We should attach much importance to addressing acute issues in current economy, in particular, place prevention of fast growth to overheated economy as the agenda of macro-control.

On the other hand, we should also note that these issues are arising in the course of progress. Some are being relieved in varying degrees, and some can only be turned around with greater effort and after a long time. While the mode of economic growth and reforms advance, we are enabled with better material, institutional and capacity to address these issues. Then, China's economic potential will be further released, and the public will sure to benefit more from economic growth.

Since this year, China's economy continues to develop fast and stably with good revenue. The achievements also lie in fast improvement of social productive forces and people's income, urban and rural alike, increasingly active consumption, and more coordinated economic growth. Besides, China has made progress in reform and opening up as well as energy-saving and emission reduction. On the other hand, some acute issues are noteworthy: trade surplus continues to expand, monetary and credit grow too fast, investment growth is still high; price is rising and energy-saving and emission reduction are challenged. To deal with such issues, we should recognize them correctly, analyze comprehensively and make calm approaches, seeking benefits and avoiding harms.

An objective analysis of the relationship between rapid investment growth, credit growth and trade surplus

There three are intrinsically linked. In general, foreign trade surplus results from excessive exports over imports. Net foreign exchange resulting from trade surplus will cause the yuan to increase through exchange settlement, which leads to expansion of credit in banks. Clearly, the rapid growth in foreign trade surplus is the root of money and credit over-growth in recent years; the increase in money supply and credit could lead to faster growth in investment. But recent years’ macro-control indicates their relationship is not so simple and direct and their mutual influence is conditional.

How much yuan supplied by exchange settlement turns credit funds depends on the community's demand and commercial banks’ ability in using deposits. People's Bank of China can largely control the commercial banks from transiting deposits to credit funds by supervising the volume and speed, and therefore control growth of money supply and credit, through monetary policy such as adjusting interest rates, deposit reserve ratio and issuing central bank’s bills to make it public. So, despite the large surplus in foreign trade and increase of foreign exchange reserves, money and credit supply is still controlled within expectation. It is conditional to transform money and credit supply into investment demand. When seeking projects, investors must consider cost of loan acquisition and recovery cycle as well as competition, demand and potential risks. And because the government is strict in supervising land approval and market access, investors should also consider their capacity in accessing to land and market. Therefore, with modest increase in credit funds and coordinated policies, investment growth can be controlled within reasonable limits.

Seen from the first 6 months, high investment growth is stabilized. Total investment in fixed assets grows by 25.9%, down 3.9 percentage points. It is a result of macro-control and greater restraints over competition. In June, urban fixed-asset investment growth increased. We should continue to strictly control fixed-asset investment and further market-oriented economic reforms to prevent investment growth rebound.

At end of June, broad money supply (M2) stood at 37.78 trillion yuan, an increase of 17.06%, and 1.37 percentage points lower over last year; RMB loan balance in financial institutions was 25.08 trillion yuan, up 16.48% and 1.24 percentage points higher over last year. Though money and credit supply grows somewhat fast, the overall financial system is going on smoothly. A moderately tight monetary policy should be adopted. Drawn from experiences, the effect of monetary measures can only be clearly seen some time later.

Increasing trade surplus and foreign exchange reserves indicates that China has grown out of long-term shortage of foreign exchange, marking China's growing comprehensive national strength and international competitiveness and economic development. Of course, along with the progress are some new problems, such as pressure on money base, monetary policy, intensified pressure on the resources and environmental and international trade friction.

It has to be pointed out, China’s comparative advantages such as low labor costs are still evident, as the international division of labor expands, the lower links in the value chain such as manufacturing keeps shifting to China. This is bound to lead to high proportion of China's processing trade and a great surplus. The trade surplus enlargement since last year is also related to shrift of surplus production capacity of the heavy chemical industry to the international market. It fuels expansion of the "two highs and one resource" (high energy consumption, high pollution discharge and resources processing), worsening the conflicts between the resources and environment. Trade surplus reflects that funds, land, resources and other important production factors are under-priced for long, that, the cost of environment is neglected and that RMB exchange rate lacks of flexibility in adjusting foreign exchange supply and demand. We should be clear that these problems can only be solved if China adjusts pattern of labor division and upgrades its external economic structure. And we have to adopt short-term macro-control, and improve middle and long-term policy guidance, to accelerate institutional upgrading to promote structural improvement.

Consumer prices rise structurally, and general price spikes will not occur.  

In this year, the consumer price index (CPI) has increased, causing widespread concern. Judging from the current total social supply and demand, the condition for sustained increase in commodity prices does not exist. Compared with active investment and consumption, fast export growth and strong domestic and foreign demand, the supply potential is even greater especially that of non-agricultural products. As to elements of the productive force, China is in advantage in terms of labor, funds and technology. From the institutional point of view, corporations’ capacity in responding to market demand is improving, which ensures stable supply. In recent years, supply of heavy chemical industry raw material turns from tension into excess capacity, the tense of coal, electricity, oil and transportation is basically eliminated, and rice of production means is falling. In June, ex-factory price indices rose by 2.5%, prices of raw materials, fuel and power purchase rose by 3.4%, 1 and 3.2 percentage points lower respectively than the same period last year.

Consumer prices rise is mainly driven by raising food price. In the first 6 months, food prices increased by 7.6%, CPI growing by 2.5%; excluding food prices rise, CPI rose just 0.7%. The food price hikes takes place when China's agricultural production develops soundly, which is a natural result of interests readjustment between workers and peasants and between urban and rural areas. From 2004 to 2006, China's grain has a good harvest for three consecutive years. This year's summer grain output also rises by 1.3%. We have a solid food supply foundation. There are three causes for short-term food prices spikes: First, world grain production declines in 2006, besides, the United States and other major grain-producers use great amount of corn for producing biomass energy, causing price rising of the world grain market; second, the food sector did not respond quickly enough to domestic grain market; third, China’s enhanced capacity in producing ethanol with corns; fourth, due to the Spring Festival and the seasonal factors.

In the long term, rising price of agricultural products and food is a natural result of economic development. When industrialization and urbanization proceed and urban income increases, all countries experience gradual price rising of agricultural products and food. It is respond of the market to growing scarcity of arable land and increasing cost agricultural labor costs. It is also a normal response to pull supply of agricultural products by the price lever and effective channel to increase the income of farmers as part of the way in which China's agriculture, rural areas and farmers share the success of economic development. Since income also grows fast, the rising price would not have much influence over lives of the vast majority of urban families. As to some boarding students from poor families and low-income urban families and other venerable groups, the government is required to give them necessary subsidies and increase in timely and properly. Now, China’s grain production capacity is stable, I believe, under the market’s regulation, meat, eggs and other non-staple food supply have great growth potential, therefore fast rising of food price will not sustain in the future.

Generally speaking, China's rising price is structural. It is necessary to actively take measures to ease the pressure caused by meat, eggs and other non-staple food price increases. Meanwhile, we need to realize China's current inflation rate is still very low. Because, if evaluating by core consumer price index as commonly used in the international community (excluding energy and food prices), it is only 0.9% over January to June this year.

Energy-saving and emission-reduction asks for be long-term and unremitting efforts.

With rapid economic development, over-exploration and destroy of resources and environment burdens further growth. Over the first 6 months, growth of electricity consumption by the heavy industry and the whole society tops over the same period last year. Some water pollutions such as Taihu contamination are even threatening social stability. Resources are becoming a burden for economic growth. There are several explications: First, the outdated economic growth mode is slow in transformation, which ignores the cost of resources and environment and features by "three highs and one low" (high factor input, high consumption of resources, high pollution discharge and low technological content). Second, key reforms are not in place. The government’s functions has not been radically changed, the institution for performance appraisal, investment, finance and land management remains to be improved. In addition, prices of resources do not reflect scarcity of resources, cost on the environment and the relationship between supply and demand. All the problems above are obstacle to scientific resources utilization. Third, it shows the limitation of China’s current stage of development. In current and the future 10 years, China is in the acceleration of industrialization and urbanization. During such period, industries particularly the heavy chemical industry develop rapidly, people's lives are constantly improving, the consumption mix is proactively upgrading with focus on improving housing, and transportation.  As a result, on one hand people ask for better lives and environment, on the other, they need more resources and produce more wastes. The imbalance worsens the contradictions between economic growth and resources and environment.

Guided by the scientific outlook of development and the "11th Five-Year Plan", the central government of China has raised a goal and ordered the local governments to vigorously implement energy-saving and emission-reduction. If we implement the central government’s resolution, work hard and persistently, I am confident to say energy-saving and emission-reduction will certainly make substantial progress.