作者：上海财经大学公共政策研究中心
出版社：世界图书出版公司
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2012中国财政发展报告（英文版）试读：
1 China’s Macroeconomy in 2011
2011 has been a year full of challenges for both China and the world. Despite internal and external pressures, China’s economic performance has achieved some satisfactory results. First of all, the economy operated steadily on the whole: the gross domestic product (GDP) achieved stable growth, prices returned to normal in the fourth quarter, resident’s income maintained the momentum of rapid growth and China’s urban registered unemployment rate stood at a relatively low level. In 2011, China’s GDP rose 9.2% year-on-year and GDP per capita exceeded $5000; affected by a series of macro-control policies, the price level eventually returned to a reasonable interval in the fourth quarter after experiencing high-speed growth in the first half of the year; China’s urban employment situation maintained generally stable and the urban unemployment rate stayed at about 4.1%; the income of urban and rural residents continued rapid growth and their cash income increased by about 20% and 14% respectively. Secondly, in terms of economic structure, regional structure improved to some extent, while industrial structure and demand structure remained unchanged. When sorted in descending order by growth rate of the industrial added value and its proportion in GDP in 2011, the secondary industry ranked first, followed by the tertiary industry and the primary industry, the same as last year. The value added of the three industries increased by 10.6%, 8.9% and 4.5%, accounting for 46.8%, 43.1% and 10.1% of GDP respectively, basically on par with previous year. In terms of regional structure, although the eastern region maintained its leading and dominant position in economic development, the central and western regions contributed to an increasing proportion of GDP; although the eastern region registered the largest volume of investment in fixed assets, successively followed by the central and western regions, the western region achieved the highest year-on-year growth rate of investment in fixed assets, successively followed by the central and eastern regions. In terms of demand structure, investment and consumption continued to be the main drivers of China’s GDP growth, but net export registered a negative growth for the third consecutive year and made a negative contribution to GDP growth.
However, while progress was made in economic development, there were some problems and changes concerning either economic aggregate or structure that we should pay attention to. First, issues such as the diversity of inflationary pressures, the deviation of the financial market from real economy and income gap stood out in the overall economy. Inflation in 2011 was driven by a number of factors. It was not only pulled by demand but also pushed by cost; it was affected by domestic factors as well as external imported factors; it was not only a result of changes in the economic aggregate but also related to the structural imbalance in China’s economy. In this context, despite strict price controls, the ratio of M2 to GDP in 2011 remained at around 1.8, a relatively high level. Consequently, China still faces tremendous inflationary pressures in 2012. In 2011, financial market performance evidently deviated from real economic growth. Stock market indexes continued to decline, the fund industry widespreadly suffered huge losses, and trading volume and the earnings multiple in Chinese stock market remained low, all of which to some extent made investors worry about the future prospect. Regarding income distribution, the income gap between urban and rural residents maintained at a high level. Second, pressures for economic restructuring kept intensifying due to following reasons. Although the Chinese economy had been under the pressures of industrial upgrading and transformation, there was no significant change in the supply structure during 2011, which remained the pattern of “secondary, tertiary and primary industries”; difficulty of private enterprise finance led to risky game of high-interest private lending, and the crisis exploded at the end of 2011 in the form of massive and continuous “running-away” of private entrepreneurs, becoming the key pressure and motivation for China’s interest rate liberalization reform. At the same time, the Chinese economic growth has been still led by government investment mainly. The expansion of domestic demand, particularly residential consumption, remains an important issue of China’s economic transformation.
To sum up, China’s macroeconomy had mixed performance in 2011. When rejoicing in the achievements made in China’s economic development, we also see a range of challenges facing China’s economy. In 2012 when the global economy starts to rebound, on the one hand, the Chinese economy maintains a momentum of rapid growth, on the other hand, China must address a number of issues in its current economic reform, such as economic structural adjustment, inflationary pressure, macro-control of real estate, private enterprise development, income distribution and the expansion of domestic demand. The following chapters will present the analysis of China’s economic development in 2011 and the outlook for 2012 from the perspective of economic aggregate, economic structure and hot issues.
1.1 China’s Economic Aggregate in 2011
To reflect China’s economic aggregate in a systematic way, our analysis is based on three markets, namely, product market, financial market and factor market. The analysis of product market mainly covers these aggregate indicators, such as product output, price levels, confidence index, etc; the factor market refers to markets where capital, labor, land and other production factors are traded, and its aggregate indicators include aggregate demand and supply of production factors, their prices based on demand and supply, and income distribution; issues about demand and supply of capital and its prices as well as economic indicators of major financial instruments are mainly included in the part of the financial market.
1.1.1 Product Market
Under the impact of complex domestic and international economic environment, China’s GDP in 2011 still maintained a rapid growth of 9.2%, though the growth rate moderately slowed down, and China’s GDP per capita exceeded 5000 US dollars. GDP is not only a key comprehensive indicator reflecting a country’s production activities and value added, but also provides fundamental data for calculating economic growth rate. In 2011, China’s nominal GDP reached 47.15637 trillion RMB and China’s GDP per capital was close to 5400 US dollars. However, the actual growth rate of GDP slightly slowed down to 9.2%. Looking at quarterly data, China’s GDP growth rate was flat to down in 2011. The cumulative GDP growth rates in the four quarters of 2011 were 9.7%, 9.6%, 9.4% and 9.2% respectively (See Figure 1.1).Figure 1.1 Cumulative Quarterly GDP and Year-on-year Growth Rates in 2010-2011Notes: Quarterly GDP values are calculated at current prices, while the annual cumulative GDP growth rate is calculated at comparable prices.Source: Sorted and calculated based on data from the database provided by the China Economic Information Network athttp://db.cei.gov.cn/.Unless otherwise indicated, data below are all taken from this source.
Although China’s GDP growth slowed down compared with that in 2010, under multiple pressures of domestic and international economic operations, a growth rate of 9.2% was still a hard-won result. The IMF estimated that in 2011, the global economic growth rate in purchasing power parity terms was 4.0%, or 1.1 percentage points lower than that of 2010. Overall economic growth rate of developed countries decreased by about 1.5%, while emerging markets and developing economies represented by China achieved an average growth rate of 6.4%. It is noteworthy that in Government Work Report 2012, the Chinese government reduced its GDP growth target in 2012 to 7.5%, a dramatic drop from the previous year. As regards this adjustment, Premier Wen Jiabao pointed out that it was a proactive adjustment in order to adapt to the economic structural adjustment and improve the quality of economic growth. Accordingly, we can expect that China’s GDP growth will further slow down in 2012.
In terms of general price index, China’s CPI and PPI maintained at high levels in the first three quarters, but reduced evidently in the fourth quarter due to the effect of macroeconomic control policies. Specifically, in the first half of 2011, CPI and PPI continued the upward trend of 2010 and maintained at high levels. For example, the national CPI kept rising in the first seven months, up from 4.9% in January to 6.5% in July (See details in Figure 1.2). In particular, among CPI components, food prices registered the largest growth in the first three quarters, up by 6.1%; prices for housing service (mainly rent) rose by 4.1%; health care and personal articles, up by 2.9%; but prices for clothing dropped by 1.1%. Therefore, as for the direct factors, food price, particularly pork price, was the primary trigger in this round of CPI increase. As for root cause, China’s inflation in 2011 was the result of a combination of complex and volatile factors: it was not only pulled by demand but also pushed by cost; it was affected by domestic factors as well as external imported factors; it was not only a result of changes in the economic aggregate but also had something to do with the structural imbalance in China’s economy.Figure 1.2 China’s CPI and PPI in 2011
In the face of inflationary pressures, the decision-makers had taken a combination of macro-control policies including raising the deposit reserve requirement ratio, increasing interest rates and constantly implementing open market operations since the first half of the year, which resulted in a significant decline in inflation. Since August, the upward trend of China’s CPI had been curbed. CPI dropped to 4.1% in December and the annual average was 5.4% (Figure 1.2). The successful inflation control achieved in 2011 showed the Chinese government’s capability and proficiency in macroeconomic control. However, the root causes of inflation in 2011 have not been completely eliminated, international raw material and energy prices kept rising, labor cost continued to increase and the world economy recovery has been slow. Therefore, the Chinese economy will continue to face inflationary pressures in 2012.
Lastly, in terms of indicators of economic conditions, the economic climate index and confidence index in 2011 showed a volatile downward trend, reflecting market concerns about the macroeconomic outlook. As shown in Figure 1.3, China manufacturing PMI declined with fluctuations in 2011. The index was generally lower than that of 2010. From January to October, China’s PMI remained above the threshold of 50%; but declined to 49.0% in November, dropping below the threshold for the first time since February 2009 (China’s average manufacturing PMI stood at 51.4% in 2011). In addition, the average production sub-index was 53.5% and the average new orders sub-index stood at 51.9%. Compared with other countries, both sub-indexes were at good levels, indicating that the Chinese economy still maintained steady growth, although slowing down the pace. At the same time, as the external environment was further complicated, the average export orders sub-index reduced to below 50%; domestic demand was relatively weak, and the new orders sub-index that reflects demand was significantly lower than the production sub-index.Figure 1.3 China’s Manufacturing PMI in 2011Source: Wind Database,http://www.wind.com.cn/.
In terms of confidence index, Figure 1.4 shows that in 2011, entrepreneur confidence index, consumer confidence index and economist confidence index all moved downward amid fluctuations. The economist confidence index ranges between 1 and 9, with 5 as the threshold; both entrepreneur confidence index and consumer confidence index range between 0 and 200, with 100 as the threshold. The threshold indicates little change in expectations for economic outlook. In China, in the fourth quarter of 2011, economist confidence index and entrepreneur confidence index slumped to the lowest level of the last two years, being 4 and 120.9% respectively; the consumer confidence index reduced to 100.5%, the lowest in the year. These indicate that affected by a variety of factors, such as domestic and international economic situations, all kinds of people showed varying degrees of concern about the economic outlook.Figure 1.4 Entrepreneur, Consumer and Economist Confidence IndexesSource: Wind Database,http://www.wind.com.cn/.
1.1.2 Financial Market
We’ll start by examining the money market. First, let’s look at the reserve requirement ratio and interest rates. In 2011, although China’s regulatory agencies set the basic tone of prudent monetary policy at the beginning of the year, the actual monetary policy appeared moderately tight due to the impact of continuously rising inflation rate. Throughout the year, the central bank adjusted the reserve requirement ratio a total of seven times. Specifically, the ratio was raised once per month in the first half of the year, a total of six times, up by 0.5% each time. By December 2011, considering the influence of various factors including the reduction in foreign exchange reserves and the decline in inflation rate, the central bank reduced the reserve requirement ratio by 0.5%. At the same time, to rein in rising inflation, the central bank also raised the benchmark deposit interest rate by 0.25% respectively three times, namely on February 9, April 6 and July 7 (See Figure 1.5).Figure 1.5 China’s Benchmark Interest Rate and Reserve Requirement Ratio in 2011
Affected by monetary policy, transactions of short-term bills, interbank lending, bond repo, interest-rate derivatives and other products all increased in the money market. It can be seen in Figure 1.6 that with continuous increase in the reserve requirement ratio and tightening of money supply in 2011, the turnover of interbank lending and lending interest rate kept rising and the latter reached its peak of 5.59% in June.Figure 1.6 Turnover and Interest Rate of Interbank 7-day Lending MarketSource: Wind Database,http://www.wind.com.cn/.
Second, let’s look at the money supply. The central bank also adjusted the amount of base money supply through open market operations besides adjusting reserve requirement ratio and interest rates. Overall, China’s money supply was stable with a slight decline, but the ratio of M2 to GDP remained at a high level in 2011. To be specific, in terms of the amount of money supply, the year-on-year growth rates of M0, M1 and M2 were generally lower than those in the previous year, but they remained relatively steady for the whole year (See Figure 1.7).Among them, M0 and M2 basically maintained synchronized growth, staying above 15% in the first half of the year, dropping by 1.2% respectively in June and July, then basically remaining at around 13% in the rest months. However, the growth rates of M1 were lower than those of M0 and M2. Particularly, the gap between the growth rates of M1 and M2 widened from 4% to 5.7% from September through December. The relationship between M1 and M2 indicates that in the circulation domain, China’s fixed deposit grew faster than demand deposit, leading to reduced liquidity.Figure 1.7 Year-on-year Growth Rates of MO, M1 and M2
As for the relative change of M2 to GDP, M2/GDP reflects the financial depth of an economy and measures the proportion of transactions conducted through the currency in all economic transactions. In general, the ratio functions as a primary indicator for measuring the degree of financialization of a country’s economy. Usually, the greater the ratio is, the higher the degree of monetization of the economy. However, this indicator, if too high, manifests excessive increase in money supply in the economy and higher inflationary pressure. In China, the year-on-year growth rate of M2 had been always higher than that of GDP since 2001, and the fluctuation of the former had been greater than the latter. As a result, the ratio of M2 to GDP substantially increased from 1.513 to 1.790 in 2009, up by 18.3%. In 2010 and 2011, the indicator continued to remain high. This indicates that China has been making progress towards deeper financialization, but at the same time, there also exist inflationary pressures.Figure 1.8 Year-on-year Growth Rates of GDP and M2, the Ratio of M2 to GDP
Then, let’s have a look at the foreign exchange market. In 2011, the Renminbi continued to appreciate against major foreign currencies, and China’s foreign exchange reserve kept rising in the first three quarters but continuously declined in the fourth quarter. Affected by a number of factors, such as the global subprime mortgage crisis and the European debt crisis, the monthly weighted average exchange rate of the Renminbi against the U.S. dollar reduced from 6.6 in January to 6.33 in December, or an appreciation rate of 4%; that of the Renminbi against the pound decreased from 10.41 to 9.86, or an appreciation rate of 5% (Figure 1.9). On the other hand, due to the effect of factors such as global funds’ need to avoid risks and the Japanese yen’s long-term zero-interest-rate-policy, there was a growing demand for the Japanese yen. By obtaining the Japanese yen at a low interest rate and then converting into other currencies, these funds can achieve arbitrage. As a result, the Japanese yen maintained a large appreciation in 2011, causing the exchange rate of the Japanese yen against the Remminbi to move up and the Renminbi to depreciate against the Japanese yen.Figure 1.9 Exchange Rates of the Renminbi against Major World CurrenciesNotes: This exchange rate refers to the weighted average exchange rate (of the current month).
Affected by a number of factors, such as the Renminbi appreciation expectations, the global financial crisis and the European debt crisis, China’s foreign exchange reserve kept rising in the first three quarters of 2011 from 2847.338 billion USD at the beginning of the year to the peak of 3273.796 billion USD in October, a growth of 15%. In November and December, the reserve reduced for the first time since 2008, and registered 3181.148 billion USD at the end of December (Figure 1.10). The decline was caused by a number of factors: the exchange rate of the Euro against the U.S. dollar fell sharply, causing the value of euro-denominated assets in China’s foreign exchange reserve to reduce and reserves held in dollar-denominated assets to depreciate; at the same time, due to the slowdown of European economies, China’s trade surplus with Europe showed a declining trend; in addition, due to risk-averse consideration, some investors withdrew their investment from China.Figure 1.10 China’s Foreign Exchange Reserve Changes
Finally, let’s analyze situations in bond and stock markets. China’s Treasury bond yield curve shifted upward in general and the stock market indexes continued to decline. In the bond market, the amount of bonds issued reduced slightly while the Treasury bond yield curve shifted up in general. In 2011, the total value of bonds issued reduced by 18.02% compared with that of last year. In terms of the composition, among the China’s bonds issued in 2011 amounting to 7814.279 billion yuan, treasury bonds totaled 1541.759 billion yuan, accounting for 19.73%; local government bonds amounted to 200 billion yuan, standing for 2.56%; central bank bills valued 1414 billion yuan, accounting for 18.10%, down by 66.75% year on year; financial bonds posted 2294.03 billion yuan, accounting for 29.36%, an increase of 64.75% over the previous year; and enterprise bonds registered 251.548 billion yuan, accounting for 3.22%, down by 11.21% from last year (See Table 1.1).Table 1.1 Total Value of Bonds Issued and Structure of Bond Market in 2011Source: Wind Database,http://www.wind.com.cn/.
In 2011, China’s stock market deviated from the macroeconomic performance. The overall stock market went down. It can be seen from Figure 1.11 that the average price-earnings ratio of listed companies in China remained low since 2008: it amounted to 17.10 in January, but reduced to as low as 12.10 in December. Figure 1.12 shows that the market turnover went down amid fluctuations: the monthly turnover reached its annual peak of 6.3 trillion yuan in March 2011, and reduced to 1.98 trillion yuan in December, a decrease of 68.6%.Figure 1.11 Total Market Capitalization and Average Price-earnings Ratio of Listed Companies in 2003-2011Source: Wind Database,http://www.wind.com.cn/.Figure 1.12 Trading Volume and Turnover of A Share Market in 2011Source: Wind Database,http://www.wind.com.cn/.
Affected by the stock market, the entire fund industry had poor performance in 2011: the net asset value of the fund industry totaled 2517.157 billion yuan at the beginning of the year and decreased to 2143.55 billion yuan at the beginning of December, down by 15%. The average income of stock funds reduced by more than 23% and that of hybrid funds fell more than 20%; though bond funds rebounded after the third quarter, due to a large decline in the first three quarters, the year still ended up with negative returns. The net asset value per unit of funds in 2011 reduced from 1.03 in January to 0.82 in December, down by 20% (Figure 1.13).Figure 1.13 Net Asset Value per Unit of Funds in 2011Source: Wind Database,http://www.wind.com.cn/.
1.1.3 Factor Market
In modern western economics, factors of production include labor, capital, land and other factors. The supply and demand conditions of capital and its prices have already been introduced in the above section about financial market, and changes to land will be covered in the topic on the macro-control of real estate. Therefore, this part mainly talks about the development of the labor market. In general, in terms of labor employment, China’s urban registered unemployment rate held steady in 2011. Figure 1.14 shows the number and rate of China’s urban registered unemployment in 2011: the registered unemployment number in the four quarters was respectively 9.09 million, 9.08 million, 9.11 million and 9.22 million, and the unemployment rate stood at 4.1% throughout the year. As can be seen, either the total number of unemployed persons or the unemployment rate in China remained relatively stable. From a comparative perspective, China’s unemployment rate was far less than that of developed economies over the same time period: the unemployment rate in the United States registered 8.6% in November, with the youth unemployment rate accounting for 25%; that in the United Kingdom was 5% in November; that in mainland France stood at 9.3% and throughout France 9.7% in the third quarter; and that in Japan was 4.5% in November. Certainly, we cannot simply compare China’s unemployment rate with these figures because the unemployment rate published by the Chinese government is limited to the urban registered unemployment rate, excluding unemployment in rural areas and unregistered unemployment in urban areas.Figure 1.14 China’s Urban Registered Unemployment in 2011
1.2 China’s Macroeconomic Structure in 2011
The macroeconomic structure includes a number of levels and different aspects. Here, we will mainly analyze the four aspects with a relatively high degree of concern, namely, industrial structure, regional structure, demand structure and distribution structure.
1.2.1 Industrial Structure
Generally, China’s three industries remained the ranking of “secondary, tertiary and primary industries” in 2011 when sorted in descending order by growth rate of the industrial added value and its proportion in GDP. However, the growth rates of the secondary and tertiary industries slowed down while that of the primary industry went up in 2011. Throughout the year: the value added of the primary industry was 4,771.2 billion yuan, up by 4.5%, accounting for 10.1% of GDP; that of the secondary industry was 22,059.16 billion yuan, up by 10.6%, accounting for 46.8% of GDP; and that of the tertiary industry was 20,326.01 billion yuan, up by 8.9%, accounting for 43.1% of GDP (Figure 1.15 and Figure 1.16). Although China’s industrial structure remained its original pattern in 2011 in terms of the total value and the absolute growth rate, the primFigure 1.15 Year-on-year Growth Rates of Value Added of Three Industries in 2010-2011ary industry showed the trend of accelerated growth. This was related to seasonality of agricultural production and rising prices. As for the tertiary industry, based on the development trend of the last three years, its proportion in GDP had always remained at about 43%, without significant change. Evidently, the development of China’s tertiary industry has been suffering a bottleneck. The specific condition of each industry was as follows.Figure 1.15 Year-on-year Growth Rates of Value Added of Three Industries in 2010-2011Figure 1.16 Proportions of Value Added of Three Industries in GDP (Accumulative)
Let’s begin with the primary industry. Overall, agricultural production maintained stable growth in 2011 and grain production rose for the eighth consecutive year. Agriculture and animal husbandry continued to dominate the industry. The total output of the primary industry in the first three quarters of 2011 was 5.0322 trillion yuan, and the nominal value increased 18.94% year-on -year. From a structural point of view, the total output of agriculture and animal husbandry accounted for about 90% of that of the primary industry. In 2011, the sown area of grain was 110.57 million hectares, an increase of 700 thousand hectares compared with that in the previous year; the total output of grain in 2011 was 571.21 million tons, an increase of 24.73 million tons over last year, growth rate was 4.5%; the output of cotton was 6.60 million tons, an increase of 10.7% over the previous year; the total output of meat for the year reached 79.57 million tons, up by 0.4% over the previous year; that of aquatic products was 56.00 million tons, up by 4.2%. The total production of timber for the year 2011 reached 72.72 million cubic meters, a drop of 10.1%. In 2011, over 1.81 million hectares of farmlands was increased with effective irrigation systems and another additional 2.21 million hectares of farmlands was guaranteed by water-saving irrigation systems.
Secondly, let’s have a look at the secondary industry. In 2011, China’s industrial value-added output grew up steadily, but the profitability slipped. (1) Although impacted and influenced by the weak global economic, China’s industrial value-added output maintained steady growth. At the end of 2011, China’s industrial value-added output increased by 12.4%, slightly lower than the growth rate of 14.9% in the beginning of the year. Broken down by quarters, the industrial value-added output in the first three quarters respectively increased by 14.8%, 14% and 13.7%, showing a slight downward trend. Decline in the second half of the year was mainly due to the European debt crisis, which caused dropping demand for Chinese commodities, thus exerting a negative impact on exports of industrial enterprises. From a structural point of view, the growth rate of the heavy industry was slightly higher than that of the light industry, while the gap between the two was gradually narrowed down: at the beginning of the year, the growth rates of added value of the heavy industry and the light industry were 15.6% and 13.1% respectively; but at the year-end, the growth rates of both industries stood at 12.4% respectively (See Figure 1.17). This change also indicates that China’s industrial restructuring policy has achieved initial success. (2) In terms of the operating performance of industrial enterprises, the ratio of production to sales maintained at a high level of above 97.5% in 2011, and the growth rate of revenue from sales remained at about 30%. It is shown that in the context of domestic and international pressures on economic growth, industrial enterprises maintained a steady growth. However, it is noteworthy that the profits of industrial enterprises failed to catch up in terms of growth rate. Enterprises suffered from increasing losses. In the second half of 2011, the growth rate of profit kept dropping, down from 28.65% in June to 24.36% in November, lower than that of sales. As a result, the profitability of industrial enterprises declined. At the same time, losses suffered by industrial enterprises dramatically increased at an accelerating pace, up from 22.19% at the beginning of the year to 67.42% at the end of the year. Evidently, although sales of industrial enterprises maintained stable growth in 2011, a consequent increase in their profits did not occur. Instead, many enterprises suffered losses. The main reasons for this phenomenon included rising raw material prices and labor cost as well as lower product demand. Some private manufacturing enterprises with weak capital strength and low–level technology were moving toward bankruptcy.Figure 1.17 Growth Rate of Industrial Value-added OutputFigure 1.18 Sales of Industrial Products
Finally, in terms of the policy, the release of “New Directory Catalogue on Readjustment of Industrial Structure (2011 edition)” will accelerate the pace of China’s industrial structure upgrading. Since June 1, 2011, China started to implement the Catalogue to speed up the adjustment and upgrading of the industrial structure. The Directory Catalogue highlights the following characteristics. Firstly, strengthen the fundamental position of agriculture, and encourage the development of modern agriculture, scientific agriculture and green agriculture. Secondly, transform traditional process manufacturing industries, encourage deep processing and enhance the value chain. Restrict the development of traditional resource-consuming and high-pollution industries such as primary processing of resources, coal mining and nonferrous metals, and encourage the development of the upstream sectors of manufacturing such as industrial design and information services. Thirdly, develop new energies and enhance energy saving and emission reduction. China’s energy consumption per unit of GDP is 2.5 times that of the world average, and its dependence on imports of main minerals has gradually picked up. There is no time to delay in saving energy and reducing emission. On the one hand, the Directory Catalogue identifies high-energy-consuming equipments as phase-out items including small thermal power generating units with a capacity of 500000 kilowatts or less per unit, iron-smelting blast furnaces with a capacity of 400 cubic meters or less, converters and electric furnaces with a capacity of 30 tons or less. On the other hand, the Catalogue encourages the development of biological intelligence, solar power, wind power, ocean energy, geothermal energy and other projects. The Catalogue provides guidance for the upgrading of China’s industrial structure from multiple aspects, including finance, taxation, import & export and land use, and will accelerate progress toward industrial structure upgrading.Figure 1.19 Profitability of Industrial Enterprises
1.2.2 Regional Structure
First, the eastern region still took the lead in terms of contribution to national GDP, but GDPs achieved by central and western regions were accounting for increasing proportions of the total. Enhancing the balanced development of regional economies and promoting industrial transformation in the eastern region were among the focuses of economic work in 2011. Based on the data in the first three quarters, the eastern region was still the front-runner of the national economy. In the first three quarters, the GDP of the eastern region stood at 5805.44 billion, 7570.60 billion and 7347.99 billion respectively, accounting for 57.8%, 58.1% and 54.9% of the national GDP, and the eastern region still held a leading and dominant position in China’s regional economic development. However, in terms of the proportions of regional GDPs in national total, the share occupied by the eastern region declined year by year while that of the central and western regions went up. Figure 1.20 highlighted proportions of regional GDP in national total in the third quarter of recent 3 years, which clearly showed this trend.Figure 1.20 Proportion of Regional GDP in National Total by Quarter
Second, in terms of total amount of investment in fixed assets, the three regions remained the ranking of “eastern, central and western regions” in descending order, but the ranking in terms of investment growth rate was in the opposite order. The distribution of investment among the three regions was in line with their contribution to national GDP, with the eastern region at the top, totaling 13004.244 billion yuan, and the western region at the bottom, totaling 6323.635 billion yuan. But the western region grew the fastest in investment, up by 29.2%, and the eastern region had the lowest growth rate of 21.7% (Figure 1.21). The increase in fixed-asset investment is a key factor of economic growth rate. Its current structure is closely related to the implementation of the rise of central China plan and the western region development strategy. At the same time, it indicates that the central and western regions will become important engines of China’s rapid and sustained economic growth in the future.Figure 1.21 Investment in Fixed Assets in Eastern, Central and Western Regions (Unit: 100 million yuan)Source: Wind Database,http://www.wind.com.cn/.
1.2.3 Demand Structure
First, investment in fixed assets maintained fast growth in 2011. Investment remained the primary driver of China’s economic growth and the investment structure was further improved. Total investment in fixed assets was 30,193.3 billion yuan, up by 23.8%. The real growth was 16.1% after deducting price factors. Compared to 2010, the cumulative proportions of fixed-assets investment in GDP in the first three quarters of 2011 were lower than 2010 levels, but its annual proportion in GDP reached 38.19%, higher than that in 2010 (Figure 1.22). In terms of structure, on the one hand, investment in new construction projects had the highest growth rate of above 25%, but showed a downward trend; investment in expansion projects maintained at a growth rate of about 15% and showed an upward trend (Figure 1.23). On the other hand, analysis by industry showed that the tertiary industry enjoyed the largest amount of investment in fixed assets, successively followed by the secondary industry and then the primary industry as demonstrated in Figure 1.24.Figure 1.22 Newly Increased Fixed Assets and Proportion in GDPFigure 1.23 Growth Rates of Investment in New Construction, Expansion and Reconstruction Projects
Moreover, investment in the primary industry was far less than that in the secondary and tertiary industries. Compared to 2010, investment in the primary industry grew faster in 2011, which was attributed to the increase of investment in water conservancy projects; the growth of investment in the tertiary industry slowed down in 2011 (Figure 1.25) .Figure 1.24 Investment in Fixed Assets by IndustryFigure 1.25 Growth Rate of Investment in Fixed Assets by Industry
Second, imports, exports and their total value maintained rapid growth, but the goods trade surplus continued to narrow and the contribution of net exports to GDP growth remained negative. In 2011, the total value of China’s imports and exports amounted to 3,642.06 billion U.S. dollars, an increase of 22.5% year on year; exports value was 1,898.59 billion U.S. dollars, up by 20.3%; and imports value was 1,743.5 billion U.S. dollars, a year-on-year increase of 24.9%. Since imports grew faster than exports, net exports reduced by 26.587 billion U.S. dollars, a drop of 14.64%. It was the third consecutive year that China’s net exports decreased since 2008. Firstly, broken down by export region, exports from the eastern region slowed down, but the central and western regions recorded robust growth in exports. In 2011, exports from Guangdong, Jiangsu, Zhejiang and Shanghai respectively grew by 17.4%, 15.6%, 19.9% and 16%, while that from Chongqing, Henan, Guizhou and Jiangxi increased respectively 165%, 82.7%, 55.5% and 63.1%, much higher than the growth rate of national export in the same period. Secondly, in bilateral trade with major partners, China’s trade with Europe, America and Japan sustained steady growth and that with emerging markets increased rapidly in 2011. In 2011, the total value of Sino-Europe bilateral trade, Sino-US bilateral trade and Sino-Japan bilateral trade increased by 18.3%, 15.9% and 15.1% respectively; the total value of bilateral trade with Brazil, Russia and South Africa went up by 34.5%, 42.7% and 76.7% respectively, all much higher than the overall growth rate. Except for Australia, the remaining of China’s top 10 export markets in terms of exports growth rate were all emerging countries. In particular, China’s exports to New Zealand achieved the largest growth, up by 35.2% (Figure 1.27).Figure 1.26 Total Values of China’s Foreign Trade by Commodities since 2005 (Unit: 100 million dollars)Figure 1.27 Growth Rates of Exports to Major Trade PartnersSource: Statistics by the General Administration of Customs released athttp://www.customs.gov.cn/publish/portal0/tab9368/.
Finally, the total final consumption maintained rapid growth, and the household consumption expenditure grew faster than the government consumption expenditure. In 2011, the total retail sales of consumer goods reached 18,122.6 billion yuan, a growth of 17.1% over the previous year. Although the data of total final consumption in GDP calculated by the expenditure approach is currently unavailable, it can be seen from the trend line since 2005 as depicted in Figure 1.28 that the slope of the household consumption expenditure curve is significantly higher than that of the government consumption expenditure curve. It indicates that the former grew faster than the latter, and the proportion of household consumption expenditure in final consumption expenditure continued to rise. Meanwhile, as can be seen from “Structure of GDP by the Expenditure Approach” (Figure 1.29), with total net exports gradually declining since 2008, investment and consumption has become the main engine driving China’s GDP growth. However, compared with developed countries, China still needs to further enhance the contribution of consumption to GDP growth in order to optimize the demand structure.Figure 1.28 The Trend Line of Final Consumption Expenditures since 2005Figure 1.29 Structure of GDP by the Expenditure Approach since 2005
1.2.4 Distribution Structure
First, segmented by geographical region, labor income gap between the eastern region and the central and western regions continued to widen. According to per capita income of urban residents of all provinces and municipalities published by the National Bureau of Statistics, we made an approximate analysis of labor income gap between the eastern, central and western regions, simply by averaging the cumulative per capita income in these regions. As depicted in Figure 1.30, quarterly cumulative income of residents in all regions increased compared with the same period last year, but the absolute value of the gap between the eastern region and the central/western regions continued to rise. This indicates that regional income inequality has not been greatly alleviated.Figure 1.30 Average Income of Urban Residents in Eastern, Central and Western Regions (Unit: yuan)Source: Wind Database,http://www.wind.com.cn/.
Second, in terms of income distribution in urban and rural areas, urban and rural residents’ income continued to increase rapidly, yet the income growth rate of rural residents was higher than that of urban residents. However, the income gap between the two remained large, and there were huge differences in their income structures. In 2011, residents’ income maintained a momentum of rapid growth. To be specific, the per capita disposable income of urban residents increased from 19,109 yuan in 2010 to 21,810 yuan in 2011, a rise of 14.13%; the per capita cash income of rural residents rose from 4,869 yuan in 2010 to 5,875 yuan in 2011, up by 20.66%.Figure 1.31 Income and Year-on-year Growth Rates of Urban and Rural ResidentsSource: Wind Database,http://www.wind.com.cn/.
In terms of income sources, from the perspective of national economic accounting, residents’ income mainly comes from the following sources: wages and salaries, operating income (mixed income), property income and transfer income. According to the result of nationwide sample survey (Table 1-2) of 74 thousand rural households and 66 thousand urban households in 31 provinces (including autonomous regions and municipalities) conducted by the National Bureau of Statistics, the per capita net income of rural residents in 2011 was 6,977 yuan, up by 17.9%, of which: the per capita income from wages was 2,963 yuan, a year-on-year increase of 21.9%; the cash income from primary industry by production and operation of rural residents achieved 2,520 yuan, a rise of 12.9%; the cash income from secondary and tertiary industries by production and operation of rural residents achieved 702 yuan, a growth of 16.7%; the per capita cash income from properties was 229 yuan, an increase of 13.0%; and the per capita cash income from transfers was 563 yuan, up by 24.4%. The per capita income of urban residents in 2011 stood at 23,979 yuan, of which: the per capita wage income stood at 15,412 yuan, an increase of 12.4%; the per capita operating net income was 2,210 yuan, up by 29.0%; the per capita income from properties stood at 649 yuan, up by 24.7%; and the per capita transfer income amounted to 5,709 yuan, a growth of 12.1%. Evidently, the operating income of rural residents was significantly higher than that of urban residents. It was mainly due to the difficulty in decomposing income data of rural residents. In economic statistics, wages and operating surplus in agriculture were combined into mixed income (operating income). There was no significant difference in the proportion of property income between rural residents and urban residents, both being low; the per capita transfer income of urban residents was much higher than that of rural residents, about twice of the latter.Table 1-2 Income Structure of Rural and Urban Residents
1.3 Hot Issues and Major Macroeconomic Policies
1.3.1 Inflation
Friedman believed that “Inflation is always and everywhere a monetary phenomenon…and can be produced only by a more rapid increase in the quantity of money than in output”. Economists usually use the ratio of broad money (M2) to gross domestic product (GDP) to judge whether there is an excess supply of money: the ratio is usually below 1 in developed economies and about 1-1.5 in emerging countries. As mentioned earlier, China’s inflation has stayed high for many years and remained at the high level of 1.8 in 2011. This indicates that China’s money supply is currently indeed excessive. However, excessive money supply is just a manifestation or consequence: factors such as the appreciation of Renminbi, increase in foreign exchange reserve and the government’s expansionary investment policy all have direct or indirect impacts on money supply. Therefore, it is not enough to understand China’s inflation in 2011 only based on money growth. In fact, there were deeper reasons for inflation in 2011, which was a result of comprehensive factors, specified as follows.
The first impact factor was demand factor. When the rapid growth of demand outpaces the growth of supply, it may lead to the rise of prices. However, from the view of final demand, investment and consumption showed a steady upward trend, while net exports dropped in 2011. To be specific, the “4 trillion yuan” investment package implemented since 2008, increasing resident income and a number of policies issued to expand domestic demands drove investment and consumption up rapidly. This was an impact factor that could not be ignored in understanding price increase.
The second one was cost factor. In 2011, prices of key production materials, including labor, land, energy and raw materials, went up constantly and obviously. This caused production costs to rise. It can be seen from the trend lines of PPI and CPI that PPI fluctuated more widely than CPI. The cost-push price changes also exacerbated inflation.
Thirdly, China’s inflation in 2011 was also affected by international economic conditions. Since the financial crisis, quantitative easing monetary policies implemented by the United States and European countries have resulted in increase in global commodity prices, creating imported inflationary pressures. Some studies showed that the contribution of imported inflationary pressures to China’s inflation in 2011 was about 30%. At the same time, China’s rapid economic growth and continuous Renminbi appreciation attracted international capital flows into China through various channels to gain higher returns, resulting in increased supply of base money. Nevertheless, a large part of the money entered into the financial market and the real estate market rather than the real economy, which further intensified contradiction between money supply and demand.
The forth factor affecting inflation was structural factor. The impact of structural factors consisted of two aspects: industrial structure and regional structure. From the perspective of industrial structure, the growth of agricultural has long been slower than that of industry and agricultural product price remained low, which adversely affected the enthusiasm for agricultural production. Influenced by factors such as strengthened support for the development of “agriculture, rural areas and farmers” from the Chinese government, the acceleration of the process of urbanization in rural areas and imbalance in global demand and supply for agricultural products, prices of agricultural products increased reasonably and necessarily, further driving up the costs of labor, land and raw materials. When looking into the composition of CPI in 2011, it is shown that price increase of food products was the major impact factor. In addition, from the perspective of regional structure, the economic growth of the central and western regions became a new growth point to boost China’s economic growth. Correspondingly, prices in the central and western regions increased at a higher rate compared to the eastern region.
Based on domestic and international economic trends, inflationary pressures currently faced by China will continue to exist in 2012: international energy and raw material prices remain high; China has gradually strengthened efforts for economic restructuring and structural price increases persist; the implementation of the income distribution policy will further increase residents’ income and stimulate consumption; labor costs keep rising and the labor shortage problem in many places has not been fundamentally alleviated; and the expectation of Renminbi appreciation remains strong. Meanwhile, we also see some favorable changes: the US economy began to show clear signs of recovery, the unemployment rate declined; housing prices in China have maintained stable with a slight decline, reducing the influx of foreign investment capital and the expectation for rising housing prices; the Chinese government initiatively lowered 2012 GDP growth target to 7.5% and the money supply will be adjusted accordingly.
Confronted with the complex and serious inflation, Government Work Report 2012 set the full-year inflation control target for 2012 at 4%. Although inflationary pressures persist, the successes achieved by the Chinese government under inflationary pressures in 2010 and 2011 prove that China’s inflation can be effectively controlled through comprehensive fiscal and monetary policies. In the context of global economic recovery, we believe that the government’s control target of 4% can be achieved.
1.3.2 Real Estate Regulation and Control
The market-oriented reform of real estate industry has played a significant role that cannot be ignored in improving residents’ dwelling conditions, promoting the rapid growth of the national economy and raising the employment rate. However, the rising housing prices are bringing more and more negative impacts. In this context, due to the particularity of real estate, the problem of housing prices is not a simple economic issue, but a comprehensive issue concerning a number of areas, including economy, society and politics. The reasons are as follows.
First, high housing price is an issue that concerns people’s livelihood. With the increase of residents’ income, their demands for improved living environment have been growing as well. According to the dwelling function of housing, housing is a necessity. If viewed only from the perspective of people’s livelihood, demand for housing should be interpreted as demand for the dwelling function provided by housing rather than the house itself. This dwelling function can be realized through buying a house or renting one. However, as Chinese people traditionally hold the idea of “owning a house” and the house rental market is imperfect, most people tend to solve the dwelling problem through the purchase. In this context, housing prices rising faster than income has made more and more groups unable to meet basic housing needs, thus the problem of housing prices becomes an important livelihood issue.
Second, high housing price has an effect on wealth and income distribution. Housing is special not only because it is a necessity satisfying people‘s basic living needs, but also because it is an object of investment that can bring about the effect of rapid wealth accumulation. The rapid growth of housing prices has produced tremendous wealth effect, but also led to increasingly prominent income and wealth gap. From the perspective of economics, the pure growth of product prices can lead to changes in wealth stock (although it may not bring about GDP growth), the rentable nature of houses and resulting rent income will bring increase in GDP and income. However, either increase in wealth stock or income flow changes will change people’s actual ability to pay and to consume in the future and result in unequal distribution of social wealth. In the Chinese real estate market, wealth and income distribution effect brought about by ongoing increase in housing price is no longer a purely economic problem, but has gradually evolved into and grown into a social, even a political issue.
Under this background, decision-makers of the Chinese government further intensified macro-control and regulation over real estate market in 2011. Since “the State Council’s New 8 Articles” issued on January 26, control of real estate had become a hot spot all over the country throughout the year of 2011 (Table 1-3). “The State Council’s New 8 Articles” almost covers all areas of real estate regulation and control as follows: require local governments to further perform their duties; make more efforts to implement affordable housing projects; adjust and improve related tax policies and strengthen tax collection and management; strengthen the differential housing credit policy; enforce strict housing land supply management; guide housing demand rationally; implement “work interview”, an accountability mechanism to provide affordable housing and stability of housing prices; uphold and strengthen the guidance of public opinion. In this round of regulation and control, a number of measures were simultaneously carried out, including accountability of local governments, purchasing limit, price controls, house property tax, business tax and downpayment ratio, and gradually extended from the first-tier cities to second-and third-tier cities. This round of control was implemented with greater efforts and stricter requirements over a longer period of time compared with others in history.Table 1-3 Major Real Estate Regulation and Control Policies Issued in 2011
Affected by this round of regulation and control, housing prices in China were stable with a slight decline in 2011. Major cities in the eastern, central and western regions witnessed month-on-month decline in housing prices (Figure 1.32). During the first three quarters, the monthly chain index of housing prices dropped gradually, but greater than 1, indicating that the upward momentum of housing prices was curbed; entering the fourth quarter, the chain index remained less than 1, suggesting that the average housing price in China started to fall. This further proved that housing prices in China exhibited a stable or slightly declining trend after implementing strict regulations on the real estate industry.Figure 1.32 Average Chain Indices (Monthly) of Housing Prices in Eastern, Central and Western Regions in 2011Notes: Constrained by data availability, we just select some representative cities: cities in the eastern region include Shenzhen, Beijing, Shanghai, Guangzhou and Tianjin; cities in the central region include Taiyuan, Hefei, Nanchang, Zhengzhou, Wuhan, Changsha and Luoyang; and cities in the western region include Chongqing, Chengdu, Xi’an, Lanzhou, Xining, Yinchuan and Urumqi.Source: National Bureau of Statistics of China,http://www.stats.gov.cn/.
Certainly, after the government’s macro-control, the upward momentum of housing prices has been curbed to some degree, however, housing price regulation and control remains a long-term and arduous task. After all, high housing prices have not only influenced the income and wealth gap between different groups of people, but also involved the government in the feast of wealth distribution as a result of land finance. The rapid expansion of real estate industry brought not only a huge amount of tax revenue but also tremendous land premium income to the government. Land costs and taxes paid by developers account for 30% to 40% of housing prices. Real estate-related income accounts for a very large proportion of local government revenue. The real estate industry as the important “pillar industry” of economy and its financial contribution have made housing prices “high and hard to decline”. Consequently, housing price control in China was trapped in a weird circle of “more regulations, higher prices”, having tremendous impacts on housing price rise expectations of the whole society.
Against this backdrop, China’s housing price control still faces many challenges. However, the premise of government intervention is to ensure the healthy and orderly development of national economy and the real estate industry. We think that the goal of real estate regulation at the current stage of China’s economic development should not be a widespread and significant price reduction in the short term; instead the regulation should be carried out progressively and rhythmically in accordance with local conditions in order to realize the rational return of housing prices. On the one hand, currently the real estate industry has significant influences on and plays an important role in key economic fields of national economic development, such as employment, finance, government finance and economic growth. Hard landing of housing prices would not be good to long-term and healthy development of the macro-economy. On the other hand, besides taking macro-control measures, we can explore other solutions to address a series of problems brought about by soaring housing prices, such as people’s livelihood, effects of wealth and income distribution, and land finance. In fact, since 2011, the government has taken various measures to alleviate pressures resulted from housing price hikes, including: increasing government transfer payments to the social security system through the establishment and improvement of low-rent housing; reducing speculative demands by levying the house property tax and raising the interest rate for investment property loan; allowing local governments to issue bonds to expand government financing channels; actively developing new pillar industries through the adjustment of industrial structure, such as the cultural industry, new material and new energy, energy saving and emission reduction. Under the impacts of these comprehensive measures, housing prices will eventually return to rational levels.
1.3.3 Private Entrepreneurs’ “Running Away”
In 2011, more than 100 cases of private entrepreneurs’ running away that started in Wenzhou and then spread to other areas triggered a heated debate among people from all fields on issues such as high-interest financing of private enterprises, widespread private lending and sustainability of private enterprises. Private lending phenomenon exposed in this incident had two significant features. First, interest rates of private lending were universally high. The maximum annual interest rate of private capital could be as high as 98%, and the average rate was about 30% to 40%, much higher than official market interest rate. Second, numerous private lenders were involved. Attracted by high interest rates, the participation rate of ordinary people in private lending was very high, amounting to 50% to 70%, or even higher. However, burdened with such high interest rates, profitability of private enterprises was seriously affected: on the one hand, affected by the global financial crisis and the European debt crisis, orders that private enterprises received decreased substantially; on the other hand, the cost of raw materials and labor further increased. Consequently, profits of private enterprises shrank drastically and returns on investment declined. To cope with the plight, demands of private enterprises for capital shot up. However, under the pressures of real estate regulation and inflation control, credit loans from commercial banks were limited, thus pulling up the cost of borrowing private capital. Finally, interest rates of private lending far exceeded the return of the real economy, and eventually led to company’s insolvency and bankruptcy, triggering the “runaway” of private entrepreneurs.
To address “runaway” of private entrepreneurs and resulting problems, Prime Minister Wen Jiabao made an inspection tour to Zhejiang Province on October 3 and 4, 2011 to gain insights into operations of small- and medium-sized enterprises, private lending, and developments of small-loan companies. After that, an executive meeting of the State Council was held on October 12. At the meeting, the State Council studied and formulated a series of financial, taxation and fiscal policies to support the development of small and micro-sized enterprises on the basis of further acknowledging the significant role of small and micro-sized enterprises in economic growth, employment and social stability. The financial measures included six aspects: increase credit supports for small and micro-sized enterprises, and lending of banks and financial institutions to small and micro-sized firms should grow at a rate no lower than the average loan growth; cancel and correct some unreasonable charges for financial services and effectively reduce company’s actual financing cost; expand the financing channels of small and micro-sized enterprises, including collective notes, collective bonds, short-term financing bonds and private equity; specify differentiated regulations of financial services for small and micro-sized enterprises; accelerate the reform and development of small financial institutions; promote the healthy development of private lending on the basis of standard management and risk prevention. The fiscal and taxation policies covered three aspects: increase tax support for small and micro-sized companies; support financial institutions to enhance financial services for small and micro-sized companies; expand the scale of special funds for small and medium-sized enterprises and provide more indirect helps for small and micro-sized enterprises. At the same time, Zhejiang provincial party committee and Zhejiang provincial government convened a series of thematic meetings to study and deploy the implementation of a package plan for addressing financing difficulties of small and medium-sized enterprises and regulating private lending market, and issued more than 20 specific measures. 11 provincial-level service teams composed of personnel from relevant provincial departments and units were set up and assigned to different cities in the province to help small and medium-sized enterprises solve their practical difficulties.
It should be acknowledged that flexible private lending had helped private enterprises solve the funding problem during their development. Take Ningbo and Wenzhou for example. The long-established borrowing tradition of mutual aid and mutual trust between the rich sources of private capitals and local businessmen in these places had greatly promoted the development of local private enterprises. Therefore, in this sense, the “runaway” event that took place in 2011 was more a reflection of endogenous limitation of the Chinese financial system than a problem of private lending: the current financial system has been unable to adapt to the requirements for China’s social and economic development. China should gradually push forward reform of its financial system and change the existing dual financial structure. Given that the financial system cannot be greatly improved in the short term, how to regulate private financial market to solve financing difficulties faced by the SMEs in the development should be a realistic policy option.
1.3.4 International Mergers and Acquisitions by Chinese Enterprises
Due to the effects of multiple factors, including sustained Renminbi appreciation, increase in foreign exchange reserves, the enhancement of enterprise strengths and the implementation of China’s “going out” strategy, Chinese enterprises entered the international market at a faster pace and on the growing scale. The global financial crisis and the European debt crisis provided Chinese enterprises with more opportunities of “going out” through international mergers and acquisitions. Overseas mergers and acquisitions of Chinese enterprises in 2011 achieved the following new developments in terms of mainstay and fields of the merger and acquisition:
First, although state-owned enterprises (SOEs) remained the mainstay of overseas mergers and acquisitions, more and more private enterprises took part. Due to their advantages in capital, business, technology and policy, SOEs were the major participants of recent overseas mergers and acquisitions by Chinese enterprises. For instance, in the field of energy, PetroChina, Sinopec and CNOOC dominated overseas mergers and acquisitions in the field of oil; China Minmetals Corporation and Sinosteel Corporation were the major players of mergers and acquisitions in the area of metallic mineral resources. However, the rise of private enterprises in China and their flexibility and efficiency in business operation made them an important new force of overseas mergers and acquisitions by Chinese enterprises in 2011. For instance, Fulida Group Holdings Limited headquartered at Xiaoshan of Hangzhou City assumed the full ownership of Neucel Specialty Cellulose Ltd. on February 1, 2011 at a price of 253 million U.S. dollars, which extended the company’s production chain to upstream products, effectively reducing the production cost and further enhancing the power of speech in the industry.
Second, although energy and mining industries were dominant areas of mergers and acquisitions, the range of M & A target has been broadened to include brand, technology, consumer goods and other areas. As energy and mining industries have a long development cycle and require high costs and expenditures, the absorption of foreign enterprises through merger and acquisition can make the enterprise enter the production stage quickly, thus saving costs and expenditures. Therefore, energy and mining industries became optimal industries for Chinese enterprises to carry out overseas mergers and acquisitions. Among 16 overseas mergers and acquisitions worth over 1 billion U.S. dollars disclosed in 2011, 14 transactions were in the areas of resources and energy. However, in the context of domestic economic transformation and consumption upgrading, Chinese enterprises’ outbound M & A gradually shifted to chemical, IT, consumer goods and other industries to seek introduction of new technology or supplement to industry chain. For example, Lenovo Group acquired 36.66% shares of the German PC company Medion AG; Haier bought the white goods business of Sanyo Electric, a Japan-based enterprise; Bright Food Group closed an acquisition of a 75% stake in Australia’s Manassen Foods; and Fosun Group made an investment of 800 million yuan to become a shareholder of the Greek luxury retailer Folli Follie Group.
Chinese enterprises have expanded their overseas mergers and acquisitions in terms of quantity, scale and area. It is not only a manifestation of the rapid growth of China’s national economic strength, but also a significant transformation of enterprise development strategy, competition mode and market expansion approach. In the context of industrial restructuring and global competition, Chinese enterprises will further increase mergers and acquisitions in the areas of resources, brand, technology and consumer goods, and the participation of private enterprises and private equity funds in overseas mergers and acquisitions will be further enhanced. Overseas M & A will be a major highlight for the recent development of Chinese enterprises.
2 China’s Fiscal Revenue in 2011
The year of 2011 marked the beginning of China’s Twelfth Five-year Plan period. In 2011, on the one hand, the Chinese economy maintained the momentum of growth as in the periods of past few five-year plans, and achieved robust growth; on the other hand, in the context that the global economic recovery was weak and entered the second adjustment period, dragged down by the economic recession in the United States and the intensifying European debt crisis, China’s macroeconomy continued adjustment and the growth slowed down slightly. Due to the interwoven interactions between two above-mentioned factors and the effect of fiscal and taxation reform, China’s fiscal revenue in 2011 was “mostly stable with some fluctuations” in general: in total, fiscal revenue maintained a rapid growth. In terms of structure, monthly revenue growth showed a downward trend; fiscal revenue differed substantially across regions; relative proportion of non-tax revenue in fiscal revenue compared to that of tax revenue maintained widening trend; of the tax revenue, revenue from goods and services tax slowed down its growth rate while that from income tax achieved a relatively faster growth, which caused the decline in the proportion of revenue from turnover tax in total tax revenue, but turnover tax was still the main source of tax revenue in China. Local governments were allowed for the first time to issue their own bonds and local debt risks have attracted increasing attention. We’ll explain the details in the following discussion. In order to observe China’s fiscal revenue in 2011 from the perspective of policy continuity, we will first make a brief review of fiscal revenue during the “Eleventh Five-year Plan” period.
2.1 Review of Fiscal Revenue during the “Eleventh Five-year Plan” Period
During the 5 years of the “Eleventh Five-year Plan” period (2006-2010), in the face of complex domestic and international economic situations and a series of risks and challenges, the Chinese government made positive and rapid responses to these challenges, ensured sustainable and steady development of the economy with great benefits and achieved a stable growth in fiscal revenue. As shown in Table 2-1, the development of fiscal revenue during this period had the following characteristics:
First, fiscal revenue during the “Eleventh Five-year Plan” period kept growing at a fast pace. During the period, China’s fiscal revenue maintained a trend of high growth, and its size increased from 3.88 trillion yuan in 2006 to 8.31 trillion yuan in 2010, a growth of 144%, or 51 percentage points higher than the growth rate during the “Tenth Five-year Plan” period. To break down, revenue collected by the central government rose from 2045.66 billion yuan in 2006 to 4257.0 billion yuan in 2010, an increase of more than 100% in 5 years; revenue collected by local governments increased from 1830.36 billion yuan in 2006 to 4061.0 billion yuan in 2011, up by about 2.22 times. The rapid growth of fiscal revenue provided a solid foundation for the government to concentrate financial resources on developing the economy, improving people’s livelihood and enhancing infrastructure construction.
Second, fiscal revenue during the “Eleventh Five-year Plan” period maintained a growth rate higher than that of GDP during the same period. During the “Eleventh Five-year Plan” period, China’s average annual growth rate of real GDP reached 11.2%, much higher than the average growth rate of the world economy during the same period, making the “Eleventh Five-year Plan” period one of the periods with fastest growths since the reform and opening-up of China. Along with the steady and rapid economic growth and the increasing of economic aggregate, China’s financial strength increased markedly. During the “Eleventh Five-year Plan” period, total national fiscal revenue amounted to 30.3 trillion yuan and the average annual growth rate was 21.3%, much higher than the economic growth rate: as indicated by the growth rates of GDP and fiscal revenue in Table 2-1, during the five years from 2006 to 2010, fiscal revenue always grew faster than the overall economy. The extraordinary growth of fiscal revenue made its proportion in GDP rose from 17.92% in 2006 to 20.69% in 2010.Table 2-1 Fiscal revenue and its growths in 2001~2011
Third, in terms of the composition of fiscal revenue, the percentage of tax revenue showed a declining tendency in general. Tax revenue increased from 3.48 trillion yuan in 2006 to 7.32 trillion yuan in 2010, up by 110%, or 22 percentage points higher than the growth during the “Tenth Five-year Plan” period; non-stax revenue increased from 395.22 billion yuan in 2006 to 987.8 billion yuan in 2010, a growth of 150%. Except for a slight rebound of tax revenue in 2010, on the basis of tax revenue growth achieved during the “Tenth Five-year Plan” period, tax revenue growth during the “Eleventh Five-year Plan” period failed to keep up with the overall growth of fiscal revenue. The percentage of revenue from various taxes in total fiscal revenue gradually declined in the past decade.
2.2 Analysis of Total Fiscal Revenue in 2011
Combinedly affected by decreasing effect of macroeconomic stimulus policies implemented in previous years, fine–tuning of proactive policies and insufficient endogenous growth, China’s macroeconomic growth in 2011 saw a tendency to fall back slightly. However, as the growth rate was very high in previous years, the economy still maintained a high growth rate: China’s GDP in 2011 was above 47 trillion yuan, a nominal growth of 17.5%, or a real growth of 9.2% after deducting price factors. Affected by this, China’s fiscal revenue achieved a rapid growth in 2011, breaking the 10 trillion yuan mark, an increase of nearly 25%.
2.2.1 Fiscal Revenue Budget for 2011
Taking into account the complex domestic and international economic situation and the implementation of many structural tax cuts, the Chinese government lowered the growth rate of fiscal revenue compared with the previous year in the budget report released at the beginning of 2011. The following major targets were set in 2011 budget. First, central government budget revenue is 4.586 trillion yuan, an increase of 8% over the figure completed in 2010 (here and below). The central budget stabilization fund will contribute 150 billion yuan, bringing total revenue for 2011 to 4.736 trillion yuan. Second, as for local government budget revenue, based on preliminary provisions for the local budgets complied by the central government, revenue collected by local governments will amount to 4.386 trillion yuan, up by 8%. Adding the 3.731 trillion yuan of tax rebates and transfer payments from the central government, local government revenue will total 8.117 trillion yuan. Third, combining central and local budgets, national revenue will be 8.972 trillion yuan, an increase of 8%. Including the 150 billion yuan from the central budget stabilization fund, total available national revenue is projected to be 9.122 trillion yuan.
In 2011, budgetary revenue from central government-managed funds will total 282.627 billion yuan, down 11%. Adding the 79.016 billion yuan in revenue carried forward from last year, overall revenue from central government-managed funds will be 361.643 billion yuan. Revenue collected by local government-managed funds whose budgets are complied by the central government will reach 2.299547 trillion yuan, down 29.5%. This decrease is mainly due to the expectation of less revenue from land-related government-managed funds. Adding the 123.15 billion yuan in central government transfer payments to local governments, revenue from local government-managed funds will be 2.422697 trillion yuan. Combined revenue from funds managed by central and local governments will reach 2.582174 trillion yuan, down 27.8%. Including the 79.016 billion yuan in revenue carried forward from last year, available revenue from government-managed funds will total 2.66119 trillion yuan.
2.2.2 Fiscal Revenue Implementation in 2011
In terms of the implementation of fiscal budgets for 2011, national revenue totaled 10.374001 trillion yuan, an increase of 24.8% over 2010. Adding the 150 billion yuan from the central budget stabilization fund, utilized revenue totaled 10.524001 trillion yuan. Breaking them down, central government revenue amounted to 5.130615 trillion yuan, 111.9% of the budgeted figure and an increase of 20.8%. The central budget stabilization fund contributed 150 billion yuan, bringing the total revenue used by the central government to 5.280615 trillion yuan. Revenue collected by local governments came to 5.243386 trillion yuan. Adding the 3.989996 trillion yuan in tax rebates and transfer payments from the central government, local government revenue totaled 9.233382 trillion yuan, an increase of 26.6%. Local government expenditure totaled 9.433382 trillion yuan, exceeding total revenue by 200 billion yuan.
In 2011, revenue from government-managed funds nationwide came to 4.135963 trillion yuan, up 12.4%. Receipts from central government-managed funds totaled 312.593 billion yuan, 110.6% of the budgeted figure and a decrease of 1.6%. Revenue collected by local governments from funds under their control reached 3.82337 trillion yuan, an increase of 13.8%, including 3.316624 trillion yuan from the sale of state-owned land use rights.
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