China was worried about the steam of its economy following a hard won victory over the SARS epidemic on summer 2003. One year later it launched another battle to cool its economy which was running in full steam---too full actually.
Zhang Ying, a 27 white-collar professional with one of China's top listed software integration companies in Beijing, began to think of having her own house, with one or two bedrooms, at the end of 2003. For four years since she graduated from university she had to pay some 800 yuan, or one-fifth of her salary every month for the apartment she shared with another girl. "Compared with many families, I earn as much as a whole family can do," she was confident on her plan at that time.
Now she has given up the plan. After spending many weekends on traveling along the fourth to fifth ring outside the downtown around the city to talk to houses sellers, she found she just cannot afford any house she wanted to buy. Within a year many developers priced their projects at least 1000 yuan higher per square meter. "I earn as much as, or even higher than a whole family can do in many cases," she sighed.
The real estate sector is one of the red-hot industries that the government is trying to cool down. The upward movement of the housing prices is very likely to continue this year as steel producers will pay even higher bills for imported iron ore.
The investment spree on steel and cement was thought to be one of the "unhealthy and destabilizing factors" in the economic operation as there were blind and replicated projects. In Tieben case, 8 local senior officials were punished for this illegal iron project and further investigation on economic crimes were carried out. The morning call for the whole sector cost nearly 10.6 billion yuan.
In 2004, the most aggressive surge of the fixed assets investment reached up to 53 percent at the beginning of the year. The government managed to rein in it at 25.8 percent for the whole year thanks to its macro-control efforts.
This is part of the government¡¯s efforts on promoting its new concept of "scientific development".
The government tries to secure the steady economic development without sharp ups and downs.
It also decides to stop the obsolete way of economic growth which costs too much energy and creates too heavy damage to the environment.
Two main tools are used: credit and land. Banks are ordered to have more deposit reserves and borrowers have to pay higher interest rates for their bank loans. Market access for the sectors thought to be overheating turns more difficult.
A nationwide crack down on illegal use of arable land swept the country last year. As a result, some projects were suspended and 70 percent of development zones were cancelled. Real estate developers have to get land through auctioning and bidding.
Actually the grain prices also rose sharply in 2004, which were the main momentum for the alarming rise of consumer price index. But most urban residents, like Zhang Ying, do not even feel much about it. This is because their spending on food is lower than they did in 1990s and the downward grain prices for years.
Farmers are glad to see the price hike for their harvest which is also the best in seven years. The government has stressed that for some sectors, the macro-control means a boost. The biggest boost is given to the agriculture.
The resolution of the "three agricultural issues" (agriculture, farmers and rural areas) is the top priority of the government's agenda now. The widening gap between the urban and rural areas and the legitimate rights of migrant workers have aroused great concerns both of the government and the public.
However, although the land yielded more output last year, China's agro-exports suffered a deficit of more than 5.5 billion USD. Technological progress is urgently needed to improve the quality of agro-products.
China has secured leadership in some research on agriculture. For example, its hybrid rice can harvest 900 kilograms per mu in some pilot fields. This year the super hybrid rice developed by a team led by Yuan Longping, Father of Hybrid Rice, which produces 800 kilograms per mu, will be promoted around the country.
Yet rural residents have to spend more of their disposable income on food but enjoyed slower income increase than urban residents. And they are not protected by the social security system. It is recognized that it is time to help farmers reap the fruits of the country¡¯s economic growth.
As more than 60 percent of the poverty stricken rural population are in the west of the country, the government has promised more input into the area, especially the infrastructure including the agricultural infrastructure.
The prosperity of the country¡¯s less developed west is included in the central government's strategy and central China holds an ambition of rise. Either the west or the mid part of the country is rich in resources and grain production. While farmers get support, including subsidies and zero tax, the fundamental way out of woods is the agricultural industrialization.
Foreign capital did and does pay more attention to the eastern and southern areas of the emerging economy. But their interest in the mid-west is increasing. The situation in this region, although it is hunger for capital influx, is different from what it was decades ago in the east and south when the foreign capital was more than welcome. They are not encouraged to attract foreign investment with tax or land as eastern and southern areas did. Policies may vary among these provinces or cities. They have to present their market potential and business environment.
Actually the rural population also has the great potential for consumption. China expects its economy will be more driven by consumption than by investment. The government will pay more attention to creating job opportunities, fairer wealth distribution and development of the service industry.
China tends to have its economy more home oriented. The relatively slow increase in retailing sales last year and the great pressure on employment make it no easy task this year. For Chinese retailers, time will likely be tougher than ever as their foreign competitors are aggressively expanding their presence in China. Some foreign giants, such as Carrefour, have even extended their outreach into west China where domestic players still dominate the market.
The government is trying to narrow the gap between the rich and the poor. Last year China's tax revenue hit a record high. As a part of the prudent fiscal policy for this year, this makes it possible for the government to take more care of the disadvantaged and spend more on education and health care. Meanwhile, the administration also targets at cutting the budget deficit by 19.8 billion yuan and less treasury bonds.
The central bank has been keeping close watch on the prices. Last year the CPI ever broke the psychological line of 5 percent and aroused great concern. The central bank raised the interest rates last October following a slight fall of CPI. This year the market still face high pressure of rising prices, which does not help consumption.
Whether there will be any changes on the interest rates of Chinese yuan is not sure so far as the central bank needs more time to observe the price changes. But it is certain that China will not make any sharp and sudden changes on its foreign exchange rate. Top officials with PBOC and the central government have repeatedly made it very clear that China has no timetable for its forex rate liberation and that China will keep its foreign exchange rates basically stable at equilibrium level.
The successful dialogue between China¡¯s top banker and finance minister and their western counterparts at G7 meeting at the beginning of February this year has promoted the understanding of China's reform on its forex policy by G7 members. They will have further communication with China on this issue in stead of just keeping pressing China to free its forex rates.
One of the reasons that China does not think time is ripe for a free forex rates system is its concern about its banking system. The Bank of China and the Construction Bank of China is preparing for listing. Chinese banks are urged to improve their corporate governance as time for their improvment is counted. China will fully open its financial market in 2006 according to its WTO commitment.
Foreign banks are very careful about expanding business in China. But a PBOC report last year pointed out that foreign banks had much stronger competitiveness than their Chinese peers in their
Beijing operation. And their interest in investing Chinese banks seems to be increasing.
Local private funded banks are also emerging. Last August the first stock commercial bank mainly invested by private businesses were born in east China's Zhejiang Province.
Anyhow, the financial playfield will show more diversity and complexity this year as private, state-owned and foreign players will bring more intensive competition and alliances.
It is believed that the private sector will enjoy a boom this year. The State Council issued its resolution on reform of investment system which gives more freedom of decision making to enterprises. Government will have to be more careful before any decisions can be made on investment. If this policy is implemented more effectively this year, as Premier Wen Jiabao expected in his work report at the annual session of the National People's Congress in March, a bull is hopeful for the equity market which traded low last year.
Last month the State Council release another long awaited resolution on encouraging non-public economy which gives non-public businesses equal treatment with enterprises under any other kind of ownership.
Businesses under different ownership are levied different taxes. Foreign enterprises enjoy favorable tax policy. The public and some senior officials are crying out for a uniformed tax system for all businesses. However, when it will be realized is still uncertain. The latest prediction is 2008.
Observers have noticed that the State Council¡¯s resolution mentioned above opens the market access to monopolized sectors for private capital, such as power, water, gas.
The energy shortage has become a bottleneck for the fastest growing economy in the world. One-third of the oil China consumes is imported. China is seeking for more oil and gas exploration opportunities home and abroad to secure its energy supply. A draft of renewable energy law is also being circulated and reviewed by the country¡¯s legislature. The energy sector will absorb and generate more capital.
The environmental watchdog is watching the possible spending spree on energy. A "storm of environmental protection" is sweeping around the country and the biggest electricity generator, the Three Gorges Project, has filled the chill, which was ordered to suspend some of its items due to its failure of submitting environmental influence assessment report.
The government is promoting the idea of building a conservation oriented society around the country. This is well embraced by the public. Appliance labeled energy efficiency is much more popular on the market. This will in turn make enterprises realize that sustainability relies more on their care for the environment than on the expansion.
As life is getting better, Chinese people are increasingly concerned about the food safety. China has set market access for food industry and is drafting standards for food. It is also exploring more international cooperation on this regard.
A survey also shows that Chinese public need to improve the awareness of intellectual property rights. Foreign companies with operations in China and China's major trade partners, EU and US are also asking for more effective IP protection in China. China has made more stringent laws governing IP and strengthened its law enforcement.
On the international market, IP is also a dilemma for Chinese manufacturers which are charged with high patents fees. They have found that low prices will not work long. The government encourages them to embed more innovation into their competitiveness. They should forge closer ties with research institutes and universities.
Chinese exports are enjoying trade surplus. But tech intensive products still contribute little a little. And most of hi-tech exports are from joint ventures.
It is not possible to predict what changes will take place on China's economy in 2005. But China knows well what changes it wants to make. As it is mentioned above, there will be storms. There will be moderated paces. Difficult choices have to be made sometimes as China¡¯s got to swim with the tide of globalization.
