International Department of the CPC Central Committee       BEIJING REVIEW
Thursday, August 3, 2017       MONTHLY
Upbeat prospects
By Zhou Xiaoyan 

Zhou Xiyong, head of a foreign trade company in Yiwu in east China's Zhejiang Province, talks with Russian merchants at the 2017 China Yiwu International Commodities Fair on May 6 (XINHUA)

The Chinese economy expanded 6.9 percent in the second quarter of the year, the same rate as in the first quarter. With this, the growth rate has stayed within the 6.7-6.9 percent range for eight quarters in a row.

The growth in the first half of the year was better than expected due to satisfactory industrial performance resulting from supply-side structural reform, double-digit export growth amid recovering global demand and burgeoning domestic consumption, especially soaring online spending.

According to NBS data, in the first half of the year, the service sector played a more dominant role in propping up the economy, its growth rate outpacing the manufacturing industry's by 1.3 percentage points and contributing 60.2 percent to economic growth, compared with 58.4 percent in 2016.

The manufacturing sector is shifting toward the middle- and high-end quality spectrum, with hi-tech manufacturing expanding 13.1 percent year on year, 6.2 percentage points higher than the overall industrial growth.

To top that off, the economy is steering away from being investment- and export-led toward consumption-driven, with residential spending contributing more to growth. Online retail sales of consumer goods rose 28.6 percent year on year, outpacing total retail sales by 18.2 percentage points.

Xing Zhihong, spokesperson for the National Bureau of Statistics (NBS), credited these improvements to the ongoing supply-side structural reform, which focuses on cutting overcapacity and corporate costs, destocking, deleveraging, and strengthening the weak links in the economy.


The 2017 Spring Housing Fair in Chongqing Municipality on April 20 (XINHUA)

Xu Hongcai, deputy chief economist with the China Center for International Economic Exchanges forecast that China's growth rate is likely to slip slightly to 6.8 or 6.7 percent in the third and fourth quarters. For the whole year, the rate will stay above 6.7 percent, making it possible to realize the goal of doubling GDP and per-capita income from the 2010 levels by 2020.

Positive changes

Consumption has become a major driver of the Chinese economy, said Yan Pengcheng, spokesperson for the National Development and Reform Commission (NDRC).

In 2014, 2015 and 2016, consumption contributed 48.8, 59.7 and 64.6 percent, respectively, to economic growth. In the first half of the year, the ratio reached 63.4 percent, 30.7 percentage points higher than that of investment, according to the NBS.

A recent report by the Boston Consulting Group, a global management consultancy, said China's consumer market will continue to rise around 10 percent annually, topping the world, despite the slowdown in GDP growth.

Zhang Liqun, a research fellow with the Development Research Center (DRC) of the State Council, said the robust consumption is backed by deeper Chinese pockets." Consumer spending is expected to maintain an upward trend, which will play a vital role in sustaining the growth momentum," he said.

The effects of supply-side structural reform are kicking in. As the reform progresses, the relationship between demand and supply in the market is significantly optimizing, resulting in robust industrial output and fatter profits.

In the first five months of the year, major industrial enterprises' profits surged 22.7 percent year on year. In June, the purchasing managers' index (PMI) for the manufacturing sector stood at 51.7, 0.5 points higher than in May, while non-manufacturing PMI stood at 54.9, rising two months in a row.

"The manufacturing sector is expanding at a quicker pace, with increasing market demand domestically and globally, optimized supply structure and improved market environment," Xu said.

China's export growth—which dropped significantly during the global economic meltdown—has also picked up momentum in the first half of the year.

In the same period, China's foreign trade surged 19.6 percent with export growing 15 percent and import increasing 25.7 percent.

According to Bi Jiyao, Deputy Director of the Academy of Macroeconomic Research under the NDRC, since the second half of 2016, positive signs in the world economy have been piling up following a prolonged recovery period after the financial crisis in 2008.

"Prices of staple commodities such as oil have bottomed out. Global deflation pressure is mitigating with consumer prices mildly rebounding and the global financial market is stable," Bi told Beijing Review.

Global economic activities have entered a long-missed cyclical recovery, backing the rebound of Chinese exports, he said.


Reform priorities

Xu suggested China continue its proactive fiscal policy and prudent monetary policy in the second half of 2017, making them more flexible and targeted.

Reform breakthroughs should be made in key areas such as state-owned enterprises, fiscal and financial systems and old-age insurance programs, Xu said.

Bi said China still faces a complicated external environment, including new adjustments in the global financial market, depreciation pressure on the renminbi, capital outflow risks and rising global trade protectionism.

"China should stick to its own path of reform and opening up, steadily push forward cooperation with countries along the Silk Road Economic Belt and the 21st-Century Maritime Silk Road, and deepen multilateral economic cooperation," he suggested.

Xu said institutional obstacles are standing in the way of further unleashing people's consumption potential.

In the first half of the year, per-capita residential spending grew 6.1 percent with inflation adjusted, lower than the 7.3-percent per-capita income increase with inflation adjusted, according to the NBS.

Calling the slower growth of people's spending compared to their income alarming, Xu reasoned out what has stopped people from spending: First, rocketing housing prices are eating into a large part of residents' disposable income. Second, inadequate social security makes people feel insecure and therefore reluctant to spend. Finally, underdeveloped consumer finance is also part of the cause.

Copyedited by Sudeshna Sarkar

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