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Home >> Opinion
UPDATED: 17:26, July 24, 2006
Caution after good beginning
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Is China's 10.9 percent GDP growth a cause for concern? What are the problems in the economy now? How should they be addressed?

After the National Bureau of Statistics declared China's economy to be generally fast and healthy, Wednesday's People's Daily called for a "prudent" attitude toward the achievements and challenges of the economy.

Generally healthy

The article first assured people that there is no need to be too concerned about the staggering pace of growth. The economy is in the middle of a boom. There is an investment incentive nationwide to start the 11th Five-year Plan period (2006-2010) on a high note. Earlier, fixed asset investment led to an increase in production capacity which in turn has created a supply increment.

The world economy is also accelerating. It is predicted to rise 4.9 percent this year, higher than 2005. That means there will be a favorable external environment for China's economy.

China's economy enjoyed better returns, experienced only mild price hikes and consumed less energy over the first half of the year. Fiscal revenue increased by 22 percent in the period. Industrial enterprises with annual sales of up to 5 million yuan saw their profits between January and May rise 25.5 percent from the same period last year, a 9.7 percent higher than last year's growth as a percentage. The availability of coal, power, oil and transportation has improved to support the swelling investment. The CPI climbed just 1.3 percent, 1 percent slower than in the first half of last year. In addition, this is the third consecutive year there has been a bountiful summer harvest. And the summer sowing is going well.

Concerns about problems

There are always concerns about certain problems that have a tendency to linger and the risks these problems could cause.

Money supply has been given most attention. The new yuan-denominated loan reached 2.18 trillion yuan in the first six months of the year, 1.5 times as much as that in the same period of last year and 87 percent of what had been planned for the whole year.

The high ratio of deposits to loans, the interest rate increase that followed the bank's interest rate hike on loans only, and high rate of investment, have combined to stimulate an appetite for more loans.

The National Bureau of Statistics warned about the risks of over capacity and increasing financial risk exposure if the excessive expansion of fixed asset investment continued. Investment on low-level, replicated projects especially does not look rewarding.

The 29.8 percent increase in fixed asset investment over the first six months of the year was 4.4 percent higher than in the same period of last year and 2.1 percent faster than in the first quarter. New projects with mega-budgets have been embarked upon. The government's effort to reshuffle the 12 sectors with overcapacity have not been effective, with the exception of the cement and coke industries.

The trade surplus is another problem. Another US$21.8 billion was added to the basis in the first six months of last year. The increase was 55 percent. The imbalances in the international payment account and surging foreign exchange reserves are likely to create difficulties.

The rising price of oil and chemical products is putting the squeeze on farmers and downstream businesses. It is difficult for farmers to make money when profits from their agro-products cannot cover the cost of production materials. The five major industries including oil exploitation enjoyed 82.3 percent of the profit growth in the first five months. Many downstream businesses are struggling to be profitable and many are recording losses.


The most effective way to address all these problems is to fully implement macro-control polices and make those policies more specific and effective.

There is speculation about further action from the central bank to curb surging loans. In response to that information, the National Bureau of Statistics advised it would need time to make a judgment on the effectiveness of the existing measures.

The central bank has taken a series of actions to curb loan growth, including increasing the interest rate for loans, issuing bank notes, more stringently supervising the financing of notes, and raising required reserves. The measures have taken effect, evident in the drop of yuan loans in June following a sharp rise in the first five months of the year.

When it comes to judging this situation and the expectations of the 11th Five-year Plan period, local governments are perhaps more ambitious. Their enthusiasm for investment has further boosted spending on new projects. It is critical they follow the central government's decisions and policy.

In the meantime, there must be increased supervision in key areas and sectors. The upward momentum of new projects must be reined in through strict controls on land use. Environmental protection, safety and standards can all be used as a threshold.

In relation to the massive trade surplus, experts want changes to the mode of of foreign trade growth by optimizing the export mix and expanding imports, especially those exports which assist in technical upgrades.

By People's Daily Online

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