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ISSUE N° 3 March 2005

Economic Situation of China and the Yangtze River Delta
at the Turn of 2004 and 2005

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1. 2004: Have macro-control measures worked?

1.1 General Economic Assessment

The heating wheels of China’s economy sped by the finishing line of 2004 steadily
- Chinese Premier Wen Jiabao, 2004 Government Work Report

Despite a full calendar year of macro-control aiming at cooling down the overheated sectors, China’s economy reported 9.5% growth with its GDP totalling 13.65 trillion yuan (US$ 1.65 trillion), consolidating its position as the world’s fastest growing economy. The Yangtze Delta Region, embracing the city of Shanghai and the two provinces of Jiangsu and Zhejiang, continues to play a locomotive role in the country’s economy, in particular in the fields of investment and foreign trade.

2004 was a “threatening but not dangerous” year for China, as reviewed by some Chinese economists. The economic growth was the fastest for the last eight years, exceeding economists’ forecasts and lying well above the official target of 7%. Investment, export and consumption remained the key drivers of the economy, but the structure of the economy has improved. Although fixed-asset investment surged by 25.8%, it dropped 1.9% from the pace recorded in 2003, and 43% from the 1st quarter of the year. In the meantime, growth in industrial output also slowed down due to the macro-control measures, while sectors like consumer goods, services and export manufacturing, which were not targeted by the authority, grew faster than the year before. Overall, the respective growth rate for the four quarters were 9.8%, 9.6%, 9.1% and 9.5%. The fourth quarter’s rebound was largely due to the grain harvests and service expansions, reflecting the growth of the primary and tertiary industry.

Generally speaking, China’s economy has maintained a stable and relatively fast growth trend, while fighting both inflation and deflation.

1.2 The Yangtze Delta Region

Widely acknowledged as the world's sixth largest metropolitan area, the Yangtze Delta Region is one of China’s most developed regions in economic terms. With only 2.2% of the country’s land area and 10.4% of the total population, it contributed 25% of China’s GDP and provided 36% of total foreign trade. As the most popular foreign investment destination, it attracted 41.8% of the country’s total actually utilised FDI (foreign direct investment) last year.

Shanghai leads the region by offering an international platform. In 2004, its GDP topped 744 billion yuan (US$ 90 billion) with a year on year rise of 13.5%, the second highest for the last ten years and the 13th consecutive year of double-digit growth. The respective contributions of the three sectors of the economy to the city’s GDP was 1.3%; 50.8%; 47.9%.

Jiangsu Province, the second largest provincial economy after Guangdong Province, reported a GDP of 1551.2 billion yuan (US$ 186.9 billion), an increase of 14.9% over the previous year, and 6.4 percentages higher than the national average, with shares of the three economic sectors standing at 8.5%; 56.6%; and 34.0%.

Zhejiang Province is ranked the fourth provincial economy after Guangdong, Jiangsu and Shandong Province. Last year, its GDP exceeded the trillion-yuan-mark with an increase of 14.3% to the amount of 1124.3 billion yuan (US$ 135.95 billion), and the percentages of the three industries as 7.3%: 53.7%: 39%. Measured by per capita GDP (23,942 yuan or US$ 2,895), Zhejiang is the richest province in China.

1.3 Main Economic Indicators

Fixed-asset investment: declined from a hot point, but still a main driver

China’s fixed-asset investment hit a 10-year high in the January to March period of last year, growing 43%. The cooling down measures took effect and slowed the growth down to 25.8% for the whole year to 7.01 trillion yuan (US$ 840 billion).

In the Yangtze Delta region, Shanghai had the same growth rate of 25.8% with total investment of 308.47 billion yuan (US$ 37.25 billion), which were mostly used for large infrastructure projects, 2010 Shanghai Expo projects, as well as real estate constructions. In Jiangsu Province, the investment totalled 682.76 billion yuan (US$ 82.46 billion), a rise of 28%, with 52.6% of which from non-state investors, while in Zhejiang Province, 66.8% of the total 594.5 billion yuan (US$ 71.8 billion) (20.2% up from the previous year) fixed-asset investment were from non-state investors.

In general, the overheated sectors such as steel, cement, aluminium, and real estate had cooled down, but investment in energy, transportation, consumer goods, service and export manufacturing were further strengthened. Overall, fixed-asset investments still accounted for 51% of the total GDP, while consumption was responsible for a mere 39.5%.

Private Consumption: expanded considerably, possibly becomes future driving force

The government policies to boost consumption have paid out, retail sales growth rate increased from 9.0% in the year before to 13.3% in 2004, reaching 5.395 trillion yuan (US$ 651 billion), which also reflected an increase of personal incomes for Chinese consumers. In 2004 the per capita net income of China’s rural residents increased 6.8% year-on-year to 2,936 yuan (US$ 355), the highest growth in seven years since 1997, while per capita disposable income of urban residents increased 7.7% to 9,422 yuan (US$ 1,138). By the end of 2004, the saving deposits of the urban and rural population stood in excess of 11.95 trillion yuan (US$ 1.44 trillion), an increase of 1.59 trillion yuan from the end of the previous year.

Rural consumption and service consumption were the highlights of last year’s consumer spending. The fast increasing rural income supported by a favourable agricultural policy has lifted the sluggish rural consumption and household electrics became a new focus of spending. In the cities, consumption in dining and tourism made a much bigger contribution to the overall consumption. Last year, some 28.5 million Chinese people travelled abroad, up 41% from 2003, and domestic travellers added 400 billion yuan (US$ 48.3 billion) to the tourism income.

Consumer spending also gained in the Yangtze Delta region. Shanghai reported total retail sales of 245.46 billion yuan (US$ 29.6 billion), up 10.5% from 2003, also the fastest growth for the last six years; in Jiangsu it was 415.97 billion yuan (US$ 50.2 billion), up 16.6% while in Zhejiang it totalled 364.5 billion yuan (US$ 44.0billion) with a 15.5% increase over the previous year.

Macro-economic control has curbed investments in several of the overheated sectors of the regional economy, which has resulted in the economy to depend more on household spending and trade.

With the upgrading of the consumption structure from food, clothes and household necessities, to houses, cars, education, and travels, it will hopefully become a new driving force of the economy.

Foreign Trade: another engine of growth

China’s imports and exports remained on the fast track last year. Foreign trade jumped 35.7 percent to US$ 1.1547 trillion, including exports of US$ 593.4 billion and imports of US$ 561.4 billion, which were 35.4% and 36% higher respectively year-on-year, as the trade surplus grew US$ 6.5 billion to reach US$ 32 billion. This was the third consecutive year that China’s foreign trade reported a growth of over 30%.

The US, EU and Hong Kong are the three main trading partners of China. Combined exports to the three countries reached US$ 332.982 billion in 2004, accounting for 56.12% the total exports, and contributing to 55% of export growth.

Foreign-funded enterprises have dominated China’s foreign trade. Their export in 2004 accounted for nearly 58% of the total exports, increasing by 40.9% over 2003. In contrast, state-owned enterprises’ export increased only 11.4% to reach US$ 153.59 billion, accounting for 25.88% of the total, while private enterprises, as a new competitor, contributed 17% to the exports.

China's imports soared in recent years as the country has bought more raw materials, energy and machinery to feed its rapidly growing economy. But decline in investment will translate into a decline in imports, while the reduction in tariffs, on the other side, combined with high oil prices, will drive imports upwards.

Net exports will then become a more important driver of GDP growth, judging from the strong trade surplus, which in the mean time, makes China more dependent on foreign trade with more risks of consecutive economic fluctuations.

Leading in China’s export were the Yangtze Delta Region, with its 37.39% contribution to the country’s total exports. Last year, the export volume of Shanghai was US$ 73.52 billion, up 51.6% from 2003; Jiangsu exported goods in the value of US$ 87.56 billion, an increase of 52.7%, and Zhejiang’s exports grew 39.8% to US$ 58.16 billion.

Swiss trade relation with the Yangtze Delta Region continued to develop quickly. As Table 2 shows the region imported goods with a total value of US$ 1,489.14 million from Switzerland in 2004, an increase of 54.5% over the previous year, and exported a total value of US$ 546.78 million to Switzerland with an increase of 80.9%. The growth rates of both exports and imports are much higher than the average of the region, reflecting closer trade relation between Switzerland and the Yangtze Delta Region. Machines, high-tech products and raw materials made the majority of the imports, in terms of commodity brackets, while light industrial products were the main exported goods to Switzerland. With the expansion of the Swiss presence in the region, Swiss-invested companies also contributed a considerable part to the total export volume. It is also noteworthy that all the figures do not include the indirect trade via Hong Kong, therefore the numbers do not show the increasing demands of high quality Swiss made consumers goods, which are mainly distributed by Hong Kong agencies.

Foreign Investment: steady increase, with new destinations

In 2004, the tightening policy did not influence foreign direct investment (FDI) to mainland China. The actually utilised volume grew 13.3% to reach US$ 60.63 billion, while the contractual volume of FDI totalled US$ 153.48 billion, an increase of 33.4% on a year-on-year basis.

China's accumulative FDI totalled US$ 1.097 trillion by December of 2004, of which 562.1 billion have been materialized, making it still the most preferred FDI destination world-wide.

Multinationals are quickening their steps to enter China’s market. According to the information from China’s Ministry of Commerce (MOFCOM), 450 out of the top 500 multinationals have set up their manufacturing bases in China.

Apart from traditional sectors like manufactures, electric machinery and other high-tech areas, M&A and outsourcing have become new trends of FDI in China, while R&D centres, regional headquarters as well as the service sector have increasing their respective shares of the total investment. However, it is noteworthy that at least two thirds of the capital under the heading of FDI is still coming from different ethnic Chinese sources.

New FDI Situation in Yangtze Delta Region

Although the Yangtze Delta Region has still seen an influx of foreign investment, the growth paces have been slowing down considerably. Last year, the total materialised FDI in the region was US$ 25.36 billion, accounting for 41.8% of the country’s total, compared to 51% in 2003. The actually utilised FDI in Shanghai was US$ 6.54 billion, with 12.6% growth rate, down 10.9% from 2003; the number for Jiangsu was US$ 12.1 billion, an increase of 17.1% (56.6% in 2003); in Zhejiang, it amounted to US$ 14.56 billion, with an increase rate of 20.8%, compared to 77.5% in 2003. The sharp decline of FDI growth rate reflects a new direction of foreign investment.

On China’s economic map, three city clusters form the most preferred FDI destinations: the traditional Pearl Delta Region, the Yangtze Delta Region, and emerging Bohai Bay Rim, led by Beijing and Tianjin. The fast growing business costs, expensive land, a shrinking base of migrant workers as well as power shortage in the two delta regions have resulted in the move of FDI to the old industrial bases in north China, where they have the advantages of a preferential policy, sufficient skilled workers from the former state-owned heavy industry factories and relatively low-priced land. More and more multinationals start to set up regional headquarters in East China and manufacturing bases in the west and the north of China. On the other hand, investment from ethnic Chinese sources, which is normally the most mobile part due to their knowledge of the country and their risk awareness, also transfers to chase the lowest costs. It is no wander that overseas Chinese investors are often described as “migratory birds”.

As a result, the governments in the Yangtze Delta Region adjusted their strategies in attracting FDI. Due to the limited supply of land and scarce energy, the cities are more selective in the types of foreign investment, aiming to increase the proportion of service industry in relation to total FDI, and lower the proportion of low-end, labour-intensive industries. Last year the service industry accounted for 37% of the total FDI in Shanghai, up from 33% in 2003, and the city expected the figure to grow 1 to 2 percentage points every year, to more than double the added value from the service industry, accounting for at least half of the total GDP by year 2010 when Shanghai hosts the 6-month-long World Exposition 2010.

Swiss direct investment is increasing steadily in China and the Yangtze Delta Region. Last year, there was a total of 88 Swiss-invested projects in China, with a majority of 75% (66 projects) concentrated in the Yangtze Delta Region, and a half of them (44 projects) in Shanghai. By the end of year 2004, Swiss direct investment totalled UD$ 2,806 million in terms of accumulated contractual value for 701 projects in China. Among them, UD$ 1,150 million is located in Shanghai, while the numbers for Jiangsu and Zhejiang were UD$ 519 million and UD$ 64.8 million respectively (See Table 3). The large number of Swiss companies in the Delta Region is mainly due to considerable investments of Swiss SMEs around Shanghai.

2. 2005: Will “Soft-Landing” be possible?

China’s economy in the year 2005 is like “sailing against the currents”: either it keeps forging ahead or it will fall behind.
- Chinese Premier Wen Jiabao, at press conference after the National people’s Congress

This year is the last year of the 10th Five-Year Plan period (2001 – 2005). At the National People’s Congress held in this March, the Chinese government outlined a development blueprint for 2005, highlighting its continued macro-economic control policy.

2.1 Government Targets for 2005

The GDP growth for this year was targeted at 8%, 1.5% lowers than 2004 rate, but higher than the 7% forecast issued in the past few years. This moderate growth was chosen to maintain a relatively rapid economic growth to create 9 million more jobs, and on the other hand, to avoid an overheated and unhealthy development.

Fixed-asset investment’s target growth rate was set at 16%, still doubled the targeted GDP growth rate, but down from the 26% of last year, when fixed-asset investment accounted for half of the overall economic output.

The fiscal policy was shifted from "proactive" to "prudent“, cutting this year's fiscal deficit by 19.8 billion yuan (US$ 2.4 billion) to 300 billion yuan (US$ 36.2 billion), to an estimated 2% of the GDP, 0.5% lower than last year’s figure.

The parallel monetary policy was also set to remain "prudent", being more adaptable to economic environment.

The Yangtze Delta Region

In line with the central government’s macro-control policy, the local governments of Shanghai, Jiangsu and Zhejiang set their economic growth rate simultaneously at 11%, much lower than their growth rate last year. Shanghai also specified energy consumption goal at less than1.02 tons of standard coal per 10,000 yuan (US$ 1,204) of GDP to ensure a sustainable growth. The 2003 average was about 1.1 tons.

2.2 Challenges and opportunities: old and new

Many signs showed that the macro-control measures have achieved an initial success. The economy will continue to boom, at a high growth rate, probably more than 8% for the nation as a whole, and another double-digit for the Yangtze Delta Region. In addition to the administrative measure of tightening credit and land, more economic measures will be used this year to keep the economy on a fast and stable track.

However, “sailing against the current”, the economy is facing many challenges, old and new. The fixed-asset investment grew 24.5% during the first two months of this year, showing a sign of rebound despite the central government’s cooling efforts. The bottleneck of energy supply is still restraining the growth. Although the electricity supply increased 12% in February, there were 25 provinces reported black-out in the same period of time again.

One the other hand, being integrated into the global economy as the world's 3rd largest trading nation and the largest destination of foreign direct investment, China is also facing challenges from outside: possible slowdown of the world’s economy, crude oil price increases, growing trade frictions, and mounting pressures of revaluation of its currency.

Widening wealth gap

Nevertheless, the widening wealth gap and the growing income disparities remained one of the biggest problems, not only in terms of increased inequality within urban China, but also in the gap between urban and rural China and in differences between the eastern coastal cities and the much poorer western and central provinces. By the end of 2004 income inequality, as measured by the Gini coefficient (where 0 represents an equal distribution of wealth and 1 implies absolute inequality), had risen to 0.454 (research by Chinese Academy of Social Sciences), already surpassing the international alarming point of 0.40. The gap has been growing in recent years. Statistics showed e.g. that the per capita income gap between the top 10% and the bottom 10% in Jiangsu Province had doubled from 5.39 tomes in 2000 to 10.71 times in 2004.

Economists explain that the high expectation for a continued rapid economic growth has supported a strong psychological tolerance for the disparity, which has now become a major political issue. The government has announced its new goal to build a “harmonious society”, putting increase in rural incomes and in job creation for urban residents at the top of its agenda.

Starting last year, a series of policies have been decided to promote the rural development. At this year’s National People’s Congress, the government announced to abolish agricultural tax by 2006, two years earlier than it had originally planned, and primary-school fees for all children in rural areas will be also exempt by 2007. The increased income of the 900 million farmers will hopefully contribute considerably to the country’s expenditure-side data, as the base is apparently quite low. It is reported that nearly 40% of the rural families still don’t have colour TVs. The change will be more substantial when the rural consumption will be gradually integrated into rural markets.

Quietly burgeoning “middle class”

There's presently no definite, official terminology of "middle class" in China. But some economists and a research conducted by the National Bureau of Statistics (NBS) suggest those household annual incomes between 60,000 yuan (US$ 7,230) to 500,000 yuan (US$ 60,240) should be categorized as medium income earners. About 5.04% of the population falls into this category and the proportion of this group is expected to increase to 45% in the year 2020.

Although the criteria varied and the authority declined the definition of the middle class, this group does lead a new trend of life style and consumption. In the longer run, an olive-shape society with a large middle class will be essential for sustainable economic growth and a “harmonious society“. At the same time, this will create a base for social stability as well.

With the new middle class emerges a new life and behavioural style. The group is responsible for a large percentage of consumption of houses, cars, travel and sports, and starts to cultivate a loyalty for brand commodities.

The sale of cars was sluggish compared to that of houses last year. This was mainly due to the expectation of further cut on prices and growing traffic bottlenecks. However, China's passenger car sales still rose 15.17% to 2.33 million units in 2004, and the sales in 2005 are expected to rise 20% to 2.79 million units. It is likely that the fall in investment as a percentage of GDP will be matched by a rise in consumption as a percentage of GDP.

2.3 Implementation, on top of the issues

The year 2005 will be a crucial year for reform. The reform of state owned enterprises and banks has reached the hardcore, and efficiency of investment is top on the government priorities list. The central government is determined to ensure a healthy and stable development. What is crucial however is the implementation at different government levels.

The Director of the National Statistics Bureau (NSB), Mr. Li Deshui, revealed recently that the GDP figures he received from various provincial governments were 2.66 trillion yuan (US$ 320 billion) more, or 3.9 percentage points higher, than the counting by his bureau. The gap between the regional and national statistics regarding the GDP growth has existed for many years. This shows the obstinate pursuit for high speed within some regional governments, largely due to the government official performance evaluation and the promotion system linked with it.

The GDP growth rate targets set by localities are all higher than the 8% target determined by the central government. The fixed-asset investment in infrastructures and real estate by local governments shows a sign of rebound despite the cooling-down policy. The central government is continuing its effort to fight local protectionism and official corruption, as well as the blind pursuit of high GDP growth rate, which will, if let uncontrolled, lead to overheated growth at the expenses of over-used energy and future development.

3. Useful Sources of Information

Ministry of Commerce of P.R. China:

National Statistics Bureau:

Shanghai Municipal Government Foreign Economic Relations & Trade Commission:

Department of Foreign Trade and Economic Cooperation, Jiangsu Province:

Department of Foreign Trade and Economic Cooperation, Zhejiang Province:

Department of Foreign Trade and Economic Cooperation, Anhui Province:

China Daily:

Stella Nie
Commercial Section

Table. 1
Current Economic Indicators* of the Swiss Consular Area

Year   2003 2004
    volume growth volume growth
      rate (%)   rate (%)
GDP (billion RMB) China 11669.40 9.1 13651.50 9.5
   Shanghai 625.08 11.8 745.03 13.6
  Jiangsu 1246.80 13.6 1551.24 14.9
  Zhejiang 939.50 14.4 1124.30 14.3
  Anhui 397.24 9.2 481.27 12.5
  Consular Area  3208.62   3901.84  
Total Retail Sales of Consumer Goods China 4584.20 9.2 5395.00 13.3
(billion RMB) Shanghai 222.06 9.1 245.46 10.5
  Jiangsu 356.65 13.7 415.97 16.6
  Zhejiang 315.70 10.9 364.50 15.5
  Anhui 133.12 9.8 150.31 12.9
  Consular Area 1027.53   1176.24  
Completed Investment in Fixed Assets China 5556.66 27.7 7007.30 25.80
(billion RMB) Shanghai 249.91 12.1 308.47 25.8
  Jiangsu 523.30 38.6 682.76 28
  Zhejiang 474.03 38.1 594.50 20.2
  Anhui 141.87 30.4 191.42 29.6
  Consular Area 1389.11   1777.15  
Exports (billion USD) China 438.23 34.6 593.4 35.4
  Shanghai 48.48 51.2 73.52 51.6
  Jiangsu 59.14 53.7 87.56 48.1
  Zhejiang 41.60 41.5 58.16 39.8
  Anhui 3.06 24.9 3.94 28.5
  Consular Area 152.28   223.18  
Imports (billion USD) China 412.76 39.9 561.4 36
  Shanghai 63.92 57.4 86.51 35.3
  Jiangsu 54.53 71.3 83.25 52.7
  Zhejiang 19.82 58.0 27.07 36.6
  Anhui 2.88 66.6 3.27 13.5
  Consular Area 141.15   200.1  
Foreign Direct Investment (during the period)          
Projects China 41'081 20.22 43664 6.29
  Shanghai 4'321 43.5 4'334 0.8
  Jiangsu 7'301 25.9 7'187 -1.56
  Zhejiang 4'442 32.0 3'428 -13.9
  Anhui 431 27.5 472 10
  Consular Area 16'495   15'421  
Contracted China 115.07 39.03 153.48 33.38
(billion USD) Shanghai 11.06 23.5 11.69 12.6
  Jiangsu 30.81 56.6 36.08 17.1
  Zhejiang 12.05 77.5 14.56 20.8
  Anhui 1.02 15.4 1.21 18.6
  Consular Area 54.94   63.54  
Actually Utilised China 53.50 1.44 60.63 13.32
(billion USD) Shanghai 5.85 30.1 6.54 11.8
  Jiangsu 10.56 52.4 12.14 14.5
  Zhejiang 5.45 72.4 6.68 22.6
  Anhui 0.39 4.1 0.55 40
  Consular Area 22.25   25.91  

Source: Chinese Authorities * All statistics not including Taiwan, Hong Kong and Macao.

Table. 2
Swiss - Yangtze-Delta Region Economic Relations*

  Import from Switzerland Export from Switzerland
  2003 2004 2003 2004
  Million USD Growth rate Million USD Growth rate Million USD Growth rate Million USD Growth rate
Shanghai 549.50 44.17 903.30 64.39 89.69 33.16 175.20 95.37
Jiangsu 253.00 53.04 355.00 40.16 111.00 64.25 181.00 62.76
Zhejiang 143.44 79.89 198.31 38.26 96.64 28.83 180.69 86.96
Anhui 18.15 76.90 32.53 79.30 4.88 2.80 9.89 102.8
Delta Region 964.06   1,489.14   302.21   546.78  
China 2,683.34   3,621.37 35.0 839.69   1,505.77 79.3

Source: Chinese authorities

Table. 3
Swiss Investment

  Investment in 2004 Accumulatedby end of 2004
  Project Contracted
million USD
million USD
Contracted Actually Projects
Shanghai 44 70   1'150.00*   182
Jiangsu 11 91.34 46.02 519.00 314.00 97
Zhejiang 5 38.96 16.89 64.78 24.78 12
Anhui 0 0 0 36.53 0.82 5
Delta Region 66 200.30   1'772.88   236
China 88 30.42** 200.00 2'806.00 2'099.00 701

* incl. one withdrawal of investment of UD$ 220 million
** withdrawals deducted already, which explains the unusual difference between contracted and actually used amounts Source: Chinese authorities


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