China's economy continued its high-growth, low-inflation model in the first half of this year, despite the damage caused by the Iraq War and the SARS (severe acute respiratory syndrome) outbreak.

If the SARS virus continues to be contained effectively, China's economy will rebound in the year's third quarter and regain its growth momentum in the fourth quarter.

Given stable fiscal and monetary policies from the government, China's gross domestic product (GDP) was expected to grow by 7 per cent in this year's second quarter, and may increase 7.5 per cent for the third quarter and 7.8 per cent for the fourth quarter.

But, according to a source with the National Bureau of Statistics (NBS), the growth rate for the year's second quarter, which is yet to be made public by NBS, is likely to be only 6.5 per cent.

A review of the 1st half of the year

The consensus among overseas academics seems to be that the impacts of the Iraq War and the SARS outbreak have hit China's economy harder than the Asian financial crisis did six years ago.

But these negative effects, though slowing the country's stunning growth, are unlikely to change the fundamentals.

Since the end of last year, China's economy has entered a new round of expansion, helped by a surge in domestic demand.

Actual economic growth is gradually approaching the boundaries of its potential, especially in the year's first quarter when GDP posted an amazing 9.9 per cent growth. That was the highest growth rate in the past six years.

China's high level of foreign exchange reserves has strengthened the country's position against oil price fluctuations in international markets. Sufficient industry output and the government's fiscal support have laid a solid foundation for winning the battle against SARS.

Industrial added-value in China increased by 15.9 per cent in the January-May period. The growth rate was 1 per cent less than in April and May but more than 4.3 per cent higher than last year.

GDP growth in the year's first half is likely to be about 8.9 per cent - higher than expectations.

The government's pro-active fiscal policy, which it has pursued for the past six years to stimulate the economy, has begun to reap dividends this year.

Social investments surged in the January-May period. Private funds, bank loans and foreign direct investment (FDI) increased by 49.4 per cent, 52.9 per cent and 53.2 per cent respectively.

This means that investment in China is becoming self-sustaining. The economy will gradually turn to private investors instead of the government for support.

While the SARS outbreak has hit sectors like tourism, transportation and service sectors, it has had little negative impact on properties, automobile, power and metal production industries.

Sales of cars in the January-May period amounted to 686,300 units, a year-on-year increase of 82.75 per cent. Sales of homes rose to 155 billion yuan (US$18.73 billion) in the same period, a year-on-year increase of 47.2 per cent.

China's exports grew more strongly than expected in the year's first half, thanks to an improving international trade environment, the recovery of the world economy, and the recent dollar devaluation.

China's currency is pegged to the US dollar and therefore devalued against other major currencies.

The country's exports amounted to US$155.9 billion in the January-May period, an increase of 34.3 per cent year-on-year.

China's imports also grew quickly in the year's first half as the country's economy boomed and world oil prices peaked because of the Iraq war.

In the January-May period, the country's imports soared to US$153.3 billion, an increase of 45.5 per cent year-on-year.

China recorded a trade surplus of US$2.4 billion yuan, a decrease of US$8.1 billion from last year's level.

However, some problems with the economy have resurfaced.

The real estate sector is overheated in some regions, as land and house prices have begun to soar in recent months.

The sale of consumer products grew by only 4.3 per cent in May, much slower than the year's first four months. The growth rate is the one of the lowest since the early 1990s.

Although SARS-hit industries - including retailing, tourism, hotels, restaurants, and transportation - still represent a small proportion of China's GDP, these sectors provide a comparatively high number of jobs.

In recent years, about 70 per cent of new jobs have been created in these sectors.

About 1.3 million workers in the above sectors have lost their jobs due to the SARS outbreak.

With another 14 million jobless already on its books, the government is under increasing pressure from urban unemployment.

The SARS outbreak also left 8 million farmers working in urban regions without jobs - a figure that equates to 8 per cent of the total rural labour force.

The National Statistics Bureau estimated that farmers' income dropped by 35 yuan per capita in the year's second quarter, a decrease of 4.5 per cent year-on-year.

However, the negative effects of SARS are still expected to be transient and limited, because the factors supporting household consumption remain unchanged.

Prospect for the 2nd half of 2003

In the past few weeks, China's consumer demand has picked up again as the nation tries to shake off the effects of the SARS outbreak.

The country's service sectors are enjoying a revival, with consumption of health- related products continuing to soar.

Sales of consumer products are expected to grow by 8.5 per cent in the year's third quarter and 8.3 per cent in the fourth quarter. Annual sales will reach 3.84 trillion yuan (US$462.65 billion), a year-on-year increase of 8.1 per cent. This is 0.7 percentage points less than last year.

Overall investments will continue to grow in the year's second half, but at a slower rate than in the year's first half.

The slowed growth in residents' income will contain overall consumption. Sales of cars and communication equipment are expected to slow despite their stunning growth in the year's first half.

It is estimated government-sponsored and other investments in the second half will grow by 20 per cent, 11 percentage points less than the January-May period. Annual investment growth will reach 23 per cent, 5.5 percentage points less than last year.

China will see FDI inflow grow at a comparatively slow rate, with annual FDI reaching more than US$57 billion.

The central bank has recently tightened its rules on bank loans to the real estate sector, which will to some degree constrain investments in housing properties.

Weaker consumer demand this year will also weigh on overall investments.

The SARS outbreak will have a lagged impact on the country's exports because exports occur a few months after contracts are signed.

So the damage to the country's exports caused by the SARS outbreak will only emerge in the year's second half, especially in the third quarter.

China's imports will soar in the second half because of strong domestic demand for advanced technology, further reductions in tariffs and increased import quotas for certain goods.

It is expected annual imports will reach US$375 billion, an increase of 27 per cent year-on-year. This figure will be 6 percentage points higher than last year's levels. The contribution of net exports this year to GDP will be 1 percentage point less that last year.

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