State of the Market


Inflation

Severe inflation will not occur in China this year, said Yao Jingyuan, Chief Economist of the National Bureau of Statistics (NBS), on March 20 at the preparation meeting for the 2004 China Development Forum.

China’s consumer price index (CPI) has grown dramatically since the fourth quarter of last year, which drew the public’s close attention and even spurred debate whether inflation would appear in China. (see graph 1)

But CPI’s climb will not continue, said Yao. Prices of industrial consumer goods constitute half this figure. Food prices account for 30 percent and the remaining 20 percent is service prices. Generally speaking, food prices rise only marginally and services prices are steady, while prices of industrial consumer goods continue to drop.

The rise in the prices of foodstuffs, especially grain, is a normal function of fluctuating supply and demand, according to Yao’s analysis. Grain output has kept shrinking since 1998. Harvests were reduced much more last year because of poor weather, which led to short supply of grain and consequently a price hike.

The government support and market impetus will increase areas of grain production this year. So the price hike of grain is unlikely to continue. Prices of vegetables and fruits, which rose in the fourth quarter last year, again, due to the weather, have begun to fall back down this year.

In general, supply still exceeds demand in the consumer goods market, Yao added. Price hike of means of production can’t transfer to the consumption area. While the price of steel products soar, prices of automobiles, the downstream products of steel products, continued to drop because of factors like a reduction on import duty.

Yao also pointed out the following factors that will restrict inflation in 2004:

First, China will abandon the mode of only seeking high speed growth and adopt a more comprehensive and sustainable strategy, which will definitely retard inflation.

Second, the prices of goods that are in full competition in the market are all in decline. By contrast, most commodities whose prices are rising are monopolized or government controlled. The maturing market economy can also effectively cage inflation.

Third, income of urban and rural residents has plateaued for the time being. Lots of people are waiting for employment. As a result, demand will not change by leaps and bounds.

In addition, 60 percent of Chinese economic activities are closely related with the world economy. Although the world economy is recovering, worldwide CPI is dropping, which can hold back Chinese inflation to some extent.

Catering

In the catering industry, foreign-funded enterprises and joint ventures have increased in scale and expanded their market share swiftly, according to a research conducted by the China Cuisine Association, the China General Chamber of Commerce and the China National Commercial Information Center.

The research showed that in 2003, among the top 100 catering enterprises, the six wholly state-owned enterprises had a turnover of 2.57 billion yuan, less than 5 percent of the total, 5 percentage points lower than in 2002. The five foreign-funded enterprises and joint ventures had a combined turnover of 15.84 billion yuan, which accounted for 30 percent of the total.

Yum China Restaurant Inc., under the Yum! Brand Inc., whose main brands are KFC (Kentucky Fried Chicken) and Pizza Hut, ranked first among the top 100 catering enterprises. Its chain stores in China now total 1,130 as of 2003, 233 more than the previous year. Yum saw a turnover of 9.3 billion yuan, up 31 percent over 2002. KFC has more than 1,000 restaurants in China, each with an average annual turnover of 8.3 million yuan.

The world’s leading food service retailer, McDonald’s Corp., has 600 restaurants in China through 2003, each with an average annual turnover of 8.8 million yuan.

Other foreign food service enterprises have also sped up developing in the market in China. Taco Bell, the third Yum! Brand heavyweight, has got a toe in Shanghai. McDonald’s China plans to open five franchises, as a renewed step of its sales model. Meanwhile, Yum! Brand, McDonald’s, as well as other foreign restaurant corporations have trickled into smaller cities. Depending on the impact of their brands, they will deal with business in other sectors to strengthen themselves.

Retail sales

China’s retail sales in 2004 will top 5 trillion yuan, with a year-on-year growth of 9 percent, according to estimation in a report released by the Ministry of Commerce.

A favorable domestic and international environment will forge a solid basis for the growth of the consumer goods market, according to the report. Resident income, especially the income of rural residents, is expected to rise faster. Consumer demand would maintain the rising trend at the end of 2003, with the urban market developing stably and the rural market accelerating.

The report forecasts that retail sales of consumer goods in cities will increase 10.6 percent in 2004. Retail sales in counties and rural areas will rise 8 percent. The gap between retail growth in urban and rural areas will be narrowed from 3.5 percent to 2.6 percent. (see graph 2)

Consumption will contribute more to economic growth this year than in 2003. The report estimates that retail sales of consumer goods will make up 39.7 percent of the GDP, 0.4 percentage point higher than in 2003. China’s economic growth will continue to be propelled by investment.

Industry

Industrial profits. In the first two months, state-owned enterprises and non-state-owned enterprises with annual sales revenue of over 5 million yuan had aggregate profits of 143.79 billion yuan, an increase of 38.2 percent compared with the same period in 2003, according to data from the NBS.

All enterprises combined grew in profits overall during the two months, with state-owned and state-holding enterprises up 37.9 percent, collective enterprises up 29.2 percent, cooperative enterprises up 28 percent, joint-stock enterprises up 39 percent and foreign-funded enterprises (including those with investment from Hong Kong, Macao and Taiwan) up 32.2 percent year on year. (see graph 3)

Most of the industrial sector kept making money. Ferrous metals mining and dressing, nonmetal mineral products, petroleum processing and coking and nuclear fuels processing, smelting and pressing of ferrous metals, and coal mining and dressing were the top five sectors in terms of profit growth, with the year-on-year rate of increase of 6.7-fold, 4.7-fold, 3.1-fold, 1.2-fold and 1.2-fold, respectively.

The top five sectors in terms of newly added profits are smelting and pressing of ferrous metals, raw chemical materials and chemical products, petroleum processing and coking and nuclear fuels processing, nonmetal mineral products, and production and supply of electric power and heat. Their newly added profits totaled 23.89 billion yuan, or 60 percent of the total added profits in industry.

Taxes paid by state-owned enterprises and non-state-owned enterprises with annual sales revenue of over 5 million yuan totaled 132.12 billion yuan, rising 21.3 percent year on year. (see graph 4)

Sales revenue of state-owned and non-state-owned enterprises with annual sales of more than 5 million yuan reached 2.33 trillion yuan in the period, with a year-on-year increase of 28.6 percent. (see graph 5)

Net losses of loss-suffering enterprises were 29.25 billion yuan during the two-month period, a year-on-year increase of 6 percent.

Prices of industrial products. In February, ex-factory prices of industrial products rose 3.5 percent year on year, equal to the growth in January.

Ex-factory prices of means of production rose 4.6 percent over February 2003, the same growth rate of January. Ex-factory prices of livelihood rose 0.5 percent, 0.2 percentage point higher than January. Due to the rise in price of grain and oil, ex-factory prices of food grew the fastest, up 3.9 percent year on year.

Purchasing prices of raw material, fuel and power increased 8.1 percent, 0.7 percentage points higher than January.

In January-February, ex-factory prices of industrial products grew at an average rate of 3.5 percent. Purchasing prices of raw materials, fuel and power rose 7.8 percent in the same period.

Resident Income

In February, monthly per-capita disposable income of urban residents equaled 963 yuan, according to NBS statistics. Total income was 1,018 yuan per capita.

The NBS surveyed 50,443 households altogether. The average number of members of each household was less than three, with an average employment rate of 1.57 per household.

Compiled by YU SHUJUN

($1=8.28 yuan)