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LI Quan, Research Fellow of the Chinese Academy of Fiscal Sciences
This year, the brightest spot from annual sessions of the National People’s Congress and the Chinese People's Political Consultative Conference is that, two keywords, i.e. promoting economic transformation and steadying economic growth, were concurrently mentioned in the context of economic downturn, which imposes a great challenge. At present, China’s economic restructuring has come to a crucial stage. Only when China smoothly changes the engines of economic growth, can it successfully drive the economy into a brand-new development stage and stoke expectations for comprehensive development of the economy and society. Small and micro enterprise economy, as the most micro link in the macro economy, are facing immense difficulties to achieve transformation and growth. Surprisingly, the “Economic Daily – PSBC Small and Micro Enterprise Operating Index” (hereinafter the “SMEOI”) demonstrated a rebound over the past month following a full year of recessions, raising hopes in the market after a chilly winter.
Since the beginning of 2016, central banks in the world have been unveiling various monetary easing measures. After the Japanese central bank launched negative interest rate, Europe also expanded its QE scale, which, however, is still unable to shore up the sluggish business climate in global economy. The PMI of Eurozone and Japan fell 1.1 and 1.2 percentage points, respectively, in February, and PMI of the US continued to stand below the expansion/contraction line despite a rally. Looking ahead, fiscal policies and structural reforms are still necessary measures to steady the global economic growth and alleviate decline in global economy. In the same period, China’s manufacturing PMI also slipped to 49%, a reflection of lukewarm production operations and weak production orders. However, decline in the manufacturing indices has close bearing on the economic restructuring efforts. Therefore, recovery and growth of the Chinese economy merits expectations following improvement of the economic structures.
An encouraging sign is that, China’s fixed-asset investment continued to grow, and the forecast-beating growth in real estate investment has led to positive growth in the area of new housing starts and robust property sales in this spring. Although the core CPI reading hasn’t reflected the pressure of inflation, the loose monetary policy was fine-tuned in order to ease the pressure from fast growing price of properties, vegetables, pork, meat etc. in tier-1 cities. The credit balance lost the strong growth steam it presented at beginning of the year, the maneuver for re-leveraging policies is limited, and capacity elimination and de-stocking remain centerpiece tasks on the road of economic restructuring.
In March 2016, the SMEOI continued to stand below the expansion/contraction line at 46.3, but it ticked up 0.2 points from the prior month, which is really an encouraging sign in the context of downbeat economy. Following months of decline, the first rise in the SMEOI lifts our expectation for stabilization of the small and micro enterprise economy. Viewed from sub-indices, except the expansion index which stood flat and the cost index which edged down 0.3 points, all the other sub-indices improved. In particular, the confidence index ticked up 0.4 points. Regionally, the SMEOI for all the other five regions except for Southwest China jumped, with indices for Northeast and Northwest China, two previous laggards, ticking up 0.4 and 0.3 points, respectively. The seven major industries fared even better. Except that the accommodation & catering industry registered a slight pullback after the Chinese New Year, all the other six industries realized growth. More encouragingly, the SMEOI for the manufacturing industry put an end to five months of consecutive declines, and went up 0.3 points from February; output and gross margin of the small and micro enterprises in the manufacturing industry rose 0.5 points and 0.5 points, respectively, in March, showing emerging industries have started to recover amid restructuring of the manufacturing industry. This, to some extent, will stir up expectations for steady economic growth. In the meantime, sub-indices measuring backlog orders, finished product inventory and raw material inventory of the manufacturing industry rose steeply, implying enterprises started to boost procurement of raw materials; noticeable rise in the finished product inventory and backlog orders is possibly related to short-term production expansions among small and micro enterprises out of upbeat expectations for economic recovery. This, on one hand, lays a foundation for recovery of the manufacturing industry, on the other hand, augment pressure on continued growth of the manufacturing industry. Additionally, the construction and transportation industries both registered some improvement, and the agriculture and services industries also picked up slightly. Therefore, we can’t reach an accurate conclusion on whether the small and micro enterprise economy will recover based on across-the-board rise in the SMEOI in March. We wish to see continued growth of the small and micro enterprise economy in the forthcoming second quarter, and hope such a momentum can last into the second half year, before confirming the small and micro enterprise economy are steadily recovering.
Annual sessions of the National People’s Congress and the Chinese People's Political Consultative Conference held in March 2016 have set the tone for unfolding of China’s blueprint during the “13th Five-Year Plan” period, and laid down the institutional set-up for continuous economic restructuring and steady economic growth. Different from the economic reforms in history, this economic restructuring happens in a new external environment and against new internal operating conditions. First, the Chinese economy is up against declines in comprehensive return on capitals through years of extensive development, and such a trend is particularly clear in the industries with excessive production capacities, and deals an enormous impact on enterprises of the steel, cement, flat glass, electroplating, electrolytic aluminum, coal chemistry, polycrystalline silicon, and soybean grinding industries; second, the government is pushing ahead with supply side reform on all fronts, and strictly limiting economic restructuring efforts to development of emerging industries and optimization of traditional production capacity, which stands to profoundly impact the economic system where used to be dominated by traditional industries; third, the global economy is showing signs of recovery, but a large number of weak enterprises could fall down on the eve of economic recovery, which will heavily impact the enterprises making meager profit with weak risk resistance capacity. In such a context, alternation of industries and change of the development path triggered by it become particularly captivating in 2016. Change of the economic development mode driven by the abovementioned three trends and economic restructuring will gradually take place over the next couple of years, and tamp down the foundation for future economic growth. During the process, operation of the macro economy is still unoptimistic, and recovery of the small and micro enterprise economy in the second quarter is never a problem of the small and micro enterprises. To be concrete, economic restructuring in the small and micro enterprise economy field shall: (a) develop emerging industries and bolster rapid and steady development of relevant industries, and (b) vitalize the idle assets, accelerate supply-side reform and reduce improper leverage as soon as possible. During this process, echelons of talents shall be cultivated to pave way for steady development of the small and micro enterprise economy in future.