The Institute of Market Economy of the State Council's Development Research Centre published its third quarter report on China's market situation on Wednesday. It analyzed the market situation in the third quarter and predicted the trend for the fourth quarter. The following two stories are part of the report.

The impact of China's macro-control measures cooling the economy have been further felt in the third quarter of this year, with growth rates for both fixed asset investment and credit continuing to decline.

Fixed asset investment grew a year-on-year 27.7 per cent during the first three quarters compared with the same period a year ago.

The growth rate dropped 15.3 percentage points and 0.9 of a percentage point respectively compared with the first quarter and the first half of the year.

Investment growth in steel and cement, which have been targetted by the government's macro-control measures, declined 65.5 percentage points and 43.4 percentage points respectively compared with the first quarter.

The decline in fixed asset investment, especially in key industries such as steel and cement where there has been overinvestment, suggests the government's macro-control measures are working.

However, fixed asset investment still grew at a higher rate.

At the end of September, the outstanding amount of renminbi loans by China's financial institutions stood at 17.3 trillion yuan (US$2.1 trillion), an increase of 13.6 per cent compared with the same period a year ago.

The growth rate was 9.9 percentage points lower than the same period a year ago and 7.5 percentage points lower than the end of last year.

The outstanding amount of new loans was 1.79 trillion yuan (US$215.6 billion) during the first three quarters, a decline of 669.7 billion yuan (US$80.7 billion) from the same period last year.

The country's broad money supply or the M2 grew a year-on-year 13.9 per cent at the end of September compared with a year ago. The growth rate was 5.7 percentage points less than at the end of last year.

Present money supply is basically at the proper level.

During the first three quarters, the country's consumer price index (CPI), the policymakers' key inflation gauge, rose a year-on-year 4.1 per cent. The overall price level is still in a manageable area.

The government avoided ups and downs in economic development, while restricting the trend of overheating in some industries.

Generally, the economy continued to develop in a stable way. Major economic indicators such as industrial output, companies' profits and grain production continued for the better.

However, the government should give key attention to prominent problems and contradictions existing in economic development in the third quarter.

The growth in ex-factory prices picked up during the period.

Ex-factory prices, which are measured at the factory doors, rose 6.4 per cent, 6.8 per cent and 7.9 per cent respectively in July, August and September from a year ago.

Purchasing prices for raw materials, fuel and energy were up 11.9 per cent, 12.9 per cent and 13.7 per cent respectively in the three months.

The pick-up in ex-factory prices was partly because of higher prices on the international market. Increasing costs due to price rises in the means of production also contributed.

Meanwhile, the strong market demand was an important reason.

The price rise in the means of production was mainly a result of strong demand from the manufacturing industry.

During the third quarter, new price factors such as food and general household products played an increasing role in propelling consumer prices.

These new factors contributed 0.8 of a percentage point, 1.6 percentage points and 2.6 percentage points respectively to the CPI in July, August and September.

The price rise for these products, which have close relations to people's daily lives, have had an impact on their consumption expectations.

The impact could be larger for low-income families.

China's property prices rose rapidly during the first three quarters.

Average property prices rose a year-on-year 13.3 per cent during the period, of which residential housing prices rose 11.5 per cent.

Rising property prices aroused heated discussions among officials and economists about whether the real estate industry had bubbles.

There were many reasons for the fast rise in property prices. They included the restricted supply of land, tight credit policy, price rises for building materials and structural problems in supply.

Huge demand following China's termination of the welfare housing distribution system also had an impact on housing prices.

However, overheating does exist in some areas of the real estate industry.

Speculating buyers were active in those areas.

During the first nine months, cargo transportation by railway, highway and water grew rapidly by 9 per cent, 11.3 per cent and 19.2 per cent respectively.

However, transportation capacity still lags behind demand.

Insufficient capacity on the railways was most prominent. They could only meet 35 per cent of the demand.

Increasing transportation demand for coal and oil products were affected by insufficient capacity.

The arrival of winter will make the situation worse, because the demand for coal will increase.

While demand increased rapidly, investment in railway transportation grew only 2.3 per cent during the first nine months.

The strain on transportation capacity strain will not be eased in the short term.

Figures in the third quarter suggest the growth rate in renminbi loans, especially short-term loans, declined by a big margin.

Some commercial banks were reluctant or refused to issue new loans.

The reduction in credit and the lack of floating capital brought big difficulties for many companies, especially small and medium-sized ones.

It is also expected to have a big impact on the companies' future development.

It could also bring losses to those companies, and even make them bankrupt.

Tight credit also stimulated loan activities outside the banking system, which has increased financial risks.

In the fourth quarter, the government should focus most attention on solving the problems in the economy, while keeping a basically stable macro-control policy.

Although the macro-control measures worked during the first three quarters, the government mainly took administrative measures.

If the government relaxes the measures, the growth in fixed asset investment and credit is likely to rebound.

The government should continue to carry out macro-control measures to prevent unstable and unhealthy factors from rebounding.

Meanwhile, it should avoid measures aimed at cutting one but that cut all.

The government should also take different measures to solve different prominent problems to maintain stable economic development.

For example, rises in egg and meat prices were mainly a result of earlier grain price rises.

The government should take measures to ensure an increase in grain production and stable supply.

For small and medium-sized companies which have good market prospects, the government should try to solve problems of insufficient loans.

The government should pay special attention to the impact of international prices on the domestic market.

It should beef up supervision on fluctuations of international oil prices.

The fourth quarter is a crucial period for the country's grain production.

Although the country can achieve the year's goal for grain production, the government should try to avoid ups and downs in grain prices.

A drop in grain prices would hurt farmers' enthusiasm and have an impact on next year's grain production.

The key to China's macro policy for the future is to let the market mechanism play its role.

The government could use more economic and legal measures to improve the market mechanism and system.

It should further reform the present's financing system to allow companies to obtain funds through various channels.

Source: China Daily