By Zhang Liqun

1. Basic Features of the Economic Situation in 2001

On the basis of the improvement in 2000, the Chinese economy continued to maintain a steady growth in 2001. Preliminary statistics indicate that the gross domestic product in the year totaled 9.58 trillion yuan, or 7.3 percent higher than that in the previous year. In contrast to the weak performance of the world economy as a whole, China''s economic growth became all the more striking. The basic features of the economic situation in 2001 were as follows:

(Ⅰ) New basis for economic growth began taking shape.

The economic environment has undergone profound changes since the Chinese economy entered a new stage of development. The mode of economic development and the system and mechanism of the economy were found to be incompatible with new circumstances. The narrow space for industrial development, the serious difficulties encountered by enterprises, the rising unemployment and the macroeconomic regulation were also found to be incompatible with the new situation. Since 1998, however, the Chinese economy began gradually adapting itself to the highly competitive market environment and building tip its own ability on spontaneous growth after a series of measures were taken to expand domestic demand, adjust the economic structure and deepen various reforms. The following are the main manifestations:

1. Broader space for industrial development

First, the real estate industry posted a rapid growth. After the mid-1990s, housing became a new hot spot of urban consumption thanks to the rise in the income of urban residents. The reform of urban housing system and the introduction of consumer credit offered a strong support for the expansion of this hot spot. At the same time, accelerating urbanization became a matter of urgency. Increased government investment in infrastructure construction helped upgrade the level of urban infrastructure, which in turn offered an active push to the process of urbanization. The acceleration of urbanization provided a broad space for real estate development investment. As a result, the improvement in the consumption structure of urban residents and the acceleration of urbanization has greatly expanded tile space for real estate development investment. Since 1998, real estate investment has constantly grown and become an important driving force for investment growth and economic growth (see table 1). The floor space and sales revenue of commercial housing all grew at an annual rate of more than 20 percent. In 2001, these main indicators rose by over 30 percent, making the real estate industry the fastest-growing sector of the tertiary industry.

Second, high-tech industries such as the electronic and telecom products manufacturing industry became the leading force for industrial growth. Since the beginning of the 1990s, new industries including information and bioengineering have registered rapid development and become an important force for the development of the new economy. It also produced diverse impacts on the Chinese economy. The manufacturing of electronic and telecom products and other new industries became a new growth point of the economy. Since 1998, the output value and sales revenue of these industries (excluding the daily electronic products) have been growing at an annual rate of over 30 percent. The manufacturing industry of telecom and related equipment, which accounted for more than 40 percent of the entire industry in terms of output value and sales revenue, saw its sales revenue rise by 43 percent in 2000 and more than 50 percent in the first half of 2001. In December 2001, the electronic and telecom products manufacturing industry accounted for 12.1 percent of the country''s total industrial added value.

Third, the transformation and upgrading of traditional industries became faster. With the intense market competition, the traditional industries such as textile, metallurgy, food, household electric appliance and machine building have all accelerated transformation and upgrading in recent years. The transformation and upgrading involves not only the upgrading of equipment, the improvement of product quality and performance and the diversification of varieties, but also the shifting from the downstream production of consumer products to the midstream and upstream production of spare parts and materials, thus increasing the national contents of these products. These activities greatly increased equipment investment and opened up .new areas for the development of the traditional industries, in recent years, the traditional industries such as iron and steel, food and beverage and household electric appliance have all posted steady growth. Their rankings in the entire industry respectively moved from the 6th, 15th, 17th and 12th places in 2000 to the 4th, 9th, 5th and 6th ill 2001 in terms of growth rates.

Fourth, the auto industry''s development became faster. The structural upgrading of urban consumption was playing a visible role in promoting the development of the auto industry. Since 1998, tile sales revenue of the auto industry has been growing at all annual rate of more than 16 percent. In the first half of 200l, the growth was as high as 25 percent, next only to the growth of the electronic and telecom products manufacturing industry.

In summary, the space for industrial development has become tangibly larger compared with that of the mid- 1990s.

2. The growth of consumer demand was higher and the upgrading of consumption structure became faster.

Since 1998, the growth of consumption and the change of consumption structure in China have all become faster (see the relevant data in tables 2 and 3),

Note: This table is compiled on the basis of the China Statistical Yearbook 2001. The final consumption and the rate of final consumption originate from the statistics on the total domestic output value, while the total retail value of consumer goods originates from the statistics on domestic trade. The deducted consumer price index is used as the price factor. Note: The above two tables are tabulated on the basis of the data concerning the people''s life in the China Statistical Yearbook 2001. All the data are the proportions of various kinds or'' consumer spending in the total consumer spending.

The above tables indicate that since 1998, the growth rate of consumption has become faster and its proportion in the country''s GDP has also become higher. The structural changes of urban and rural consumption have become quicker. While tile proportion of spending on housing, transportation, communications, medical care, education and entertainment has risen, the proportion of spending on food and clothing has declined. In 2001, the growth rate of the total retail value of consumer goods was 9.33 percent at comparable prices, or 0.07 percentage points higher than that in 2000. This is an indication that consumption has continued to grow at a relatively faster pace. The growth of consumption and the upgrading of consumption structure offered an important support for industrial upgrading and industrial expansion.

The fast growth of consumption was closely related to a series of policies adopted in recent years to stimulate consumption. The measure to increase personal income helped maintain a steady relationship between personal income and economic growth. Preliminary statistics indicate that in 2001, personal income increased by 8.2 percent in the urban areas and 4 percent in the rural areas. Both growth rates were higher than that in the previous year. During 1998-2000 period, the average annual growth rate of per capita income in the urban areas was 7.1 percent (at comparable prices), with a ratio of 0.99 to the economic growth rate during the same period. Compared with the 1992-1997 period, this average annual growth rate of income was 0.5 percentage points higher and the relative ratio was higher by 3.6 percent. The average annual growth rate of per capita net income in the rural areas was 3.4 percent during the 1998-2000 period, with a ratio of 0.96 to the economic growth rate. Compared with the 1992-1997 period, this income growth rate was 2 percentage points lower and its relative ratio to the economic growth rate was 1.5 percent higher. With this policy support, the ratio of the personal income growth rates in both urban and rural areas to the economic growth rates were somewhat higher. When the economic growth rates were lower (11.5 percent annually during the 1992-1997 period and 7.65 percent annually during the 1998-2000 period), a steady growth of personal income became an important factor to support the growth of consumption and the upgrading of consumption structure. In addition, consumer credit, longer holidays and other policies to stimulate consumption and the removal of the policies constraining consumption also played an important part in promoting the growth of consumption. Besides policy incentives, the richer and more diversified supply of consumer goods and services and the continuous improvement of the quality of these goods and services were also a vital catalyst to consumption growth. In short, higher income, better supply and low prices offered favorable conditions for the growth of consumption and the upgrading of consumption structure.

3. Economic system and mechanism underwent positive changes and microeconomic subjects became more dynamic.

In recent years, the state-owned enterprises have quickened their pace of strategic restructure and have obtained a clearer understanding on the way to reform. Thanks to the measures such as shortening the battlefront, transforming tile small and medium-sized enterprises, initiating merger and restructure, separating bad assets, reducing redundant personnel and intensifying upgrading and transformation, the large and medium-sized state-owned enterprises have visibly boosted their vitality. Turning these enterprises into joint-stock companies has laid a solid foundation for the establishment of modern enterprise systems in the state-owned economy. At the same time, the ownership relations in the non-state-owned economy became increasingly clearer. On this basis and in keeping with the requirements of productivity development, the enterprises in the private economy also turned to the stock-holding system, with corporate governance structure being constantly improved and optimized. In the face of fierce market competition, the enterprises in the non-state-owned economy drastically quickened their pace of structural adjustment, transformation and upgrading. They quickened the cycle of metabolism and increased the competitiveness in the market environment. The continuous increase and improvement of policy measures in favor of the non-state-owned economy also provided growing support for its development. In short, the accelerated transformation of China''s enterprise systems and mechanisms has made these enterprises more adaptable to the environment of all-round competition. Compared with the 1997-1998 period, corporate vitality became tangibly stronger.

The establishment of new rules represented another important aspect of the changes in the economic system and mechanisms. These new rules covered the areas of bankruptcy, unemployment, social security, the transformation of government functions, the improvement of market regulations, the standardization of market order, and especially the standardization of the capital and stock markets. These rules constituted a very important basis for enterprises to adapt to the environment of all-round competition.

In short, the economic system and mechanism have undergone a series of positive changes and become increasingly adaptable to the changes in development stages and development environment. The socialist market economic system has rapidly been improved, and the microeconomic basis and system environment for economic growth have been constantly improved.

4. The policy system designed to expand domestic demand was improving and the results became more tangible.

Expanding domestic demand represented a major adjustment of China''s macro-regulatory policy. It was also an important measure to cope with the changes in the external environment. From then on, the macroeconomic regulatory policy shifted its emphasis from controlling demand and preventing inflation to expanding demand and overcoming deflation. Expansion of domestic demand requires a process of constant practice, understanding and improvement: from increasing government direct investment in infrastructure construction to encouraging private investment, from expanding investment to stimulating consumption, from expanding domestic demand to actively expanding export, and from emphasizing short-term goals and government roles to emphasizing mid-term and long-term goals and market rules. At present, this policy system is still in a process of constant improvement, with the financial and monetary policies being continuously enriched and their effects being continuously improved. The 2001 Central Conference on Economic Work decided to keep to the principle of expanding domestic demand and to continue to pursue a proactive financial policy and a sound monetary policy. The conference also decided to integrate the expansion of domestic demand with the strategic adjustment of the economic structure, the deepening of the economic system reform, the increase of employlnent, the improvement of the people''s life, and with the sustainable development. This will turn the expansion of domestic demand into a complete policy system that incorporates both short-term and long-term goals and harmonizes macro-regulation with reform and development.

The accumulation of experience in macro-regulation and the improvement of policies provided an important guarantee for a steady economic growth.

We can see from the above that the new sources of economic growth were taking shape and expanding, which was also a main factor that promoted the economic improvement in 2000 and the further growth of domestic demand in 2001.

(Ⅱ) Comprehensively understand the impact of the world economy on the Chinese economy

While the new sources of economic growth are constantly increasing, we should see that the basis for the spontaneous growth of the Chinese economy was still relatively weak. This was also one of the basic features of China''s economic operation in the new stage of development. Therefore, we should not ignore the impact of the changing external environment on the Chinese economy. This was obviously a feature quite different from those when the Chinese economy was characterized by excess demand and rapid expansion.

China''s net trade balance did not change much in recent years. It seems that external demand has had little impact on the domestic economic operation. However, things will be different if we analyze imports and exports separately. For domestic industries, exports represent direct external demand, and the concrete manifestation is the growth of the value of delivered export products. Imports on the other hand represent part of domestic demand. As many imported goods cannot be substituted by domestic industries, they are unlikely to affect the market share of the domestic industries. We should also see that when the domestic market is characterized by excess demand or oversupply, foreign trade has different impacts on the domestic economic operation. In the former case, economic growth rate is determined mainly by the potential of supply growth, and foreign trade mainly influences the domestic economic operation through import growth. As a result, the impact of foreign trade on the economic growth is mainly determined by the ability to pay in foreign exchanges. In the latter case, economic growth rate is mainly determined by the growth of demand and therefore foreign trade mainly influences the economic operation through export growth. Therefore, net export is only an indicator for tile national amounts. When demand is restrained, the impact of foreign trade on the economic operation should be determined mainly through tile indicator of export: Proceeding from this perspective, we can see that international economic changes have been having growing impact on the operation of the Chinese economy in recent years. Because of the 1998 Asian financial crisis, the growth rate of China''s export dropped drastically to 0.55 percent from the 21 percent in the previous year. This was one of the primary causes for China''s GDP growth rate to declining to 7.8 percent from the 8.8 percent in the previous year even though China adopted strong measures to expand domestic demand. The drastically higher growth in export in 2000, was also one of the primary causes of an economic rebound. Seen from the time sequence regression analysis of export growth and economic growth, the two indicators have a visible interrelationship. The co-efficient of export variable tends to increase. In the regression equation between industrial added value on the one hand and the three demands of investment, consumption and export on the other band, which was established with monthly indicators, the co-efficient of export variable during the 1989-1994 period was clearly smaller than the variables of investment and consumption, accounting for only 30 percent of the co-efficient of investment variable and 35 percent of the co-efficient of consumption variable. The co-efficient of export variable during the 1995-2000 period was visibly larger, accounting for 90 percent of the co-efficient of investment variable and 95.1 percent of the co-efficient of consumption variable. Compared with the changes in the indicators of investment and consumption, the changes in the export indicator have almost the same intensity of impact. In the equation established with annual economic indicators, 1 percentage point change in the export growth rate brings about 0.12 percentage points change in the GDP growth rate. In the year 2001, China''s export growth rate was 21 percentage points lower than that in 2000, and accordingly its impact on the economic growth rate should be more than 2 percentage points. An analysis of the GDP computation structure indicates that the impact of the export decline on the economic growth rate in 2001 should be 0.7 percentage points. Of course, due to the influence of methods, the perfection degree of statistical system and other factors, the quantitative analysis is not entirely accurate: But export''s impact on the economic growth thus worked out is quite obvious and therefore convincing.

The above analysis indicates that the changes in the world economy have a clear impact on the Chinese economy. The lower economic growth rate in 2001 compared with that in 2000 was primarily due to the impact of the world economy. The unlhvorable impact of the world economy was, to a great extent, offset by the expansion of the sources of domestic economic growth.

(Ⅲ) The intensity of macro-regulatory policies was basically steady.

In analyzing the economic situation in 2001, one aspect worthy of attention is that although the downturn of the world economy had a visible impact on tile operation of the Chinese economy, the intensity of macro-regulatory policies did not increase.

The issuance of treasury bonds did not intensify in 2001, remaining at tile previous year''s scale of 150 billion yuan. Of the total, the 100-billion-yuan construction debt was mainly used to ensure the construction of the ongoing projects and the 50-billion-yuan special debt was entirely used for the construction of the key projects associated with the development of western region such as the transmission of natural gas and electricity from the west to the east. The basic feature of the financial policy was to stabilize the policy intensity for short-term goals and improve and increase the policy intensity for mid-term and long-term goals. And the effects of tile latter policies also produced positive impacts on the short-term economic operation. The direct impact of the financial policy on the current economic growth did not intensify, but its indirect impact increased. It proves that the financial policy was playing a growing role in promoting structural adjustment, deepening economic restructuring and maintaining social stability.

The monetary policy also played a neutral role in affecting the short-term goals. The emphasis of the monetary policy was to improve the mode of fund utilization, adjust the interest rate system, broaden funding channels, strengthen financial supervision and prevent financial risks. All these measures were targeting at the mid-term and long-term reform and development goals.

The above conditions indicate that the Chinese economy is moving from the growth realized mainly through policy spurs to the spontaneous growth realized more through market regulation. Accordingly, the emphasis of macro-regulatory policies also began moving from short-term goals to mid-term and long-term goals. This is perhaps a new feature of both the economic operation and macro-regulatory policies.

　　Ⅱ. Analysis of the Economic Trend in 2002

In analyzing the economic trend in 2002, we should first of all analyze the trend of the world economy and then analyze the growth of the domestic economy in this environment.

(1) Analysis of the World Economic Outlook in 2002

Due to the influence of the U.S. economic recession and the prolonged downturn of the Japanese economy, the growth of the world economy visibly slowed down. The September 11 events made things even worse, casting a heavier shadow over the prospect of the U.S. economy and the world''s as well. Given current economic trends in the main countries and regions, the world economy is unlikely to have a tangible recovery in 2002. Worldwide overproduction, low prices and fierce competition will aggravate further. The world political and economic order will witness more uncertainties and less stability, whose impact on China''s economic development cannot be underestimated.

First, the export environment will worsen further. In 2001, China''s export rose by 6.8 percent over the previous year. This growth rate was 21 percentage points lower than that of 2000. Expanding export in 2002 still has to surmount enormous difficulties, and the export growth rate is expected to be further lower than that in 2001.

Second, worldwide overproduction, low prices and excessive competition will aggravate ill 2002, which will be transmitted to China more visibly through the channels of international price fluctuations and imports after China''s entry to WTO. They will also increase the pressure of deflation.

(Ⅱ) Analysis of Domestic Economic Operational Posture

Compared with the world economic conditions, the posture of China''s domestic economic development in 2002 will be better. First of all, the Sixteenth National Congress of the Communist Party of China will be held in this year to further define the goals for the new century. This will stimulate the enthusiasm of the entire Chinese people to accelerate economic development. Second, China''s entry to the WTO and successful bidding for hosting the 2008 Olympic Games have boosted the country''s international prestige and enhanced the confidence of domestic investors and consumers. Under this circumstance, domestic demand is expected to continue to maintain a steady growth, the micro foundations as well as the operational quality and efficiency are expected to be further improved.

1. Investment will continue to maintain a relatively high growth but the growth rate will be lower.

While the external economic environment experiences changes, the domestic economic growth rate will slide. Due to these factors, investment will go down and the market push to investment will also be less intensive. On the other hand, the government, which is obsessed with risk losses, will alleviate its push to investment. In addition, increased stock market risks have made the listing of enterprises more difficult. Except for the market of government bonds, other stock markets will experience slower development. All these factors will suggest that investment growth will slide in the future.

At the same time, we should also see that the investment in real estate development will continue to grow rapidly thanks to the industry''s broader areas of activities and better funding guarantee. With the support of the government bonds funds and government credit, the capital investment is expected to maintain a steady growth. Therefore, investment in 2002 is expected to grow by a relatively high level of more than 10 percent despite a series of unfavorable factors.

2. Consumption growth will be steady.

In 2002, conditions to ensure a sustained and rapid growth of the peasant income are still not ripe. In addition, wider income gap, lower purchasing power of the low-income urban groups and slow growth of the personal income in the economically backward regions will be hard to change in a short period of time. Due to the large base figure, the effects of salary increase for civil servants and the employees of public institutions will be weakened. Therefore, the personal income growth in both urban and rural areas will be lower than that in 2001. In addition, the longer holidays, the interest tax and other policy measures to support consumption growth will also play a weaker role. On this basis, the rate of consumer demand growth in 2002 will be somewhat lower. On the other hand, some favorable factors will continue to play their part. They include the upgrading of personal consumption structure, the growth of new consumption points, the improvement in consumer goods supply and the low price levels. Therefore, the decline in consumption growth rate is unlikely to be drastic; the growth rate will remain at about 10 percent.

The above analysis indicates that compared with 2001, the growth rate of domestic demand in 2002 will be slightly lower, and so will the growth rate of external demand. This will bring the economic growth rate slightly down. The economic growth rate for the whole year is expected to be about 7 percent. On a quarterly basis, the growth trend will be fairly steady. First-quarter performance has always been good in recent years. It is expected that this trend will be maintained this year. The economic growth rate in the first quarter will be 7 percent or slightly higher. From the second quarter on, China''s economic growth rate will be maintained roughly at the first quarter level if the world economy will not go down further.

Ⅲ. Serious Handling of Certain Relationships and Enhancing the Effects of the Policy to Expand Domestic Demand

In the economic operation in recent years, the macro-micro relationship, the planning-market relationship and the development-reform relationship have been complicated and interwoven. How to correctly handle these relationships is of vital importance for further improving the policy system to expand domestic demand.

Increased demand restraint has made the problem of macro aggregates prominent and naturally drawn public attention to the macroeconomic goals. When the economic growth rate continues to decline, possibly to less than 7 percent, it will pose potential threats to social stability. Therefore, accelerating development inevitably becomes the primary goal. When market risks increase, restraints should be strengthened. However, when the ability of the market mechanism to allocate resources declines, the use of planning tools will naturally be emphasized. This is where the interrelationship between increased planning tools, expanded demand and faster development lies. In coping with the sudden assaults arising from the change in development stages and the changes in external economic environment, selecting the above means and goals is absolutely necessary. On the other hand, as the Chinese economy is in a process of deep-seated transition, the fundamental driving force for economic development remains in deepening reform, improving market mechanism and increasing the ability of the microeconomic subjects to develop independently. The latter constitutes a more basic and fundamental goal.

Accelerating economic development is the common ground for two categories of measures and goals. Only the means and ways used are different. One is to expand the current demand by planning means. The other is to make supply obtain new development ability in an environment of intense market competition by solving tile problems ill systems and mechanisms and by increasing the ability of microeconomic subjects to develop independently. However, increasing the scale of resource allocation by planning tools will reduce the efficiency of resources to certain extents and call affect the transformation of government functions. Therefore, this method is not conducive to improving and expanding the functions and scope of market regulation.

In general, planning-based measures can bring about fast results with higher cost and less sustainability, while market-based measures take a longer time to work, but can bring about better results and are more sustainable. When economic downturn becomes a primary concern, planning-based measures are preferable. When increasing economic stability and improving operational quality and efficiency becomes tile primary goal, market-based measures should be chosen. In practice, the two categories of measures taken in recent years have crisscrossed, thus creating a fairly complicated situation. A correct assessment on the economic situation and its development trend is key to the selection of different measures. As there will be more uncertain factors in the future economic situation, the selection of two categories will be more difficult. Therefore, we should follow the situation more closely and adjust policy combination in a timely manner so as to strive for the best possible results.

As far as tile economic situation in 2002 is concerned, the economy can maintain a roughly steady growth with the support of spontaneous growth ability if no unexpected events occur. The growth rate can reach about 7 percent. In this case, the policy to expand domestic demand should adopt more market-based measures while maintaining the intensity of planning-based measures. We should also see that with the Chinese economy undergoing phasal changes, the existing systems and mechanisms are becoming more incompatible with the development of social productive forces. This is where the deeper-level and fundamental causes of many current economic problems lie. Entry to WTO means integration with the world economy. One very important aspect is to integrate in terms of systems and rules. For this reason, deepening the reform and accelerating the establishment and improvement of the socialist market economic system is a measure of fundamental significance to promoting China''s economic development, to increasing tile international competitiveness of the Chinese enterprises, and to preparing for WTO. The policy to expand domestic demand should actively coordinate with the policy measures designed to deepen economic restructuring, and the transition in systems and mechanisms should continue to help improve the environment for the implementation of tile policy to expand domestic demand. Only by doing so can policy effects be improved and policy sustainability be strengthened.