China's Macroeconomic Forecast and Analysis Q4 2014

Transcription

1 China's Macroeconomic Forecast and Analysis Q Center for China in the World Economy, Tsinghua University October 12, 2014

2

3 Adjusting the Real Estate Sector Leads to Economic Slowdown World Economic Landscape 2014Q3 The U.S. Strong Resilience and a Clear Prospect for Growth The Eurozone Lower-than-Expected Growth with Stimuli Upcoming China Further Restructuring with Slight Economic Slowdown Retail Sales Continued Growth and Changing Consumption Structure Real Estate Decline in Both Sales Volume and Prices with Investment Slowing Down M2 Prudent Monetary Policy and Slightly Loosened Credit Policy CPI Stabilizing Commodity Prices at Low Level, with Slim Chances of Rising Imports & Exports Overall Recovery of External Demand Implying Improved Exporting Prospects China's Economic Outlook 2015 Experts Views Daokui Li: Develop new economic growth engines in a new round of economic restructuring Gangming Yuan: Eliminate the after-effects of previous stimulating measures CCWE Macroeconomic Forecast Research Group: Daokui Li, Gangming Yuan, Dingming Lei, Chun Liu, Hao Cheng, Lin Fu, Xiang Xu, Shuyu Wu, Jinjian Shi, Sijia Hu, Dapeng Chen, Yusha Li and Like Aobo Tel.: Website: Quarterly Accumulated GDP Growth In China, the economic growth recovery seen in Q did not continue in Q3. Of the three engines of GDP growth, investment and consumption growth have declined since July compared with H and one year earlier. There is no sign of a pickup in the economy in Q3, as was seen in the previous two years. However, foreign demand has recovered and resulted in a better performance in exports on the whole, contributing to sustained rapid economic growth in China is the concluding year of the 12 th Five-year Plan, in which it is of critical importance to conduct reform and economic restructuring based on the growth goals that were met beyond expectations in the past few years. Favorable policies for public investment should be fully given to promote investment in public consumption infrastructure and make the existing production capacity greener and further upgraded. We forecast that China's economy will grow at a rate of 7.3% in Our macro forecast model predicted that the annual growth rate of GDP would be 7.4% in CPI and M2 will grow at 2.0% and 13.0% respectively on a year-onyear basis. Continued decline in real estate investment is inevitable, prompting the slowing down of investment in fixed assets which will grow at 17.2% annually. With the economy picking up in the United States, foreign demand will experience a recovery. Export and import are predicted to grow at a respective rate of 6.5% and 3.1% with a trade surplus of $245 billion. With an estimated annual growth rate of 12.3% in retail, the upgrade of consumption structure is in progress. Quarterly Accumulated CPI Growth Quarterly Accumulated Fixed Assets Investment Growth Quarterly Accumulated M2 Growth Q Actual Estimated Estimated Estimated GDP (%) CPI (%) Export Growth (%) Import Growth (%) M2 Growth (%) Source: CCWE Retail Sales Growth (%) FAI Growth (%)

4 The U.S. Strong Resilience and a Clear Prospect for Growth The annualized GDP growth rate in the U.S. on a QoQ basis was -2.1% and 4.6% respectively in Q1 and Q The American economy deviated from the medium-term trend because of the effects of poor weather conditions and other factors, resulting in a temporary decline in Q1 before a rapid growth recovery. It is indicated by the annual data that the U.S. GDP increased by 2.3% and 2.2% respectively in 2012 and The figure of H is about 2.3%. We believe that the U.S. economy is now stable at a growth level of 2-2.5%. Although this level is lower than the more than 3% seen before the crisis and over 4% in the late 1990s, the overall growth is highly stable. The Labor Market With the economy doing better, the U.S. job market has also made significant improvement. The unemployment rate has dropped to 5.9%, the first time the rate has been below 6% in six years. It has fallen from the peak of 10.0% in October 2009 (the financial crisis) to 5.9%. In 2014, with the strong performance of the job market, the unemployment rate fell to 5.9% from 6.7% at the beginning of the year. U.S. employers added 200,000 new jobs to nonfarm payrolls per month on average, with a slight recovery in the labor-force participation rate. It can be inferred from weak wage growth that the U.S. job market remains unbalanced, which will lead to a further decline in the unemployment rate and a recovery in the labor-force participation rate. It is expected that the Fed will continue implementing policies to promote recovery of the job market for some time. Monetary and Fiscal Policies At a meeting of the Federal Open Market Committee (FOMC) held in December 2013, the Fed made a decision to taper the size of quantitative easing (QE). With the obvious recovery of the economy, QE is expected to come to an end completely by this October. From a series of speeches by Janet Yellen, Chair of the Federal Reserve, the Federal Reserve will leave the ongoing easing monetary policy unchanged after the end of QE, on the condition that the job market will see further improvement and inflation is suppressed. To support further recovery in the job market, the FED will maintain its balance sheet at $4.4 trillion and its target interest rate at % over a long period. It is unlikely to raise its target interest range for the federal funds rate until June In the fiscal year 2014, the federal budget deficit was about $506 billion, accounting for 2.9% of GDP and falling sharply from $1.09 trillion in fiscal year 2012 and $680 billion in fiscal year According to the forecast published by the Congressional Budget Office (CBO) in August 2014, the federal budget deficit of the United States for fiscal 2015 will further decline to $469 billion, and for fiscal will be steady at around $550 billion. The federal deficit will continue to rise until fiscal year 2019, as health, retirement and other benefit payments will be higher. In the absence of a long-term deficit control strategy, the medium-and long-term deficit problems of the United States have not been completely resolved. Accordingly, we believe that the U.S. economy will demonstrate a relatively strong resilience, with a stable growth of 2-2.5%. The U.S. job market is also likely to make some improvements. The FED will maintain easing monetary policy over a long period. The federal financial situation has significantly improved, with a bright growth prospect in the next few years. However, the medium-term deficit problem remains to be resolved. The Eurozone Less-than-Expected Growth with Stimuli Coming up Data from the European Central Bank (ECB) in September indicate that the Eurozone economic growth slowed down in Q2 compared with Q taking into account factors regarding seasonal factors and working days, etc.), and the downward trend continued in Q3 (as of August), resulting in downside risks to the entire economy. While the German economy shrank 0.2% in Q2, the unemployment rate and long-term interest rates continued to decline. Private and public consumption expenditure increased by 0.1% from the last quarter. Spanish GDP growth rose to 1.19% in Q2, but the unemployment rate remains high. The growth rate of the French economy fell to 0.11%, and the unemployment rate also increased. Italy is still negative in GDP growth, with the unemployment rate at around 12.5%. Among those debtor countries, Portugal GDP growth on a quarterly basis was 0.6% in Q2 2014, but the unemployment rate continued to decline. The Greek economic downturn has been suppressed, and the annualized GDP lowered to 0.27% in Q2 2014, with the unemployment rate data unknown. Growth below Expectation and Good Long-term Prospects Although the Eurozone maintained positive growth on the whole, the growth rate fell short of expectations. With the Ukrainian geopolitical crisis deepening, the economic growth has been overshadowed. The Eurozone economy faces downside risks within a short period. In this case, the ECB lowered its GDP growth forecast for this year and next, while raising the growth forecast for 2016.

5 Capital markets are optimistic about the long-term prospects. Long-term interest rates continued to decline in major countries, but Greece and Portugal, representatives of debtor country, experienced rise in interest rates in July and fall back in August. More Stimulus Policies Coming up and Considerable Uncertainty To expand credit, promote investment and stimulate the economy, the ECB made an announcement to cut its main benchmark refinancing rate from 0.15% to 0.05% in early September. It also announced that it would start to purchase asset-based securities (ABS), but the market reaction has been weak. In October, the ABS purchases program, which amounted to no more than 1 trillion, was announced and a covered-bond (CD) purchase program will also start in October at the earliest. The ABS purchase program will kick off in Q4. However, the first market reaction has been negative, as the total purchase size has not exceed 1 trillion. The ECB expects to stimulate the economy with longterm quantitative easing policies, but must face such issues such as weak market demand for credit stimulus and restrictions rooted in its own mechanism and core interests of core countries, with large uncertainty regarding policy implementation and its effects. Figure 1: Eurozone Inflation Rate Figure 2: Eurozone GDP Growth Source: ECB statistic Source: ECB statistic China Further Restructuring with Slight Economic Slowdown China's economy recovered at the end of Q1 and this trend continued in Q The growth rate is sustained at 7.4%, but the overall downside trend has not been reversed. Fixed assets investment remains depressive, and there is a downturn in the real estate market. Total retail sales growth increased slightly as the issue that the overall domestic demand is insufficient continued to appear. External demand has increased since April, and import and export growth rates have accelerated markedly. The export rate was 7.2% up on a YoY basis in Q2, and the import rate rose 5.5%. The retail sector is doing better than before and the surging of exports makes the overall economic growth stable. However, the Chinese economy is experiencing growing pains in the process of restructuring and increasing attention is being paid to the quality of growth. It is expected that GDP growth will continue to slow in the coming year. In Q3 2014, the economy has shifted its policy focus from ensuring growth to economic structural changes, leading to a decline in growth. China hit a new low in growth in both fixed asset investment and total retail sales. The real estate market has seen a sustained downturn. Fueled by more foreign demand, exports will continue being the main engines of Chinese economic growth in Q3. It is expected that the Q3 GDP growth will be 7.3%, lower than that of the last quarter. In the wake of the release of stimuli such as the relaxed credit limit policy in September, the real estate market will pick up in Q4. It is anticipated that 2014 full-year GDP growth will rebound to 7.4%. Since the primary goal for China's economic restructuring has remained unchanged, and the policies to ensure growth are weakening, the economy will maintain steady growth in the next year, with a slight downside trend. We expect China's GDP growth will gradually decline to 7.2% by the end of In summary, it is expected that Chinese GDP growth will be 7.3% in Q3 2014, slowing down from Q2. Fueled by stimuli in the real estate market, the growth will pick up slightly in Q4. It is estimated that the full-year GDP growth will be 7.4% with the overall downside trend unchanged. We expect the 2015 full-year GDP growth will drop to

6 Figure 3: Manufacturing PMI and Non-Manufacturing Business Activity Index Figure 4: yoy Sources of Capital in place for Fixed Assets Investment Since 2013 (%) Manufacturing PMI Non-Manufacturing PMI Figure 5: Accumulative Growth of Nation-Wide Fixed Assets Investment (excluding farmers) (%) Figure 6: Macroeconomic Leverage Growth (%) Quarterly Accumulative Growth of Social Financing Size - (Quarterly Accumulative Growth of Actual GDP + Quarterly Accumulative Growth of CPI) Retail Continued Growth and Changing Consumption Structure In August 2014, the total retail sales of social consumer goods amounted to RMB2.1tn, representing a YoY growth of 11.9% in nominal terms (an actual growth of 10.6% after deducting price factors). This is 0.3 percent lower than that in July. According to statistics, the figure in rural areas (12.8%) was higher than that in urban areas (11.8%). According to statistics by consumption pattern, the growth of retail sales of goods (12.3%) is higher than that of food and beverage (8.4%). From January to August, the total retail sales amount of social consumer goods retail is RMB16.6 trillion, up 12.1%. From the perspective of growth by sector, over 50% of sectors have outperformed this year, except food, automotive, construction and decoration materials. It is worth noting that Chinese consumers purchased a great deal of gold as the price of gold fell sharply compared to the same period last year. With a high comparison base, the growth of gold, silver and jewelry projects were negative. This situation has now been reversed. The growth of gold, silver and jewelry projects was up 7.3% this August. Though the growth of retail sales hit a new low from March to August, the actual growth is 0.1 percent higher than that of July after deducting price factor. The growth of retail sales is lower since January partly because this year s CPI is also lower than that of previous years. We expect the growth of retail sales to rebound in Q4, but will be lower than that of last year. First, based on historical experience, retail spending will seasonally rebound in the next few months. Second, the economy is under a substantial downside pressure, resulting in weak recovery. Third, dining and high-end consumption sectors are facing great growth pressure. According to the macro-forecasting model of CCWE, we expect the total retail sales of social consumer goods will rise to 11.8% in Q and 12.3% in the full year of 2014.

7 Figure 7: Growth of Total Retail Sales of Social Consumer Goods Figure 8: Growth of Total Retail Sales of Social Consumer Goods by Sector Growth of Total Retail Sales of Social Consumer Goods August January- August Real Estate Decline in Both Sales Volume and Prices with Investment Slowing down Fixed assets investment has been declining from the beginning of this year because of the downturn in the housing market. From early 2014 to the end of August, the growth of completed investment in fixed assets accumulated declined from 17.9% to 16.5%, and the figure in real estate fell from 19.3% to 13.2%. CCWE estimated that, if the investment growth in real estate is as high as the growth of investment in fixed assets this year, the actual investment gap in real estate would be billion RMB, which will contribute 0.5% of GDP growth. This fact indicates that the downturn in the real estate market is the main reason for the slowdown in investment growth. The sluggish real estate market is reflected in dropping volume and prices of housing transactions. Since 2013, with housing prices falling, the transaction volume of housing has been declining, and the peak period of September and October in previous years has hardly been in evidence. The housing price index in September indicated that the average price of new residential housing of 100 cities throughout China dropped by 0.92% from the previous month, the second consecutive month of decline. From the beginning of this year, housing transaction volume has seen negative growth. By the end of this August, the accumulated sales area of housing is only 650 million square meters, down 8.3% from the previous year. Due to the downturn in the real estate market, the growth of new projects across the country slowed down in terms of quantity and area. The new construction area growth has been falling significantly since Although the investment growth continued declining in the first three quarters, we still believe that the full-year investment will be sound based on the following three reasons: First, the real estate market will show signs of a turnaround. Pursuant to the new policy released by the People's Bank of China, the preferential interest rate for first-time home buyers will be at a 30 % discount, and the definition of a first home loan will be expanded, providing a stimulus to the real estate market. Moreover, the gradual phase-out of home buying restrictions in second-tier cities will also stimulate the housing market to some extent. Second, the social financing size dropped from the record low level in July to the average level. It is anticipated that the monetary policy will be fine-tuned on a sound basis by the end of this year, and the financing situation will be better positioned to help the liquidity for developers and other investors. Third, the significant economic downward trend will indirectly accelerate the approval of infrastructure investment projects, and the approval of more projects will offset the decline trend of fixed assets investment and promote stable economic growth from the end of this year to next year. In summary, we hold a cautious expectation for the growth of fixed assets investment. Based on the CCWE forecast model, it is estimated that the growth of completed investment this Q3 will further drop to 16.3%, while it will rebound in Q4. The full-year growth of fixed assets investment will be 16.8%.

8 Figure 9: Downturn of the Real Estate Market with Transaction Volume and Price Dropping Figure 10: Improved Financing Condition Average Price of Housing (Right Axis, Yuan/m2) YoY Growth of Sales Area (Accumulative) (%) Social Financing Scale (RMB100mn) M2 Steady Monetary Policy and Slightly Loosened Credit Policy In August 2014, the balance of broad money (M2) was a decrease of 1.2%, and 1.5% from the end of the previous month and from last year, respectively. Affected by weak investment demand, the social financing scale and total size of loans rose from a low level in Q3. In July, they both hit a record low, causing some concerns in the market. In August, credit began to return to a normal level. The PBOC injected500 billion RMB through their Standard Lending Facility in September, and cut the interest rate on 14d repurchase agreements by 20bp to stabilize market confidence. The rapid growth of outstanding loans and M2 in H did not appear in Q3. In July, monetary and credit data were much lower than expected. The growth of M2 fell from 14.7% in June to 13.5%, down 1.2%. New loans were RMB385.2bn in July, compared with 1.08 trillion in June. Combining the financial data of the two months, the total credit loans in RMB did not see a surge or substantial reduction and the monetary policy remained robust. In September, the PBOC implemented 500 billion RMB of SLF to deal with possible tight liquidity. According to our estimates, the amount of money released by this tool is seen as a new kind of stimulus that is tantamount to lowering all banks' RRR (required reserve ratio) by 0.5 percent. The SLF is a short-term - liquidity management tool, with a three-month term. In the medium-and long-term, the impact of this is less than that of cutting reserve requirement ratio by 0.5%. While maintaining the flexibility, this policy instrument helps the real economy reduce the cost of financing, and better stabilizes market expectations. According to our model of monetary growth, we expect the M2 growth will be 13.0% in Q3 2014, 13.2% for the full-year 2014 and 13.4% for the full-year Figure 11: Stock of Broad Money M2 in 2014 Figure 12: Growth of Broad Money M2 in 2014 Source: The People's Bank of China Source: The People's Bank of China

9 CPI Stabilizing Commodity Prices at Low Level, with Slim Chances to Rise The National Consumer Price index in August 2014 rose 2.0% on the YoY basis, and 0.2% on the MoM basis. Food prices rose 0.7% and non-food prices decreased 0.1%. Consumer prices rose 0.3% and service prices were flat. From January-August, the national consumer price index rose 2.2% on average over last year According to the average price data of main food products in 50 cities released by the State Statistical Bureau for the first 20 days in September, and taking into account the downside trend of the economy, it is expected that the CPI will rise 1.8% YoY and 0.8% MoM this September. Because of low CPI Growth YoY and MoM from January to August and actual conditions of the new phase of economic restructuring, it is anticipated that CPI will rise 1.8% and remain steady at a low level in Q3, and the full-year CPI will rise 2.0%, with low inflation regulation pressure. Taking into account the potential changes to China s monetary policy in the near future, the trend of CPI growth YoY and MoM over the past few years and the foreign demand condition of the next year, it is anticipated based on the model of CCWE that CPI will rise 2.3% in Figure 13: CPI Growth and Forecast Figure 14: CPI Growth and Forecast % 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% % % % 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% % CPI YoY (including forecast) CPI MoM (including forecast) CPI Growth YoY 2015 CPI Growth MoM 2015, CCWE Forecast, CCWE Imports & Exports Overall Recovery of External Demand Implying Better Exporting The growth of imports and exports rose 2.3% over the first eight months in Exports rose 3.8% and import rose 0.6%. The cumulative trade surplus exceeded $200 billion for the same period, a YoY increase of 30%. The exports have seen a steady recovery since February and saw positive growth in April. In Q3 the export situation continued to show improvement. The YoY growth of total exports increased to 14.5% and 9.4% in July and August, respectively. Compared with a bitter outlook for exports, the outlook for imports in Q3. is still not very optimistic The YoY growth of imports is highly volatile in 2014, and turned negative again after June's positive growth With gradual economic recovery in the United States and Europe, exports there grew rapidly. The YoY growth of exports in August 2014was 7.38% in the US and 9.06% in Europe. Fueled by stable foreign trade policy, a low base and other factors, it is expected that the exports in the United States and Europe will make further improvements. In 2014, exports to Japan will continue declining due to a weak domestic economy and the tax increase policy there. The growth of 2.1% in August was a new low for this year. The United States, Japan and South Korea have seen dramatic falls in imports. Import prices of most of commodities, such as iron ore, coal, refined oil and soybean fell. In summary, imports and exports fluctuated greatly fluctuation in early 2014, but gradually picked up. Exports grew because of recovery in foreign demand, but imports remained weak. We also need to be aware that the better performance of exports is also impacted by low base. Based on those factors affecting the economic situation at home and abroad, we believe that imports and exports, especially the latter, will continue to take a favorable turn in Q According to our forecast model, it is expected that exports and import will increase 7.3% and 1.7% respectively in Q The cumulative trade surplus will be USD bn. The full-year growth of exports and imports in

10 Figure 15: Cumulative YoY Growth of Imports and Exports Figure 16: YoY Growth of Imports and Exports by Country Cumulative YoY Growth of Imports s Cumulative YoY Growth of Exports Cumulative YoY Growth of Imports and Exports YoY Growth of Japan (%) YoY Growth of the U.S. (%) YoY Growth of EU (%) YoY Growth of GDP (%) China's Economic Outlook 2015 In 2015, China's economy will continue to face a structural change pattern with old growth momentum weakening rapidly and replaced by new growth engines. On the one hand, as the effective housing demand is basically stable and the supply of new housing continues to rise, it is difficult for the real estate sector to reverse the short-term downside trend, which will down the growth rate of China's economy. On the other hand, consumption spending will make a further key contribution to the economic growth. Fueled by the economic recovery of countries such as the United States, the rise in external demand will also partially alleviate the economic downward pressure marks the final year of the "12th Five-Year Plan". By reviewing indicators of China's economy over the past four years, it is not difficult to see that the economic growth goal of 7% set by the plan will be achieved smoothly. This fact provides some flexibility to the economic efforts for 2015, allowing China to continue deepening economic restructuring, changing growth momentum, fully releasing the effects of reform and exploiting new growth engines. The Chinese government should seize the opportunity to make use of their advantages in public investment, to promote public consumer infrastructure investment and the greening and upgrading of existing capacity. According to our macroeconomic model, it is predicted that China's economic growth will be 7.3% in 2015.

11 Experts Views David Daokui Li: Develop new economic growth engines in a new round of economic restructuring Since China s economic growth rate recently declined, CCWE also adjusted its forecast on this year s growth from 7.6% to 7.4%. One of the important reasons is that the real estate sector entered a stage of depth adjustment. The nationwide drop in housing transaction volume and prices resulted in a slowdown in property investment and development, which has a direct impact on the overall macroeconomic trend. According to our analysis, if the growth of real estate is parallel to that of fixed assets investment rather than 3.3% lower, China's macroeconomic growth will rise approximately. 0.3%, which would provide a difference between 7.7% and 7.4%. Meanwhile, starting from the middle of last year, there has been a direct correlation between the economic slowdown and promoting reforms. As proposed by the Third Plenary Session of the 18th CPC National Congress, it is extremely crucial to change government behavior, which is the focus advocated/endorsed in the first phase of the overall deepening of reform. The adjustments of government behaviors, such as rectifying work style and anti-corruption, are necessary for long-term growth, but will be maintained in the short term. It also highlights the commitment and resolution of policy-makers to this round of reform. Due to the depth adjustment in the real estate and industrial sectors of short-term reforms, a new growth engine must be found in the Chinese economy to replace real estate. What is this growth engine? In my opinion, it is infrastructure construction. China's infrastructure level lags behind that of developed countries. Compared with Western Europe, the U.S., Japan, and South Korea s infrastructure stock per capita are 38%, 23%, and 18% respectively. In particular it should be noted that the national savings rate is close to 50%, the highest in the world. These two factors clearly demonstrate that infrastructure should be the new growth engine for China's economy. How does China build this new growth engine? Reform is the key. Investment and financing channels must be reformed to create channels with long-term low interest rates for infrastructure projects. In addition, repayment mechanisms for infrastructure projects must be established by all the levels of government, including a public-private partnership mechanism and a financial budget repayment mechanism In short, the Chinese economy is likely to experience difficult times in the next one or two years because of the depth adjustment of the real estate industry and a further decline in the growth rate. In order to meet this challenge, we must create a new growth engine. Infrastructure is the choice. Yuan Gangming: Eliminate the after- effects of previous stimulation measures. China's economy continues to face more downward pressure, with pressure on exceeding the bottom line. The National Bureau of Statistics announced that GDP growth dropped to 7.37% in Q2, and the YoY growth of industrial added value fell to 6.9% in August. Together with tighter monetary contraction and the downturn in the real estate market, it is expected the GDP growth will fall to 7.3% in Q3. It is difficult to reverse the downward pressure on the economy because those stimuli were much too intense, leaving the side effects hard to eliminate. First, the effect of the four-trillion Yuan of stimulus policy leading to the investment of tens of trillions of Yuan is diminishing, resulting in too high a ratio between investment and overcapacity issues. The investment of numerous loans into long-term projects did not bring the desired economic growth. Loan-output ratio, the government debt ratio and debt ratio of the entire society significantly increased. Bad loans and financial risks increased. Second, monetary and loan policies that were too tight were released after policies that were too loose. Large projects and enterprises benefited from too-loose monetary policy while SMEs were victims of too-tight monetary policy. The configuration of money stock is unbalanced. Excessive monetary deflation and high-risk financing in the market formed a vicious cycle. Enterprises still face the issue of how to obtain funds at a reasonably low interest rate. Third, the real estate sector is shifting from fever season with surging prices to cold season with a drop in transaction volume and price. Those sectors whose growth depended for years on the bubble and high fever of real estate sector have seen a downturn, and the local land-based finance is unsustainable. The real estate market is facing oversupply rather than short supply. Due to too-high housing prices, buyers are overstretched. There are too many unsellable or vacant houses. Developers have surplus houses. With the expectation of lower housing prices, speculation activities in this field will be unprofitable. The substantial decline in housing prices will present a major threat to developers, speculators, local governments, banks, financial markets and economic growth. Due to the serious side effects of the previous stimulus, it is a bad idea to do nothing at all. Lessons should be learned and measures should be taken to eradicate those side effects. No further stimuli for investment growth should be released to solve the problem of a too-high ratio of investment and unsustainable rapid growth. Going with the flow, patience should be the attitude toward the investment slowdown. Projects too large or long should be divided into small pieces to recover the funds step-by-step. We should make our investment structure and industrial structure less complex, and investment liabilities deleveraged. As for the imbalance issue of currency configuration, there should be no policy bias where large projects are preferred over small ones. SMEs should benefit from our monetary-easing policy to improve and re-launch, and we should prevent the funds for SMEs from again flowing to large enterprises and creating imbalance. As for the downturn in the real estate market, no further incentives should be released for speculative buyers. Instead, mitigation measures should be taken to ensure that housing price drop smoothly. In addition, more favorable policies for home buyers should be released, to promote healthy adjustment of the real estate sector and support the steady development of the overall economy.

12 Disclaimer This report is not directed at or intended for distribution, publication, access or use by any citizen or resident of any region, country or other jurisdiction that may cause CCWE to violate local laws or regulations or be subject to those laws or regulations of such region, country or jurisdiction. Unless specified otherwise, the copyright of all materials in this report belongs to CCWE. The alteration, transmission, duplication, or dissemination of the report s contents without the prior written authorization of CCWE, is strictly prohibited. The sources of the information and opinions contained in this report are believed by CCWE to be reliable, but CCWE does not guarantee their accuracy or comprehensiveness nor assumes any liability for any losses caused by any dependence on such materials, unless such losses are caused by specific laws or regulations. The dependence on this report should not replace the exercise of independent judgment. CCWE has the right to issue such a report as is inconsistent with this report in terms of the information and conclusions contained herein. This report and similar reports reflect assumptions, views and analytical methods of scholars or researchers. The opinions contained in this report do not represent the views of CCWE. CCWE. All rights reserved. Address: Room128, Shunde Building, School of Economics and Management, Tsinghua University, Beijing, China Tel.: (010) Fax: (010) Website: