Hu Kaihong(host):

Ladies and gentlemen, good morning. Welcome to the State Council policy briefing. In order to help everyone better understand the situation of China’s economy, today we have the pleasure of introducing Mr Yu Bin, director of the General Office and chief of the Department on Macro-economy Research at the Development Research Center of the State Council. He will give his insight into the macro economic situation and will address your questions. First he will give an introduction.

Yu Bin:

Reporters and friends, good morning. I’m glad to have such an opportunity to exchange views with all of you in regard to China’s economy situation. First, I would like to briefly share my thoughts about the current economic situation.

As the Chinese economy shifted from high-speed development toward a development of mid- and high speed in the second half of last year, we have seen phenomena such as decline in demand, decline in commodity prices, and increasing pressure on the enterprises to deal with over capacity. The overlapping of such factors have led to mounting downward pressure on the economy. Since 2010, the GDP growth rate has been declining, while the momentum of growth has not plummeted.

The industrial added value growth rate of surveyed enterprises, since the second half of last year, has decreased significantly. In the first half of last year PPI rose on a monthly basis and its scope of decline has narrowed. But with the decline in commodity prices in the international market, in the second half of the year, however, we witnessed a downward trend again in the PPI. The good news is that the National Bureau of Statistics announced in March that the monthly PPI growth was -4.6 percent, which shows a narrow decline. In December last year, surveyed industrial enterprises saw a year-on-year negative growth in profits of - 8 percent, but during the first two months of this year, the decline has been narrowed.

Yu Bin:

The key to dealing with downward pressure in the economy is to achieve a balance between supply and demand on the new platform. After the international financial crisis, total demand has been in steady decline in China, the supply side has witnessed excess capacity, and there has been an obvious gap between supply and demand, which illustrates the need to approach the new equilibrium level through the upgrading of structure.

Due to the failure of a remarkable number of excessive production capacity enterprises to leave the market, oversupply has led to increasingly fierce competition and continuing negative growth of PPI. Corporate profits have declined, and their debt burden is increasing. Eyeing the whole year, the international economy is heading toward improvement. The European Central Bank has launched QE, and there is an increasing likelihood of the US Federal Reserve raising interest rates during the year. The worldwide commodity prices have stabilized indeed, the uncertainty of the world economy in the short term has been reduced, and the international economic environment is expected to be slightly better than last year. On the domestic housing market, the big picture has been shifting from the shortage of supply toward an overall balance between supply and demand and excessive supplies in some localities. In 2014, the real estate investment growth was 10.5 percent, a plunge of 9.3 percentage points over the previous year. The newly implemented policies regarding credit and proportions of downpayment will have a positive effect on real estate sales growth, and mildly improve investor sentiment. It is estimated that in 2015, real estate investment growth rate will decline to about 7 percent, a decline narrowed significantly compared to last year.

Because of the overall excessive production capacity of industry, the adjustment of the real estate market, automobile production entering a phase of comparatively low growth, the mid- and long-term adjustment of investment in the manufacturing sectors has not ended. During the first two months, corporate investment in equipment witnessed a growth of 15.5 percent, a year-on-year increase of 3.3 percentage points, which shows a continued upward trend. Considering the short term positive factors, including the accelerated depreciation of assets and stabilizing exports, annual total investment is expected to increase by 11 percent in 2015.

Yu Bin:

As the economy slows and the growth of productivity of labor is slowing down, the income growth rate of residents will be reduced mildly. The driving effect imposed by buying housing and automobiles is diminishing, and the public consumption is demonstrating a declining trend amid overall steadiness. Considering the large stock of deposits, the downward trend of prices and the continued, fast growth of new consumption patterns, including information, total retail sales of social consumer goods is estimated to achieve growth of around 16 percent.

Along with the improving international economic situation, the impact imposed by the short-term demand gradually diminished, and commodity prices dropped sharply before the enterprises dealt with capacity, the effects of reforms and growth-stabilizing policies are unfolding, and the internal positive factors of the economic system are accumulating. We estimate that economic downward pressure will be gradually eased, and an estimated target of GDP growth - around 7 percent in 2015 - will be achieved if no major unexpected occurrences take place.

In general, China’s economy is in a critical period shifting from high-speed to mid- and high-speed growth, and factors - such as structural adjustment and the gradual digestion of preliminary stimulus policies - have been superimposed together, which means that the running of the economy will remain under pressure.

It is necessary to proactively guide market expectations and prioritize management over short-term demand, and this can slow down the downward trend of the economy. But at the same time, the policy focus should be put on the efforts in adjusting the supply side, guiding the gradual exit of excessive production capacity, and promoting the merger and reorganization to boost the survival of the fittest. After the supply is reduced and the structure is tweaked and upgraded in order to live up to the new context in which the supply is in harmony with the demand, the transformation would achieve a new rebalance. In this process, we should pay more attention to risk management, strive to improve the quality and efficiency of economic operation, and promote stable and healthy economic development.

The above is my basic understanding of China’s current economic situation, and now it is time to answer your questions.

Hu Kaihong(host):

questions, please.

China Central Television:

I have two questions. First, the government set the gross domestic product (GDP) growth target for 2015 at 7 percent. What is the figure for the first quarter of this year, did it reach 7 percent? Second, while the Chinese economy enters a “new normal’’ of slower growth, the stock market has witnessed major rises. What do you think of this phenomenon?

Yu Bin:

The GDP growth target for 2015 was set at about 7 percent at the central economic conference held at the end of 2014 and the annual parliamentary session in March 2015. Generally speaking, I think the economy didn’t slide out of the reasonable range in the first quarter although it was under a lot of downward pressure.

The second question is an issue everyone is concerned about. That is how to view the sharp uptick in the stock market amid slower economic growth. The economic growth rate of 7 percent is not low for China as the world’s second-largest economy when compared to other economies. After restructuring and industrial transformation and upgrades in recent years, the economy has improved in terms of growth quality and effectiveness. I think this is the reason for the stock market rally. The Chinese economy slowed, but the 7-percent growth rate is still faster than that for many other economies. This economic momentum led to the stock market rise to some extent. Better economic performance focusing on quality and effectiveness also provided a solid foundation for the increases in the stock market.

China News Agency:

What do you think of China’s economy in the first quarter of this year? Are there any new drivers and new trends for the economy? Some say the economy will stabilize in the second quarter. What do you think of such a notion?

Yu Bin:

We haven’t got relevant statistics from the first quarter. The National Bureau of Statistics will issue them next week. We can make a better assessment of the first quarter’s economy once we have complete statistics. In the first quarter, supply was being readjusted more quickly in order to suit demand. Supply has been readjusted over the past number of years.

We see that when investment growth slowed in the first quarter, consumption took up a larger proportion of GDP and became a more powerful driver of the economy. We reckon that the trend will continue in the second quarter.

At the same time, after industrial production growth slowed, the service industry is becoming a new driver for the economy. It’s good for economic restructuring. This trend will also continue into the second quarter.

I agree that the economy will stabilize in the second quarter.

Economic Daily:

There is a feeling among some global economists that China’s economy shows signs of deflation. What do you think? Thank you.

Yu Bin:

If judging only from the producer price index, which has been decreasing for 37 months to March, one can say it’s deflation. But if we take into account the consumer price index, it’s not fair to say that the country’s economy is not stable. The National Bureau of Statistics released the CPI figures this morning. The CPI in March increased by 1.4 percent from the same period last year.

Also, I want to emphasize that under most circumstances, deflation occurs in other countries due to a lack of monetary supply or liquidity. But in China, the continuous decreasing of PPI resulted from not only the large decrease in the price of bulk commodities in the international market, but also the readjustment of supply in the country’s economy.

The readjustment means shutting down a large amount of surplus capacity, in order to strike a balance between the supply and the demand and stabilize the PPI.

Thank you.

Phoenix Television:

Many analysts believe the Chinese stock market is likely to climb to 6,000 points this year. Does this pose a risk to the economy? Will the recent relaxation in real estate policies affect property prices and turnover?

Yu Bin:

About the stock market, I think it is not normal or reasonable for it to rise or decline by large margins in the short-term. Currently, the stock market has been supported by the basic situation as I just mentioned, but we have to notice that many stockholders have an insufficient awareness of risk prevention. More attention should be paid to this situation.

About the second question on real estate, the State Council released measures to adjust its real estate policies. I think these measures are highly necessary. Generally speaking, China’s real estate, whose supply used to lag behind demand, is facing a balance of supply and demand. This does not mean there is no room for the market’s development. As we all know, China’s urbanization rate reached 55 percent by the end of last year, which still lags far behind the target of 70 percent. Therefore, for a long time to come, until 2030, urbanization will be rapidly pushed forward, and there is a lot potential and demand from urban residents to improve housing conditions. From this point of view, China’s real estate market will have promising prospects for development for a long time to come. The market is going through some sharp fluctuations, and the policies adopted by the government are not aimed at bringing real estate back to the high-speed track of growth, but leading the market to a new stage, or what we call a soft landing of the real estate market. From the investors’ point of view, the annual growth of investment in real estate from 2000 to 2013 was 24 percent. The high growth came from supply lagging behind demand. The investment has slowed by a large margin since 2013 but we think for a long time to come the growth in investment in real estate will be around 7 to 8 percent. Why? We estimate that Chinese economic growth rate will be around 7 percent, the GDP growth rate will be around 7 percent, and this means the growth rate of urban residents’ income will be around 7 percent, and their purchasing power will grow too. Along with urbanization’s 1-percent growth rate year-by-year, the real estate market and investment will maintain a 7 to 8 percent growth rate.

Thank you.

Bloomberg:

I’d like to know more about China’s CPI and PPI statistics. Do you think China’s deflation will continue? Or in other words, what measures will the Chinese government take to avoid the risk of deflation?

Yu Bin:

The CPI growth should be controlled at around 3 percent - this is the target set at the two sessions this year. Judging from the current situation, we can definitely achieve the target this year.

Regarding PPI, as I’ve just said, PPI will continue to decrease due to two reasons: a sharp decline in bulk commodity prices in the global market and the overcapacity of China as a supplier. Recently, bulk commodity prices in the global market have gradually stabilized, so this factor is losing its effect. On the other hand, we are accelerating the adjustment. With the structure readjustment, much excess capacity will be phased out after asset reorganization. Thus, the other reason causing prices to fall will no longer exist. So I think the decline of PPI will gradually slow down in the future. The PPI published in February has already proved my point of view. Thank you.

Xinhua News Agency:

You just mentioned that economic growth in the first quarter of 2015 is still within a reasonable range. So what is the minimum limit of this “reasonable range?” Also, what is your opinion on the 1 trillion yuan debt-for-bond swap program for local governments, against a backdrop of continuous economic slowdown, as revenues decrease sharply and budget deficits balloon? Thank you.

Yu Bin:

The Chinese government is targeting GDP to grow at around 7 percent and CPI at around 3 percent in 2015. Any economic figure meeting this target can be defined as “within a reasonable range.” In the first two months of 2015, both the growth in GDP and CPI has met this target.

Regarding the debt swap program, it is reasonable for Beijing to increase investment as a means of macroeconomic control. This year China is facing the pressure of an economic downturn, and the government has decided to boost financial expenditure. That can only be done if we solve the problem of local government debts.

Currently, the debt levels of local governments are high, while the revenues of the governments are slumping. As a possible result, many investment projects aiming to benefit people and quicken urbanization may fail. That’s why China launched the program to alleviate the debt burdens of local governments, a move that will better fund infrastructure, maintain economic stability, and promote people’s livelihood. As Premier Li Keqiang said in the annual government work report, we now have two engines: one is to encourage mass entrepreneurship and innovation, and the other is to increase the supply of public goods and services. Obviously, those investment projects will increase public products and services and thus meet the demand of the public. Thank you.

Dow Jones and the Wall Street Journal:

Could you talk about employment? Will the goal of 10 million job opportunities be reached?

Yu Bin:

The relationship between employment and economic growth has changed significantly. China’s economy increased by 7.4 percent last year and created 13.32 million jobs, which means 1.8 million jobs with every one percent point of economic growth, while at the beginning of this century, the number was only 700,000. I think two reasons contribute to the change. First is the increase in China’s economic gross. The amount of economic gross was 10 trillion yuan in the past, so 1 percent growth equaled to 100 billion yuan, which could provide a matching amount of job opportunities. Last year the amount was 63 trillion yuan, and the 1 percent growth equaled to 630 billion yuan. So apparently, compared to 100 billion yuan, new jobs created by 630 billion yuan will be totally different.

Second is the significant change in China’s economic structure. The industrial added value has been occupying the highest proportion of GDP in the past, but last year the proportion by service added value reached 48.2 percent, and the service industry offers more job opportunities by 20 percent to 30 percent compared with that of the manufacturing industry. Therefore, taking the above two factors into account, I think 7 percent growth could basically satisfy the employment demand and I have confidence in realizing this year’s goal.

Thank you.

National Broadcasting Company:

I am curious about a particular aspect. Currently, China is undertaking big international projects, such as the Asian Infrastructure Investment Bank, the Silk Road Economic Belt and the 21st Century Maritime Silk Road, and projects with the BRICS, which will involve a large amount of money. Where will this money come from? Furthermore, China also needs money to invest on its own development. How will China coordinate the two demands for money?

Yu Bin:

By the end of last year, China’s foreign exchange reserves reached $4,000 billion. I think we won’t have a problem to use part of those reserves on the AIIB and the Road and Belt Initiative you just mentioned. In the meantime, from the economic situation, exports grew at a rate of 6 to 7 percent, while imports often appear at zero growth or negative growth due to slowing domestic demand. The trade surplus has increased. On the other hand, we are in a very different financial situation today compared to the beginning of the reform and opening up. At that time, we relied heavily on foreign capital and foreign investment. However, after 30 years of development, with traditional high saving rates, it won’t be a problem to provide enough funds for domestic development. The problem now is to improve the efficiency and effectiveness of the investment, which needs evaluation of many of the projects. For example, we need to consider both the economic benefits and social efficiency when building a new road. If we were only concerned about the social efficiency, we may make bad investments. If we have good economic benefits and social efficiency, we will make profits from our investments and use that money to invest on other things.

Hu Kaihong(host):

That’s the end of today’s policy briefing and see you next week.