction funds and the combination of investment and loans. Investment in infrastructure will continue to grow fast, a key to stabilizing investment. The real estate market will grow steadily and slowly with the market correction. Helped by policies, the manufacturing investment is expected to stop falling. Fixed asset investment for the whole year is expected to grow about 9 percent, about 5.5 percent of which will be real estate investment growth. Consumer demand will continue steady growth. Now, employment is basically stable, and income growth of both urban and rural residents is generally in line with the economic growth. The upgrading of the residential consumption structure and the improving sales of commercial property greatly shore up consumer demand. But the slow growth of the economy and income will have a lagging impact on consumption. Retail sales of consumer goods for the whole year will increase about 10.2 percent on average.

Imports and exports will still be under pressure. The global economy will struggle to recover and external market demand will stay sluggish; economic recession will lead to more differences among countries out of their own interests, giving rise to trade protection and trade barriers against China in particular. Of course, the real effective depreciation of the RMB in the first half of the year will prop up China’s imports and exports to some degree. The figure for exports is expected to go down by 6.2 percent and imports down by 8.0 percent for the whole year.

Consumer prices will continue to show mild growth. There will be neither inflation nor deflation. The reasons for this: first, labor cost shows a strong growing momentum and service prices are steady but rising a bit. Second, monetary liquidity is relatively easy, which helps prevent the consumer price from declining further. Third, despite the ample supply of grains, food prices are rather uncertain because the prices of meat and poultry are subject to seasonal demand and vegetables are affected by the weather. In addition, carryover effects will reduce from 0.9 percentage point in the first half of the year to 0.4 percentage point in the second half of the year. Consumer prices for the whole year are expected to increase 2 percent.

What macro regulation policy should China implement?

The focus of the economic plan for the second half of the year is to better cope with the relation between supply-side structural reform and demand management. First, moderately expand the aggregate demand and keep the economy running within a reasonable range so as to create a good macro environment for the supply-side structural reform. Stay problem-oriented and target-oriented, considerably alleviate the financing difficulty of private enterprises, reduce excess capacity, foster new growth and stimulate private investment. Second, speed up the supply-side structural reform to ensure a vigorous progress of the five major tasks: cut overcapacity, destocking, deleveraging, reducing cost and strengthening weak links. The key to cutting overcapacity and destocking is to accelerate and push forward the fundamental reform of the State-Owned Enterprises and the financial area; the focus on destocking and improving the weak links is pushing forward urbanization, turning the migrant workers into real citizens. Consider lowering the macro tax in cost reduction. In addition, enhance the quality of the macro regulation policy and give markets clear expectations to provide a stable policy.

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