Prospects for China's means of production
(China Daily)
Updated: 2004-04-09 10:17

The Ministry of Commerce recently released two reports on the market of means of production and the consumption market. Excerpts follow from the two reports:

Part I The market of means of production

Performance in 2003

Sales of means of production hit an all-time high of 8.72 trillion yuan (US$1.05 trillion) in 2003, a year-on-year increase of 19.5 per cent.

Monthly sales growth has remained stable at around 20 per cent, a sign of sustainability for further growth.

Workers busy themselves on the rubber production line at Wushi Farm in Hainan Province. It is estimated the general price level of the means of production will grow by around 5 per cent this year.[newsphoto]

The supply of means of production, including imports of international resources, increased considerably last year amid robust market demand, which helped maintain an equilibrium between demand and supply.

Statistics indicate a year-on-year increase in the supply of 32 major items of means of production in 2003, which is attributed to a 17.8 per cent rise in local output and 25.2 per cent growth in imports.

Crude oil supply rose 10.26 per cent year-on-year, coal by 15.3 per cent, steel by 24.89 per cent, copper by 15 per cent, aluminum by 28.75 per cent, cement by 16.77 per cent, and vehicles by 33.37 per cent, including an 83.25 per cent surge in the output of sedans which has reached 2.2 million.

But market demand for many items had outgrown supply, and the number of these items is on the rise. According to an official investigation in the third quarter of last year into 300 items, including coal, steel, cement and chemical fertilizers, trading in 97 items, or 32.3 per cent, was "robust," with 185 items, or 61.7 per cent, enjoying "stable" trade and 18 items, or 6 per cent witnessing "inactive" trade.

Prices of means of production registered an average year-on-year growth of 8.1 per cent in 2003, a new high compared to recent years.

The market boom is attributable to the constant growth of the logistics sector, as many relevant industries, including brokerages, processing and distribution, have undergone structural upgrading over the past years. The overall value of commodities processed through the logistics service increased year-on-year by 27.5 per cent.

Dynamics of the market boom

The boom in the means of production market in 2003 was a result of a number of factors including industrial production, investment, export and terminal consumption, a departure from the previous years' situation, in which the market was almost solely driven by infrastructure construction.

Major industrial enterprises created 4.1 trillion yuan (US$495.9 billion) in added value last year, up 17 per cent year-on-year, beating the record figure in 1997.

Heavy industries' robust growth has particularly stimulated the demand for raw materials. Heavy industries accounted for 2.6 trillion yuan (US$318.9 billion) of added value, a year-on-year increase of 18.6 per cent.

The boom in the means of production market was also closely related to the momentum in fixed-asset investment, which stood at 4.27 trillion yuan (US$515.6 billion) last year, a surge of 28.4 per cent year-on-year.

China's expanding global trade links have bolstered demand for means of production. Exports climbed by 34.6 per cent to US$438.4 billion last year. In addition, 41,081 foreign-funded businesses were approved to open in 2003, accounting for US$115 billion of contracted foreign capital.

Outlook for 2004

The means of production market has the potential for further development in 2004, considering the nation's current strong momentum of economic growth.

In particular, many government policies, including fostering the underdeveloped western regions and the old industrial base of northeastern China, building a sound public health system and helping increase rural residents' incomes, will sustain steady growth in fixed-asset investment.

But apart from these favourable conditions, some deep-seated problems are also looming on the horizon.

The investment mania in some areas, often spurred on by local government, has led to many overlapping projects. This incurs huge risks for the market, especially since many of the projects are constructed using borrowed capital.

The expansion of some lucrative industries, such as steel, autos and nonferrous metal, has sparked a raw material shortage and led to abnormal price rises. Some areas even resort to mass exploitation of elementary materials for short-term gains, with disastrous environmental consequences.

The vast demand for means of production has led to an increasing market reliance on imports. New demand for steel, aluminum, copper and oil will have to be satisfied with imports, considering the limited domestic productivity of these resources.

By comprehensive analysis, demand for means of production will remain healthy this year, and, as usual, the growth of the demand will exceed GDP growth.

As the government has taken steps to address problems like overheated investment in a few industries, duplicated projects and excessive bank loans, growth in the sales of means of production will be around 12 per cent this year.

The huge demand can generally be met, given that supply of resources has been going well.

Domestic output of major industrial products, especially elementary products, can meet the needs of economic development and still have the potential to expand. The shortage of some items such as oil, copper, rubber and some chemicals can be replenished with imports.

Although the prices of means of production increased considerably last year, some room remains for further price rises. It is estimated the general price level will grow by around 5 per cent this year.

The supply-demand situation of some key items follows:

■Steel: Demand is likely to reach 300 million tons in 2004. National steel output will exceed 270 million tons, with a newly added production capacity of 40 million tons this year. If imports are taken into consideration, steel supply will meet demand.

But some upper-reach materials such as iron ore, coke and coking coal will be in short supply.

High demand and production costs will cause steel prices to grow this year. According to the China Logistics Information Centre (CLIC), steel prices rose by 5.7 per cent in January. According to this reckoning, the price will continue to increase for a couple of months before falling moderately.

■Nonferrous metals: In 2003, prices of nonferrous metals increased by an average of 8.03 per cent. Copper prices rose by 14.14 per cent, aluminum 5.54 per cent, lead by 5.47 per cent and zinc by 2.71 per cent.

Copper prices will remain strong in 2004 due to limited resources. The domestic price will reach 22,000-25,000 yuan (US$2,658-3,020) per ton, higher than the 2003 level.

The aluminum price is expected to fluctuate between 14,500 yuan (US$1,752) and 15,500 yuan (US$1,812) per ton.

■Oil: Tentative estimates indicate that oil supply and demand will both be colossal and basically remain in equilibrium. But local shortages cannot be excluded considering the impact of seasonal and transport factors.

China's crude oil consumption is estimated to reach 270 million tons in 2004, including more than 100 million tons of exports. The consumption of gas, diesel oil and kerosene will add up to 136 million tons, a year-on-year increase of 4.6 per cent.

Oil prices will remain at last year's level, with any fluctuations being moderate.

The nation's oil refining industry is now in its golden age, with sharp rises in sales income and profits. But the rate of profit growth may be lower than that in 2003.

■Coal: The coal price has climbed noticeably since last winter, mainly because of huge electricity consumption and the expansion of the metallurgical, chemicals and construction materials industries. The average coal price increased year-on-year by 6.9 per cent in December.

The tight coal supply will hopefully be eased as the climate warms up. Coal prices will be stable this year and the coal industry is likely to shift from fast growth to moderate development.

■Automobiles: The auto industry has become a locomotive of the current economic boom, as better-off families' increasing demand for private cars propels its rapid growth.

But stock is also gradually increasing. More than 300,000 cars are in manufacturers' warehouses, not including those stocked in the distribution process.

Car makers' and sellers' promotion efforts will lead to frequent long-term price cuts in the future. Although the car trade will remain active in 2004, average prices are likely to decline slightly.

■Rubber: Rubber prices fluctuated sharply in 2003 because of the gap between demand and supply. The price of natural rubber soared by 41.9 per cent during the year.

Although the output of natural rubber will grow in 2004, market demand outpaces supply. Demand will surpass 1.9 million tons this year, which means a shortage of about 1.3 million tons. The rapid growth in synthetic rubber production will make up for the natural rubber to a certain extent.

Rubber prices will keep rising at a high level, but the possibility of a slump cannot be ruled out.

Part II The consumption goods market

Performance in 2003

The scale of the consumption market kept expanding last year.

The retail volume of consumption goods was 4.58 trillion yuan (US$553.8 billion), 9.1 per cent more than the volume in 2002.

Although the growth was once disturbed by the SARS (severe acute respiratory syndrome) outbreak and slowed to 4.3 per cent last May, it rallied quickly in the following months. In December, the sales of consumption goods jumped by 10.9 per cent year-on-year.

Trade in large-scale marketplaces was active, with a few massive marketplaces speeding up their expansion. The number of commodity marketplaces with a trade volume above 100 million yuan (US$12 million) slid by 15 to 3,258 in 2003, but their overall trade volume added up to 1.98 trillion yuan (US$239.7 billion), up 12.1 per cent year-on-year.

The number of marketplaces with a trade volume above 1 billion yuan (US$120 million) reached 414,70 more than the previous year. They accounted for 1.25 trillion yuan (US$151 billion) of trade volume.

The number of comprehensive industrial and agricultural marketplaces declined last year, but marketplaces of specialized commodities such as vehicles, construction materials and audio-video products were on the rise.

The structure of private consumption was changing, as the proportion of food in citizens' expenses continued to decline in favour of healthcare, telecommunications and entertainment.

The excessive supply of major commodities was relieved last year, whereas some commodities like cotton and oil even were in tight supply.

Official statistics indicate that, in the first half of 2003, the supply of and demand for 87 major commodities was in balance, compared to 513 commodities in surplus. The number of commodities in normal supply increased to 129 in the second half, while that of surplus items dropped to 471.

This was the a most favourable situation since late 2000 in term of the demand-supply balance.

One reason is the fast growth of exports helped consume some excessive commodities at home, to a certain extent.

The output of major agricultural products including cotton and oil were also reduced as the amount of farmland decreased last year.

Some products continued to be popular among consumers, such as personal computers, sedans, housing and telecommunication tools.

With closer ties with the international market and wider competition, the domestic consumption market is increasingly effective in terms of self-adjustment.

For example, some drugs and disinfectants were in short supply last spring because of the SARS outbreak, but the situation soon stabilized as supply stepped up.

Outlook for 2004

By rough reckoning, retail in consumption goods will exceed 5 trillion yuan (US$604.1 billion), rising more than 9 per cent from last year.

Rural residents' consumption will grow further and the gap in consumption growth between rural and urban areas will narrow.

Retail of consumption goods will increase 8 per cent in rural areas, and 10.6 per cent in cities. The gap of growth rate is 2.6 percentage points, which will be smaller compared to the 3.5-percentage-point margin in 2003.

Retail in the catering industry is likely to surge by over 18 per cent this year, largely because the SARS epidemic last year has left the industry with abnormally low income figures. The catering industry's share in the overall retail of consumption goods will also increase by around 1.5 percentage points.

Thanks to the deepening of the government's western development strategy, the consumption market in the western and central provinces will grow rapidly, whereas the market in the affluent eastern area is likely to grow at a moderate pace.

Retail of consumption goods took up 39.3 per cent of China's GDP in 2003. The ratio is expected to rise this year to 39.7 per cent or so.

Although consumption is contributing more, investment still plays the leading role in economic growth, while consumption rate will remain relatively low for a long time, which is determined by the nature of the current economic period.

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