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Highlights of July 22 Press Conference on Shanghai Economic Development in the First Half of 2011


Shanghai Economic Development in the First Half of 2011
Shanghai Economic Development in the First Half of 2011

Cai Xuchu, chief economist and spokesman of Shanghai Municipal Statistics Bureau

Oriental Morning Post:I’d like to ask Mr Cai to comment on the rapid rise of the city’s consumer prices in the first half of this year as compared with the last two years and predict the CPI trend in the second half of this year. Are we able to tame the inflation?

Cai Xuchu:Shanghai’s CPI rose 5 percent from a year earlier in the first half. Actually, the CPI remained high from the beginning of the year. CPI in January rose 4.3 percent year-on-year and it reached 5.9 percent in June, a high level in recent two years. This round of inflation started in the end of 2009 and has lasted for 20 months. Its growth rate was stable in the last two years but turned fast this year.

I will give my views based on available statistics.

My first view is that the CPI composition has turned from a simple mode to a mixed mode. We can compare the CPI of the first half of 2011 with those of last year.

The first comparison is between the prices of consumer goods and services. Last year’s CPI rose 3.1 percent from 2009. Consumer goods contributed 2.5 percentage points to the CPI growth while services contributed 0.6 percentage points. By contrast, consumer goods had a weaker influence on the 5 percent CPI growth rate in the first half of this year, while the influence of services expanded 30 percent from last year’s 19 percent. About 53.4 percent of service prices went up in the first half due to policy-adjusted prices and rising labor costs. As a result, service prices have been rising since the second half of 2010 and fueling the inflation.

The second comparison is between food and non-food commodities. Food price rose 10.4 percent year-on-year in the first half, contributing 2.8 percentage points to the city’s CPI growth. Its influence on overall inflation was 56 percent, 25 percentage points lower than in 2010. This means the influence of non-food commodities is steadily increasing.

The third comparison is between eight categories of consumer goods and services. Last year, price inflation occurred in five categories; this year it occurred in seven categories, indicating inflation is spreading to other consumer categories.

My second view is that the price inflation in the first half of this year wasn’t driven by the food price hike alone. More factors need to be considered in analyzing the CPI growth such as:

Cost increase. The hike in the prices of land, labor, energy, resources and raw materials has driven up the production, transportation and operation costs of companies. The rising cost of production materials has pushed up the prices of agricultural products in the first half of this year, raising fruit price by 35.1 percent, pork price by 26.5 percent, and fish price by 23.6 percent. This is the main factor for this round of inflation.

Imported inflation. The soaring prices of main commodities in the international market have a ripple effect on the domestic prices of agricultural goods, fuels and metals.

Policy-adjusted prices. The central government has increased grain prices a few times, as well as the prices of refined oil products and electricity in the first half of the year. Shanghai also raised the prices of water and medical services. These police-adjusted prices directly pushed up the cost of living in Shanghai and added to the inflation.

Inflation expectation. Sudden and blind panic buying took place in the first half of this year as people stocked up on iodized salt following Japan’s tsunami as well as soaps and detergents. This reflected the social expectation of widespread inflation. Simultaneous price increase by instant noodle manufacturers and daily chemicals enterprises also reflected the inflation expectation among companies.

My third view is that we are still facing a lot of pressure in taming inflation in the second half of this year. But current inflation is within control and there is no major fluctuation in consumer prices. While the CPI is still on rise, its growth rate is slowing. We also see more positive developments that can help us stabilize prices. This summer’s grain harvest can help ease the concern over inflation; majority of industrial products are still in oversupply and the slowing of economic growth will reduce inflationary pressure; commodity prices in the international market dropped somewhat in June; the country’s prudent monetary policy began to bear results; and the influence of inflation factors is waning in the second half. The CPI is expected to hit the ceiling in the third quarter and taking a downturn in the fourth quarter. The CPI for the whole year won’t be higher than that of the first half.

Jiefang Daily:We noticed that the fixed asset investment decreased and it is a rare phenomenon. How do you interpret the decrease because the data may affect the trend of macro-economy?

Cai Xuchu:The fixed asset investment declined by 5.8 percent year-on-year in the first half of this year. It is the first decline since 1999. I think it is a periodic decline according to historical data. The fixed asset investment decreased in 1961, 1977, 1989 and 1999 and each lasted for no more than three years. It occurs about every 10 years or so.

The investment decrease is also the result of macroeconomic control and adjustment and economic restructuring. After the World Expo there is also less need for fixed asset investment. I think we should view the decrease from following perspectives:

First, macroeconomic control measures have led to credit tightening which slowed fixed asset investment. This year China switched to a prudent monetary policy from a moderately loose stance while local governments also took steps to regulate their funding platforms. All these affected investment projects. Loans for fixed asset investment in Shanghai shrank 0.3 percent in the first six months. Among them, domestic loans fell 18 percent.

Second, Shanghai can take advantage of the periodic decrease to adjust its investment structure. Investment in some key areas and industries continued to grow in the first six months, and the city’s gross fixed asset investment remained huge despite some decline. Investment in the private sector grew well, up 11 percent by shareholding firms and 25.4 percent by foreign enterprises. Investment in projects concerning people’s life was guaranteed. Investment in affordable housing projects accounted for 30.3 percent of total housing investment in the first half of this year. Investment also increased in some key industries – biomedicine by 88 percent, IT by 40.9 percent and equipment manufacturing by 23.6 percent, but it decreased by 39.5 percent in energy-intensive industries.

Third, after the World Expo, local infrastructure investment fell by 31.3 percent, which is a cause for the sharp fall in fixed asset investment. Shanghai has completed a large number of infrastructure projects from airports to subways and river bridges and tunnels during the 11th Five-Year Plan period (2006-2010) ahead of the 2010 World Expo. Therefore, infrastructure construction in the first half of this year scaled down dramatically.

Fourth, a fall in investment may affect economy but positive signs pointing to a gradual increase in investment in the second half of last year have appeared. The decline of investment is slowing. The 5.8 percent drop in the first half of this year was 2.3 percentage points lower than that of the first quarter. With some key projects under construction in the second half, the decline of fixed asset investment will continue to slow down. We estimate that investment in the second half of this year will exceed that in the first half and this year’s total investment will remain the same as last year to sustain the city’s economic growth.

Shanghai Daily:Will you release the GDP of the first and second quarters? It seems that Shanghai’s GDP growth rate of 8.4 percent in the first half of this year is lower than that of many provinces. How do you comment on the slowdown of Shanghai’s GDP growth?

Cai Xuchu:Shanghai’s GDP grew 8.5 percent in the first quarter and 8.4 percent in the second quarter. The growth was quite steady. Shanghai lagged behind some provinces and municipalities in terms of GDP growth. Many provinces and municipalities boast two-digital GDP growth because they are in a different stage of development. Shanghai’s GDP growth rates of 8.5 and 8.4 percent in the first two quarters are slow compared with last year’s rate of 10.3 percent, but they are consistent. By contrast, last year’s growth rates fluctuated wildly between 5.9 percent and 15 percent.

The 8.4 percent growth rate was not achieved easily because our economy was affected by many factors such as a slowdown in the global economic recovery, pressure from imported inflation, and the termination of China’s economic stimulus program. As Shanghai is undergoing an economic transformation, there will be a lot of overhauls and pains. Some economic indicators will show a slowdown. Another reason to consider is that last year’s GDP grew at a faster rate because of the World Expo, resulting in a higher base for measurement. Considering all these factors, I feel a decrease in GDP growth is quite normal. It reflects the actual economic operation in Shanghai.

Securities Market Weekly:I want to know how to interpret the 7.4 percent decrease of investment in the tertiary industry because it is a priority industry.

Cai Xuchu:The tertiary industry includes real estate development. A slowdown in real estate investment has led to shrinking investment in the tertiary industry.