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Overcapacity
Steady Hand on the Tiller
China's economy remains stable as it posts better-than-expected first-half results
By Deng Yaqing | NO. 30 JULY 28, 2016

Workers in a plant of Fushun Special Steel Co. Ltd. on April 7 (XINHUA)

Investors and international observers breathed an audible sigh of relief on July 15 when China announced its GDP growth had leveled out at 6.7 percent in the first half of the year. While economy doomsayers had been battening down the hatches, fearing the worst, the news dispelled global concerns of a further slowdown or even a hard landing.

"The national economy has realized moderate but stable and sound growth, laying a solid foundation for achieving the full-year goal of 6.5 to 7 percent growth," said Sheng Laiyun, spokesman of the National Bureau of Statistics (NBS), citing the impact of downward pressure under the currently complex and tough domestic and overseas economic circumstances as a contributing factor for the less-than-stellar growth.

Amidst the fragile global recovery and gloomy trade climate, it has not been easy for China to achieve such stable growth. Despite the ongoing supply-side structural reform and intensified measures tackling "zombie companies," the country shows little signs of a sharp slowdown, which is testimony to the growing internal impetus of its economy, said Tan Haojun, an economic commentator, in an article.

Developments highlights 

In the first half of the year, stable progress has been made in economic transformation and upgrading and supply-side structural reform, Sheng noted.

The service industry kept expanding at a relatively fast pace, making up 54.1 percent of GDP in the first half of the year, up 1.8 percentage points from the same period last year.

What's worth mentioning is that the hi-tech industrial and equipment manufacturing sectors respectively grew 10.2 and 8.1 percent—accounting for 12.1 and 32.6 percent of the total industrial value-added output—and the strategic emerging industries expanded 11.8 percent in the second quarter, 1.8 percentage points faster than in the first quarter.

Xu Hongcai, Director of the Economic Research Department at the China Center for International Economic Exchanges, suggested that the rapid expansion of the strategic emerging industries came from investment growth. While investment in the manufacturing sector slowed down, in the service sector it maintained a double-digit growth rate.

That meets the demand of industrial transformation and upgrading, and accords with the trend of striding toward the middle and higher end of the industrial chain, said Xu.

According to statistics from the NBS, in the first half of the year, investment in the service sector and hi-tech industry increased 11.7 and 13.1 percent year on year respectively, with it growing 22.5 percent in information technology services.

Despite that, given the current scale of the new economy, its high-speed growth is not enough to offset the impact of the gliding traditional economy. However, if the new economy can maintain momentum, it's bound to play a positive role in wrenching the economy out of the future slowdown, said Xu.

Aside from that, consumption contributed 73.4 percent to economic growth, up 13.2 percentage points year on year. "Domestic demand is still the pillar propping up China's growth, and consumption is playing a larger role in it," Sheng noted.

At the same time, industrial value-added output in central and western regions respectively grew 7.3 and 7.2 percent and outpaced eastern region by 0.9 and 0.8 percentage points.

"Amidst the structural adjustment and transformation, central and west China have showed a strong late-starting advantage," said Tan.

Another important highlight of economic development is the recovery of industrial data, indicating that industrial production is stable and sound, said Xu, who argued the faster growth of industrial value-added output in the second quarter indicates that efforts in cutting overcapacity and de-stocking have yielded some results. Industrial value-added output grew 6 percent during the first half, 2 percentage points higher than in the first quarter.

In addition, energy consumption per unit of GDP went down by 5.2 percent year on year, indicating the continual progress made in energy saving and emissions reduction, according to Sheng.

Employment also remained steady during the first half. According to statistics from the Ministry of Human Resources and Social Security, a total of 7.17 million jobs were created in urban areas, completing 71.7 percent of the full-year target. Meanwhile, the unemployment rate in major cities, by and large, remained at roughly 5.2 percent.

"Currently, China is under great downward pressure. However, under such adverse conditions, the nation still scored well in [achieving] employment [targets] because its service industry is undergoing rapid expansion," said Yao Jingyuan, a research fellow from the Counsellors' Office of the State Council.

Yao said the service industry is most capable of creating jobs, and in fact, almost all of the more than 14,000 companies established in the first six months are engaged in the sector.

Challenges ahead 

However, China's economy is still confronted with an array of difficulties, according to Sheng. On the one hand, the global economic recovery fell short of expectations, global trade is still sluggish, and uncertain factors like Brexit further destabilize the fragile international environment. On the other hand, the country is now suffering the throes of structural adjustment and industrial transformation and upgrading, and the real economy is struggling.

After experiencing three decades of extensive growth and being overdrawn by the real estate industry, China's economy has accumulated a lot of hidden problems and risks, said Tan, who believes low supply quality and severe overcapacity in some sectors have directly affected the sound development of the economy.

In fact, carrying out the supply-side reform is quite an arduous task for China. If the country gives up promoting the reform, the road ahead will become increasingly bumpy. If the country faces up to the reform, it may have to go through a tough period with slower economic growth and voices of doubt from external forces, said Tan.

In addition, statistics from the NBS showed per-capita disposable income reached 11,886 yuan ($1,779) in the first half of the year, a year-on-year increase of 6.5 percent after adjusting for inflation, 0.2 percentage points slower than the GDP growth.

Although residents' income grew more slowly than gross GDP, it outpaced per-capita GDP, said Wang Pingping, Director of the Household Survey Office of the NBS. With the adjustment of the family planning policy ongoing, the general population has been expanding in recent years. In the first half, per-capita GDP grew about 6.2 percent.

At the same time, rural residents saw their incomes grow at a faster pace than those of urban residents, and income from the service industry has been on the rise, Wang noted.

"Though residents' incomes registered relatively rapid growth in the first half of the year, it's not an easy job to keep pace. Attention should be paid to the wage income of workers affected by the de-capacity of coal, iron and steel industries and farmers' income being dragged down by the falling prices of some bulk farm products," said Wang.

Another area of robust growth is residents' income from some innovative types of business and freelance work, which has not been included in the NBS figures, said Zhao Xijun, Vice Dean of the School of Finance at Renmin University of China.

Since China's economy is in the middle of profound transformation, the development of a new economy may bring about changes to the original income structure, which can justify income growth slightly lagging behind GDP growth, said Quan Heng, a research fellow from the Institute of World Economics at the Shanghai Academy of Social Sciences.

It's not possible to keep residents' incomes growing faster than GDP all the time. As long as the two can maintain a dynamic growth trend and positively interact with each other, it will be okay, said Quan.

Macroeconomic Indicators in H1, 2016 

Value-added output of industrial enterprises above a designated size—those with principal business revenue of more than 20 million yuan ($3.04 million) a year—grew 6 percent.

Fixed assets investment totaled 25.84 trillion yuan ($3.87 trillion), up 11 percent.* Investment in the property sector reached 4.66 trillion yuan ($697.5 billion), up 8 percent.*

Retail sales of consumer goods totaled 15.61 trillion yuan ($2.34 trillion), up 9.7 percent.* Online retail sales amounted to 2.24 trillion yuan ($335.28 billion), up 28.2 percent.

Foreign trade in yuan-denominated terms decreased 3.3 percent to 11.13 trillion yuan ($1.67 trillion). Exports decreased 2.1 percent to 6.4 trillion yuan ($957.94 billion), while imports dropped 4.7 percent to 4.7 trillion yuan ($704.2 billion).

Non-financial foreign direct investment into the Chinese mainland stood at 441.76 billion yuan ($69.42 billion), up 5.1 percent.

China's non-financial outward direct investment amounted to 580.28 billion yuan ($88.86 billion), up 58.7 percent.

The consumer price index (CPI), a main gauge of inflation, rose 2.1 percent. The producer price index (PPI), which measures inflation at the wholesale level, contracted 3.9 percent.

The per-capita disposable income of urban residents stood at 16,957 yuan ($2,538), up 5.8 percent.* The per-capita cash income of rural residents stood at 6,050 yuan ($906), up 6.7 percent.*

New yuan-denominated loans amounted to 7.53 trillion yuan ($1.13 trillion), 967.1 billion yuan ($144.75 billion) more than over the same period last year.

By the end of June, M2, a broad measure of money supply that covers cash in circulation and all deposits, had reached 149.05 trillion yuan ($22.31 trillion), up 11.8 percent.

Total social financing, a measure of the funds raised by entities in the real economy and a broad measure of liquidity in the economy in general, totaled 9.75 trillion yuan ($1.46 trillion).

Note: All growth rates are on a year-on-year basis.

* The growth rate has been adjusted for inflation.

(Sources: National Bureau of Statistics, Ministry of Commerce and People's Bank of China)

Supply-Side Structural Reform Features 

Cutting overcapacity: In the first half of the year, output of raw coal and crude steel decreased 9.7 percent and 1.1 percent, respectively.

Destocking: At the end of May, the finished goods inventory held by industrial enterprises above a designated size decreased by 1.1 percent. From March to June, residential housing for sale had been on the decline for four consecutive months.

Deleveraging: At the end of May, the asset-liability ratio of industrial enterprises above a designated size stood at 56.8 percent, 0.5 percentage points lower than at the same time of last year.

Reducing costs: From January to May, the cost per-hundred-yuan turnover of primary activities of industrial enterprises above a designated size was 0.22 yuan less than that of the same period of last year.

Improving weak links: In the first half of the year, investment in water environment and public facility management, and information transmission software and information technology services rose 26.7 percent and 22.5 percent, 17.7 percentage points and 13.5 percentage points faster than the growth of total investment, respectively.

(Source: National Bureau of Statistics)

Copyedited by Francisco Little

Comments to dengyaqing@bjreview.com

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