Abstract
This 2004 Article IV Consultation highlights that China has continued its rapid economic growth and integration into the global economy. Real GDP grew by 9.1 percent in 2003, underpinned by strong fixed investment and exports, which registered growth rates of 20 percent and 29 percent in real terms, respectively. Consumption growth declined somewhat from 2002, reflecting the impact of the SARS epidemic in the second quarter. Significant progress has been made in structural reforms. In the banking sector, restructuring plans are being put in place for the two state banks that were recently recapitalized.
1. This statement contains information that has become available since the Staff report was circulated to the Executive Board on July 7, 2004. This information does not materially alter the thrust of the staff appraisal.
2. New data for the second quarter of 2004 point to some success in slowing down the economy, but data revisions and incomplete reporting make it difficult to draw firm conclusions. Real GDP grew by 9.6 percent (y/y), down from 9.8 percent in the first quarter. The slowdown in the reported growth rate appears to have been influenced to some extent by an upward revision to GDP growth in the second quarter of 2003.1 Without this revision, second quarter 2004 growth would have been about 11 percent. However, staff estimates of GDP seasonally adjusted on a quarterly basis suggest a significant slowdown in second quarter 2004 GDP growth. Indicators for expenditure show a marked decline in fixed asset investment growth from 36 percent (y/y) in real terms in the first quarter to 22 percent in the second. Consumption growth, on the other hand, appears to have picked up, as real retail sales rose by 11½ percent (y/y) in the second quarter, following a 9¼ percent increase in the first quarter.
3. External trade continued to be buoyant, with exports and imports increasing by 46 percent and 51 percent (y/y), respectively, in June. China had a small trade surplus of $1.7 billion (customs basis) in the second quarter, compared with a deficit of $8.5 billion in the first quarter. Foreign exchange reserves increased by $30 billion during the second quarter, in part reflecting strong net FDI inflows of $20 billion. On a monthly basis, official reserves increased on average by $10 billion in the second quarter, compared with $12 billion in the first, suggesting that non-FDI capital inflows (including errors and omissions) may have declined in the second quarter.
4. Food price increases continued to drive CPI inflation. The CPI in June increased by 5.0 percent (y/y), compared with 4.4 percent in May. Food prices were up by 14.0 percent (11.8 percent in May), and non-food prices by 0.4 percent (0.7 percent in May). Staff estimates of the CPI on a seasonally adjusted basis suggest that inflation stood at 5.8 percent (month on month at an annual rate) in June, roughly the same as in May, but less than the 7.8 percent rate in April.
5. Broad money and loan growth declined to 16¼ percent in June (y/y), compared with average growth of 19¾ percent and 20 percent, respectively, in the first five months of 2004. Estimates of loan growth, however, may understate the growth in new lending to some extent because of the substantial writeoffs of nonperforming loans by banks at the end of last year and during the first half of 2004. Although broad money and loan growth rates have come down, the staff believes that continued monetary policy vigilance is needed to ensure a soft landing of the economy.
In the release of GDP data for the first half of 2004, revised data for the same period in 2003 were published, but revised GDP data for the whole of 2003 were not.