Growth dropping in 3rd quarter


Updated Mon, 16 Aug 2004 00:00:00 GMT

The People's Bank of China's second-quarter monetary policy report, released on Monday, provides some insights on its judgments about the economy.

During the past half year, China's macro management measures were gradually implemented and yielded some results. The destabilizing and unhealthy factors in the economy were brought under control, and the economy maintained rapid growth.

 Macro management is currently standing at a critical juncture. The results achieved were preliminary and partial, and not on solid grounds.

 The pressure from the fixed investment expansion and rising capital goods prices remains strong, the supplies of coal, electricity, oil and transportation capacity are still tight, while the systematic defects that have led to the protrusive problems in economic performance remain unsolved.

The excessive rises in investment demand were brought under initial control, while spending demand keeps on the rise.

 Fixed investment growth slowed down. Fixed investment rose by 28.6 per cent on a year-on-year basis in the first half of this year, down 2.5 percentage points from a year earlier and 14.4 percentage points slower than the first quarter of this year.

Consumption demand continued to grow. Retail sales rose by 12.8 per cent on a year-on-year basis in the first half of this year. Stripping out price factors, the real growth was 10.2 per cent.

Foreign trade maintained its fast growth and trade balance shifted from a deficit in the first quarter to a surplus in the second. Foreign trade totalled US$523 billion in the first half of the year, up 39.1 per cent year on year. Exports stood at US$258.1 billion, up 35.7 per cent, while imports rose by 42.6 per cent to US$264.9 billion. The two quarters reported a combined US$6.8 billion trade deficit.

Consumer price index kept on the fast upward curve. CPI rose by 3.6 per cent in the first half of this year. The index growth was 2.8 per cent and 4.4 per cent respectively in the two quarters, and was as fast as 5 per cent in June. Price indices for capital and investment goods continued to climb, while prices of major commodities, including crude oil and gas, kept rising.

 During the first half of this year, investment in steel, non-ferrous metals and cement slowed down on a monthly-adjusted basis. The growth of crude steel output downshifted to 13.8 per cent for the first half year from 26.4 per cent in the first quarter, while the growth of aluminium and cement output decreased by 9.2 and 10.6 percentage points respectively from the first quarter.

The supplies of coal, electricity, oil and transportation are at high levels unseen in recent years, but the bottleneck restraints they put on economic growth have yet to be essentially alleviated.

 Power shortages remain serious, with more than 20 provinces and municipalities having imposed power curbs.

   According to the PBOC's risk warnings on loans to luxury housing, townhouses and commercial real estate, commercial banks strictly controlled lending to luxury townhouse development and investment-intended consumers while continuing to step up funding support to the development of economy housing.

Commercial real estate loans stood at 2.1 trillion yuan (US$253 billion) in outstanding terms at the end of June, up 36.1 per cent on a year-on-year basis, which was 5.3 percentage points slower than a month earlier.

    Real estate loans, in particular, rose by 26.3 per cent, while the outstanding amount dipped by 16.1 billion yuan (US$1.9 billion) from the end of May, the first decline of its kind in recent months.

  In the second half of this year, domestic and international environments will continue to provide favourable conditions for the sustained, harmonious and healthy growth of the economy.

    We expect economic growth to subside marginally in the third quarter, while full-year growth will be rapid and stable; annualized rises in consumer prices will likely broaden in the third quarter, but the trend may lose some momentum in the fourth quarter.

Taking into consideration factors like base figures, money supply growth will likely come in at a relatively low level in the third quarter, but we see the full-year target as achievable.

Macro management is currently standing at a critical juncture. The results achieved were only preliminary and partial, and not on solid grounds. The PBOC will continue to implement the State's macro management policies, maintain its prudent monetary policy, and make adjustments in accordance with changes in macroeconomic performance.

The bank will modify its open-market sterilization operations in a flexible fashion in keeping with liquidity conditions in the financial system so as to protect the normal settlement needs of financial institutions and borrowing demand, as well as to ensure the stability in money market interest rates.

    It will enhance the management of reserves, central bank lending and rediscount, pay attention to the co-ordination of various monetary policy tools, and appropriately limit the aggregate amount of credits.

    Steadily promote market-oriented reform of interest rate regime and better utilize the fundamental role of market forces in resource allocation

    The advantage of price instruments is that it grants micro entities the right to adjust their behaviour according to macro management signals, and using price instruments like the interest rate in macro management will have gradual influence on the banking sector and the real economy.

    The bank will steadily promote the market-oriented reform of the interest rate regime, instruct financial institutions to properly set lending rates according to factors like macro policy tendencies and lending risks.

    The bank will support commercial banks' efforts to take on liabilities and price their products independently so as to improve competitiveness. It will co-ordinate interest rates on local and foreign currencies to promote orderly capital flows. 

    The PBOC will consider a credit policy that fits with the State's industrial policy, as well as ways to implement it, so as to let micro entities better play their role in optimizing credit structure and readjusting economic structure.

    The bank will help commercial banks further enhance risk awareness, raise their efficiency and compliance in following the State's industrial policy, prevent new non-performing loans from being created and maintain sustainable profitability.

    It will continue to encourage financial institutions to step up funding support to coal, electricity, oil, transportation, agriculture, high-tech industries, equipment manufacturing and education, and be more active in providing regular working capital loans to small and medium-sized enterprises that have good market prospects, are profitable or create many jobs.

    The bank will further standardize the development of consumer credit by drawing lessons from the current practices, and endeavor to strike a balance between consumption and investment.

    Accelerate the building of financial markets to improve the efficiency of the monetary policy transmission mechanism

    The PBOC will continue to faithfully implement the State's guidelines on promoting the opening up and stable development of the capital market, lose no time to formulate China's financial market development blueprint, examine the approach to financial market reform and innovation, closely watch the impact of using market instruments on monetary policy and financial stability. The bank will examine the approach and timing for allowing commercial banks provide fund management services.

    Propel the reform of financial enterprises and promote the sustainable development of the financial industry

    The PBOC will propel the reform of State-owned commercial banks and push the Bank of China and China Construction Bank in their joint-stock restructuring. Meanwhile, it will support the joint-stock reform of the Bank of Communications, and help it complete the financial restructuring as early as possible.

    It will continue to study the joint-stock reform plans for the Industrial and Commercial Bank of China and the Agricultural Bank of China.

    Maintain the fundamental stability of renminbi exchange rate at an appropriate and equilibrial level.

    The PBOC will watch and analyze world economic trends and monetary policy tendencies of major countries' central banks, improve the renminbi exchange rate forming mechanism, enhance and improve foreign exchange management, and maintain the fundamental stability of renminbi exchange rate at an appropriate and equilibrial level.