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23 February, 2001 The Chinese Economy in 2001 |
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First Quarter 2001 Executive Summary
China ended the final year of its 9th Five-Year Plan period (1996-2000) on a positive note, with the declining economic growth trend since the early 1990s reversing its course. After having fallen for seven consecutive years from a peak of 14.2% in 1992 to a low of 7.1% in 1999, China's real GDP growth edged back to 8% in 2000. The rebound was mainly due to a strong turnaround of exports, thanks to a faster growth of the global economy in the first half of 2000. During the first six months of 2000, the US economy expanded at an annualized rate of 5.2% while the Euro Area grew by 3.6%, up from 3% and 1.9% respectively during the same period in 1999. As the overseas demand for Chinese products soared, China's exports surged by 27.8% year-on-year in 2000, up substantially from 6.1% in 1999.
Meanwhile, domestic economic activity had also picked up as the government continued to expand its investment and consumers stepped up spending. Thanks to increased state investment in technical upgrade, as part of the government's effort to modernize the state-owned enterprises (SOEs), state-sector fixed asset investment expanded by 9.7% in 2000, up from the 6.1% growth in 1999. Meanwhile, the increase in salaries of middle- and lower-income urban residents since September 1999 and the introduction of week-long holidays to celebrate the Labor Day for the first time have also boosted the growth of retail sales value to 9.7% from 6.8%.
OUTLOOK FOR 2001 Continuing last year's strong growth momentum, the Chinese economy is set to expand at a robust pace in 2001. Such a positive outlook is despite an expected slowdown of the global economy, which would slash the growth of China's exports this year. Exports In the US, although recent aggressive interest rate cuts by the Federal Reserve should help avert a recession of the US economy, real GDP growth is likely to fall substantially from 5% in 2000 to only 1.8% this year. Meanwhile, renewed weakness of domestic demand in Japan is expected to depress the country's GDP growth from 1.5% to 0.3%. Given that the US and Japan collectively accounted for a massive 60% of China's exports, the economic downturn of these two markets would inevitably put a drag on the country's export growth. The extent of moderation, however, should not be overstated, as China's exports are mainly low-cost consumer products that are less sensitive to the contraction of income and wealth in the overseas markets. It is expected that China's export growth would remain robust in double-digits and average about 11.5% in 2001. Investment Domestically, economic growth would be supported by robust expansion of fixed asset investment. With the government stepping up its campaign to develop China's western region, as set out in the 10th Five-Year Plan which spans from 2001 to 2005, increased construction of infrastructure projects in the inner provinces is expected to provide continued support to fixed asset investment growth this year. Meanwhile, to prepare for keener foreign competition after China's accession to the World Trade Organization (WTO), possibly by the middle of this year, domestic enterprises would also increase investment, particularly in new technology, to boost their competitiveness. Consumption The faster increase of consumption would provide another boost to domestic demand. To meet the country's growing welfare needs, the government approved the establishment of a National Social Security Fund (NSSF) in September 2000. Funded mainly by proceeds from the sale of government's equity stakes in state enterprises, the NSSF will provide money for pensions, medical care and unemployment insurance payments. Increased social security expenditure would boost consumer confidence and stimulate consumption. Meanwhile, the fall in real interest rates, thanks to the rise of inflation, would also depress savings and encourage spending. At end-2000, the after-tax real return on one-year bank deposits slipped to only 0.3%, the lowest since September 1996.
Growth and inflation Given that exports accounted for only 23% of China's GDP, stronger domestic demand should largely offset the expected moderation of exports and help China maintain a robust GDP growth of 7.9% in 2001. Despite the stronger domestic demand, inflation will remain well contained, thanks to the country's large pool of under-employed labor force that helps keep wages stable. Increased imports of foreign goods as China lowers trade barriers after WTO entry would also prompt keener competition between domestic and foreign producers and keep local price increase at bay. It is expected that consumer price inflation would rise only modestly from 0.4% in 2000 to 1% in 2001. CURRENCY STABILITY With increased domestic demand, there is little need for China to devalue its currency to boost economic growth. Meanwhile, the country's favorable balance of payments position would continue to lend support to the Renminbi. Although the slower growth of exports would depress China's trade surplus to US$ 16.3 billion this year from US$ 24.2 billion in 2000, increased capital inflows would offset the negative impact on the external payments. As China opens up its market wider after WTO entry, foreign direct investment (FDI) in China would increase. In anticipation of expanded business opportunities after China's WTO entry, foreign investors had signed investment contracts amounted to a total of US$ 62.7 billion with China in 2000, up substantially by 52.2% from 1999. The surge in contracted FDI during 2000 is expected to translate gradually into higher growth of utilized FDI in the coming year. Meanwhile, the inflow of foreign portfolio investment is also expected to rise substantially as Chinese companies step up overseas listing. It is reported that Chinese enterprises would raise at least US$ 12.5 billion through listing in the Hong Kong stock market in 2001, matching last year's levels. Given the strength of the country's external payments position, the Renminbi is likely to appreciate should China decide to widen the currency's trading band after its entry into the WTO later this year as reported. As the strengthening of the currency would put a further drag on exports which have already been hit by a slowdown of the world economy, the widening of the Renminbi trading band would unlikely be too drastic in the initial year after WTO entry. It is expected that the Renminbi would appreciate only moderately from the current range of RMB8.2770-8.28/US$ to RMB8.23/US$ by end-2001. SUSTAINING GROWTH While increased domestic demand would keep the Chinese economy on an 8% growth trajectory in the coming year, the sustaining of robust expansion in the longer term requires the enhancing of the country's productivity. During the 10th Five-Year Plan period, the government will focus on a number of initiatives that could boost productivity of the Chinese economy. Continued economic reforms Following the establishment of four asset management companies during 1999 to clean up the problem loans of the state banks and the implementation of a debt-for-equity swap scheme to reduce the debt burden of the state enterprises, China will step up its effort to restructure the banking and state sectors. To prevent new loans from becoming non-performing in future, the government will introduce measures to improve the credit culture of state banks. A key element of this effort is the move to liberalize interest rates so that credit decision will more closely reflect market risks. On enterprise reform, the government will continue to promote private equity investment in SOEs through the stock market. The aim is not only to provide a new source of enterprise capital, but also a means of disciplining the SOEs to boost their efficiency. As banks increase lending on improved loan quality and the SOEs become more efficient, China should be able to grow at a more sustainable pace. Further market opening In its bid to gain WTO accession, China agreed to open up its market wider to foreign companies. Apart from reducing import tariffs, China will allow increased foreign participation in previously protected sectors such as banking, insurance, telecommunications and automobiles, and permit foreign-invested enterprises to distribute and sell products directly in China. As controls on foreign trade and investment are relaxed, Chinese enterprises will have to compete not only with the increased variety of imports, but also a wider range of locally manufactured foreign product brand names. To counter the foreign competition, domestic enterprises will have to increase investment in new technology to boost efficiency. The technical upgrades of Chinese enterprises, together with the transfer of foreign technology and expertise that accompany the foreign investment, should raise the productivity of the Chinese economy and lend support to more sustainable long-term growth of China. Nurturing private enterprises Once China becomes a WTO member, the government will also have to relax its restrictive and discriminating policies against private local enterprises as required under the WTO rule that calls for national treatment for all enterprises operating in a member's country. Representing an important first step in this direction, China lowered the minimum capital requirement for private enterprises to conduct foreign trade in January 2001. The government is also considering to approve the establishment of more private commercial banks across the country to fund the growth of the private economy. The allocation of additional resources to the more efficient private sector would help to boost the productivity of the Chinese economy. The promoting of private economy could also help absorb the surplus workers being laid off by the state sector and alleviate the social impact of ongoing SOE reform on the stability of the economy. Developing the West The opening of China's market and the development of private economy also have a geographical dimension. Under the government's "go-west" campaign, foreign and private enterprises are particularly encouraged to invest in the country's western hinterland. Various preferential treatments, including exemptions on income tax, tariff and import value-added-tax, are given to companies investing in government-sponsored industries and state-designated priority projects in the inner provinces. Meanwhile, the government has stepped up spending on infrastructure development and environmental protection to boost the operating environment in the western region. Attracted by the improved investment environment and the government preferential policies, more companies would venture to invest in western China. Through the transfer of new technology and expertise, increased investment in the inner provinces would boost the productivity of the western region and support a more sustained and balanced economic growth across China in the longer run. CONCLUSION Thanks to improved domestic demand, China is likely to ride out the current economic downturn in the US more easily than its Asian neighbors, even though the exposure of its exports to the US is the region's largest. With exports accounted for only 23% of China's GDP, stronger domestic spending would offset the moderation of exports and keep the Chinese economy on an 8% growth trajectory in the coming year. However, to sustain robust economic growth in the longer term, China will have to boost the country's productivity. This will require the government to open its market wider to foreign investors, to develop the country's private economy and the western hinterland, and to step up effort to reform the banking and state sectors.
Jason Kwok Joe Lo Ellen Cheuk Alice Chan Tel: (852) 2868-8443 |
