SEEKING THE STABILITY AND NEW-ROUND GROWTH OF THE ECONOMY

Basic characteristics of economic performance in 2004

China's forecasted GDP grow for 2004 was about 9.3 percent, continuing the trend of steady and rapid growth. At the start of 2004, the growth rate of investment soared. Total fixed asset investment grew by 43 percent in the first quarter, close to the overheated 1993 level. The growth rate of investment fell sharply due to the effects of macroeconomic management. By early December 2004, total retail sales of consumer goods surpassed RMB5 trillion yuan, and it grew by 13.2 percent during January-November over the same period in 2003, with an inflation-adjusted growth rate of 9.9 percent, up 0.7 percent year-on-year. The growth rates of house and auto sales fell from their highs. In 2004, China's foreign trade amounted to as much as US$ 1.155 trillion, up 35.7 percent or US$ 303.7 billion over 2003 and 2.3 times that in 2001(before China's entry into the WTO). Price increases tended to stabilize. The monthly CPI growth rate year-on-year, rose from 3.2 percent in January to 5.3 percent in August, before falling to 1.9 percent in November. The increase in money supply also slowed down markedly. After the implementation of macroeconomic management measures, at the end of the third quarter, M2 grew by 13.9 percent over the same period in the previous year, down from the 19.1 percent at the end of the first quarter.

Economic outlook for 2005

The world economy is forecast to maintain its rapid growth in 2005. The economies of the US, Japan and the EU will continue to enjoy a relatively high level of growth. Meanwhile, with advent of free trade between China and the ASEAN countries, the flexibility of China's foreign trade will increase. All of the above will benefit China's foreign trade. International industrial structure adjustment continues apace. Direct investment by Multi-National Corporations (MNCs) should continue to increase, while China will still be one of the major investment destinations. This will be beneficial to China's utilization of foreign capital. Even with uncertainties such as the US dollars' depreciation and oil price fluctuation, generally speaking, the international economic environment for China's economic development will still be quite favorable in 2005.

In 2005, China's economy will still be ascendant although its growth rate is likely to be slightly lower. The reasons are as follows: First, in 2004 administrative means were strengthened along with macroeconomic management efforts. Macro management now extends to concrete sectors and projects of investment and loans. There is markedly less room for local governments, banks and enterprises to act at their own discretion. Second, the relation between supply and demand is turning from partial shortage to prevailing surplus. Products with supply shortages since 2003 mainly include grain, steel products, cement, and non-ferrous metals, but their supply and demand is changing. The change will influence expectations and restrain various microeconomic entities from expanding their production and investment. Third, the slowing in the growth of money supply and investment will have delayed effects on economic growth and prices, and they are forecast to surface in 2005. The economic growth rate and price level will tend to fall. Fourth, the upgrade in the structure of consumption is beginning to stabilize. The growth of housing and auto sales will tend to be stable, weakening their promotion of industrial upgrade. Fifth, from the aspect of past experience, the first half of 2004 should have been the peak of cyclical fluctuation in inventory investment. It can be forecasted through models that the growth of inventory investment would decelerate in the third quarter and then decrease in the fourth quarter. The above factors probably mean that the slight deceleration in economic growth will linger in 2005.

In 2005, the policy environment and market mechanism will help improve China's economic development. The Central Economic Working Conference convened in December 2004 has put forward the overall requirements of economic work in 2005. It has been proposed at the conference that we shall carry out sound fiscal and monetary policy and continue to control the excessive expansion of fixed asset investment. Meanwhile, it was also proposed that we fully implement the principle of "differentiated treatment and retaining some projects while curtailing others", that we pay attention to better utilizing the fundamental role of the market in resource allocation and that we lay more stress on employing economic and legal means to ensure steady and rapid economic growth. As China still boasts big potential for another bout of economic growth, there is enormous room for development in terms of industrial upgrades driven by housing, auto consumption, and the closely related urbanization. On the other hand, with the deepening of reform and reinforcement of the constraint mechanism, investment and production in the whole economy will gradually become more rational. With the role of regulation by market forces being strengthened and corresponding rules and mechanism being improved, potentials will continue to be realized, keeping economic growth at a high level.

In a nutshell, the growth rate of China's economy will stabilize around nine percent. With stability between aggregate supply and demand, and the increase in agricultural product supply, it is forecast that the CPI will increase at a steady rate of about 3 percent.

Policy proposals

In terms of the economy, the "moderate" policy of macro management will be better adopted, reform efforts intensified, and related market-orientated rules and mechanism enhanced. Specifically, the policies include the following: Improving the constraint of risk responsibilities in investment, fostering and standardizing the capital market, and realizing diversification of channels of investment and financing. We plan to step up efforts to establish a lasting land allocation mechanism and develop the program of land and resources. We shall also implement sound fiscal policy, gradually reducing deficits and upgrading the efficiency of fiscal fund utilization. We will also continue to carry out sound monetary policy, proactively promoting the market-based reform of the interest rate and the mechanism of exchange rate formation.