By Fan Jianping, director, Economic Forecasting Center, State Information Center

(Caijing Magazine) Recent economic indicators show that only M1 and government fiscal expenditures, which are policy-controlled, have been expanding in China.

Other indicators decided by the market -- including housing starts, port transportation volume, steel production and enterprise pre-production funding -- have so far shown no signs of recovery. Some indicators have continued to fall by small margins, while for others the rates of decline are accelerating.
 
All of the positive economic signs can be connected to the government's policy stimulus package; the market has yet to perk up. But until enterprises show more enthusiasm toward investment, government spending alone will not be able to keep the economy trending upward.

Market sectors have reported fluctuating results. Unstable global economic trends have had an important impact. Steel output and prices increased early this year but fell recently. It was the same story for electricity output.

A U-curve for economic recovery means a period of time will pass before the economy perks up after hitting bottom. When an economy is at the bottom of a U-curve, production capacities are reduced. Excess and outdated production capacities are scaled back until the market rebalances.

Much of China's excess production capacity is not outdated. In recent years, many high-tech factories producing value-added products have been built. Some enterprises can boast of the nation's most technologically advanced facilities.

Most high-value enterprises are export-oriented and target developed countries. However, demand in developed countries has fallen considerably in the economic downturn. Therefore, some of this high-value production capacity, which emerged through industrial upgrading, faces the danger of being eliminated.

A study of the correlation between money supply and industrial production has shown that, 10 months after money supply clearly increases for three consecutive months, industrial output enters a phase of stability.

China's M2 money supply and lending have accelerated since November. This increase had spanned three consecutive months as of January. Therefore, industrial production may not see a stable upward trend until the fourth quarter 2009.

The government should be prepared to offer an additional stimulus package, but hold back for some time. A more urgent task for the first half of 2009 is to implement policies that have already been issued.

If the effects are not as satisfactory as expected by June, the current stimulus package should be reviewed and revised. Enterprises that lack incentive to invest should be the focus of next stimulus package.

This article is an edited version of the author's speech Looking for the New Engine of China's Economic Development, delivered at a recent Caijing forum.