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-- An analysis of economic situation in 2012 and prospects for 2013

DRC Task Force on Analysis of Economic Performance

Since the beginning of 2012, the European debt crisis has become further worsened, and global economic growth has slowed down significantly. China has been active in controlling its real estate market and defusing risks involved in investment and financing platforms, with its economic growth facing considerable downward pressure. As the CPC Central Committee and the State Council have adhered to the general principle of seeking growth while keeping stability, attaching more importance to steady growth, the national economy has gradually stabilized, and the growth rate of the year is expected to be slightly higher than 7.5%. Looking into 2013, the international environment will be full of complexity and uncertainty and the Chinese economy will be in a process of seeking a new balance. While continuing to follow the proactive fiscal policy and prudent monetary policy, we should pay attention to the balance between demand-side policies and supply-side ones, and that between short-term policies and medium- and long-term ones, increase policy elasticity and effectiveness, help enterprises resolve their difficulties in operation, step up economic restructuring, foster new competitive advantages, facilitate the change of driving forces behind growth and the substantive transformation of development pattern, and promote the steady operation of the national economy.

I. Economic Operation Tends to Get Stabilized at a Low Level and the Yearly Growth Rate Is Expected to Be Slightly Higher Than 7.5%.

In the previous three quarters, China's economic growth continued to go downwards, and recovery was held back beyond expectation, suggesting changes in the country's internal mechanisms for economic operation. In terms of the yearly trend, some positive factors are now gathering momentum; a slight rebound is likely in the fourth quarter; and the growth rate of the year is expected to be slightly higher than 7.5%.

1. New changes in economic operation mechanisms

(1) Increasing interplay of global economy and trade

Since the beginning of 2012, the European debt crisis has continued to worsen, sending developed economies into a downturn or recession. The emerging economies and developing countries, due to their smaller market sizes and greater dependence on developed countries, have seen notably expedited economic contraction; economic growth in such countries as India, Brazil and Turkey has slowed down considerably. As the growth of China's exports to developed economies declines, its exports to emerging economies and developing countries have also dropped or even more considerably. In the meanwhile, with the growing scale of economy and China's increasing contribution to global growth, the economic slowdown and import decline of China have produced much greater impact on global economy and the prices of bulk commodities, and the "China factor" has become increasingly prominent in world economy. In this round of economic downturn, shrinking demand at home and abroad has brought about a vicious circle, and the downward pressure on the economy is much greater than expected.

(2) Reduced capacity of local governments to expand investment

Since May this year, the CPC Central Committee and the State Council have introduced a series of policy measures for steady economic growth. Compared with 2009, however, the effects of these policy measures have fallen short of expectation due to ineffective policy implementation. Besides inadequate enforcement, the primary reason lies in the fact that local governments have insufficient financial resources, which has undermined their capacity considerably for making investment and providing support for relevant policy measures. First, ever since the real estate market was put under tight control, developers have reduced purchases of land, leading to a notable decline in government proceeds from the transfer of land-use rights; second, to avoid risks, financial institutions have cut the loans to investment and financing platforms considerably; and third, due to the prime focus on speed instead of efficiency, economic growth has slowed down quarter by quarter, and sharp declines have been seen in the growth of tax revenue and other types of government revenue. In addition, risk constraints have apparently gained strength, and local governments have been more rational than ever in making investments.

(3) Weakened effectiveness of monetary policy

Monetary policy has started to loosen up since May this year. Though the growth of broad money M2 has rebounded and aggregate social finance has increased considerably, the growth of medium- and long-term loans and fixed asset investment in real economy has recovered slowly. In a period when the potential growth rate is set to decrease and internal restructuring deepens, such factors as investors' unstable expectations, lack of confidence and risk aversion have refrained investment from expanding, and led to the reduced effectiveness of monetary policy.

(4) Longer destocking than usual

Since the beginning of the new century, the adjustment of business inventories in China has taken on a relatively stable pattern, with an inventory cycle of 38 to 40 months. Empirically, this round of destocking should have ended in the middle of the year. Due to the lingering crisis, coupled with excessive capacity expansion and the rapid growth in previous two years, enterprises have been over-optimistic about economic growth and price trends, and inventories have been kept at a relatively high level. With domestic and overseas demand shrinking, the greater magnitude and longer duration of passive destocking have caused a lower utilization rate of industrial capacity.

(5) New progress made in restructuring

New progress has been made in economic restructuring since the beginning of 2012. As the manufacturing industry has remained sluggish with inadequate utilization of industrial capacity, non-manufacturing industries have maintained their vitality, and service industries have shown great momentum of development. While eastern China has seen a slowdown in economic growth, central and western areas of the country on the whole have taken on a fast growing trend. Although economic growth has slowed down, employment has stabilized and both urban and rural residents have seen their income growing rapidly. In addition, industrial gradient shift has gained speed, and the cycle of new product R&D and marketing has shortened with improved quality; the trend of substituting machines for labor has become increasingly evident, with improved capital structure and labor productivity.

2. A moderate rebound is likely in Q4, and the yearly growth rate is expected to be slightly higher than 7.5%

Some positive factors are gathering momentum now. First, the new round of loose monetary policies is driving the world economy to improve in the short run. After the European Central Bank (ECB) put into effect the outright monetary transactions (OMT) and the Federal Reserve System launched a new round of quantitative easy monetary policy (QE3), such countries as the UK, Japan, Brazil and Australia have adopted a loose monetary policy one after another. In the short run, this will help stabilize financial markets, increase consumer confidence and boost the growth of China's exports. Second, the purchasing managers' index (PMI) has picked up across the world. In September, the United States, EU, Germany, Japan as well as emerging markets saw an upturn in PMI. After falling for four consecutive months, China's PMI registered a growth in the same month, up 1.1 and 2.2 percentage points by "new orders" and "new export orders" respectively over August. Third, the raw materials price index (RMPI) has rebounded, and the prices of bulk commodities on the whole are on the rise, which will drive enterprises to replenish their raw materials inventory and increase demand. Fourth, domestic demand is in an upward trend in the short run. There is an upswing in infrastructure investment and in the real estate market, and the investment in fixed assets has been growing steadily; driven by such factors as rebounding real estate sales and long holidays, the actual growth rate of consumption this year will be slightly higher than that in 2011. And fifth, enterprises have seen a better month-on-month growth in profitability. From January to August, the profits of major industrial enterprises across the country suffered a 3.1% year-on-year decrease, smaller than that in 2011. In August, profits were up 3.93% month on month, and enterprises of different types saw positive growth in profits. In addition, the remarkable drops in Q4 last year in the growth of industrial output, investment, exports, etc. has laid a foundation for the recovery in Q4 this year.

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