I. Industry and transportation in 2005

In 2005, the Central Committee of the Communist Party of China (CCCPC) and the State Council made comprehensive, appropriate policies and effective regulatory ratifications for the final year of the 10th Five-Year Plan. The national economy continued its momentum of robust growth as a result of adopting the Scientific Concept of Development established and implemented in each region and sector along with the rigorous implementation of macro-control policy measures. Industrial growth and growth in the transportation economy were stable and rapid, exhibiting the following five characteristics:

First, the quality of economic development was improved in a stable and gradual way. a) Stable and rapid production growth: the value added of the above-statistics-threshold industries was expected to grow by around 16.4% on a yearly basis; and the rate of growth reduced by only 0.3 percentage points compared with the previous year; the monthly production growth rate fluctuated between 16% and 16.8% since April, achieving a consistent and high rate of growth. b) High-speed growth of exports: As expected, the delivered export values of the above-statistic-threshold industrial enterprises would increase by roughly 26%, slowing down by about six percentage points over the previous year. c) Economic efficiency of industrial enterprises: The profitability of industrial enterprises started to grow at a stable rate in 2005 after maintaining a growth rate of 30%-40% for three consecutive years; and the annual profits of the industrial enterprises were expected to reach 1.38 trillion yuan and the total tax value would exceed one trillion for the first time, marking a growth of 20% for both profits and tax value. The contribution rate of total assets among industrial enterprises and the turnover of current assets maintained growth to various extents.

Second, the shortage of coal, electric power, oil and transportation was eased, compared to the previous year because of an all-around emphasis on their supply, preemptive plans, stronger coordination, curbed expansion of energy-consuming industries and toughened demand-side management. Since April, the coal stock of the whole society, major ports and key coal users had significantly increased; and the coal stock to be directly supplied to power plants reached 24.83 million tons by the end of 2005 and remained at a stable level. The restrictions on electricity use significantly relaxed while the supply shortage of electricity eased by about ten million kilowatts during peak hours in the summer. The shortage of finished oil products in Guangdong and other provinces also was eased. The transportation of key provisions was guaranteed. The state railway transported 2.31 billion tons of goods, an increase of 6.6% over the previous year, of which 1.07 billion tons of coals were transported, marking a growth of 8%.

Third, structural adjustments took effect at an increased rate. Production lines of calcium carbide, coke, and ferroalloy were closed, as were small-sized cement production lines, in accordance with laws; and the process of using self-baking slots to produce electrolytic aluminum was basically superseded. The new dry-method cement production accounted for 40% of the total cement production capacity, growing by 7.5 percentage points over the previous year. Steel and strip products accounted for close to 40% of the total steel production, growing by more than five percentage points over the previous year. Sedans with engine displacements of one liter or less accounted for close to 10% of the total sedan production, increasing by about five percentage points. There was an increase in production of numerically controlled machine tools, power generators of more than 300,000 kilowatts, digital apparatus and other technology-intensive products, as well as an increase in exports of large and self-contained electromechanical equipment and new-and high-tech products.

Fourth, investment structure continued to be optimized. Policies implemented for stronger and improved macro-control helped to curb the rallying of investment in steel/iron, non-ferrous metal, building material and other industries and maintain stable markets. In the first 11 months, the investment in ferrous metal smelting and rolling processing demonstrated a 21.1% annual growth rate, decreasing by 12.8 percentage points over the previous year. The investment in the cement manufacturing industry dropped by 7.1% for the year. However, the investment in coal mining, oil and gas mining, and railway construction in the first 11 months, where more investment was needed, grew by 75.5%, 27.3% and 38.3%, respectively.
Fifth, the growth rate of industrial product prices slowed down. The factory prices of industrial products and the prices of production goods in circulation all went "first high and then low". In 2005, the price growth rate of production goods in circulation was 2.9%, dropping by 10.7 percentage points on a year-on-year basis. Since October 2005, the monthly price level had maintained a downward trend. It was estimated that the factory prices of industrial products grew by around 5% in 2005, with the growth rate decreasing by one percentage point.

II. Industry and transportation in 2006

In 2006, China will have an overall international and domestic environment that favors the country's stable economic development. The global economy will continue its growth and the external demand will as before play a strong role in China's economic development. The fast-paced process of upgrading the structure of domestic consumption, industrialization and urbanization will maintain a strong internal drive for economic growth. The year of 2006 is the start of the 11th Five-Year Plan and the strategic measures deployed by the State Council will be fully launched, which will serve as a stimulus and guide for overall development efforts. The Chinese economy has maintained an annual growth rate of around 10% for three consecutive years, which lays down a sound foundation for further stable and rapid economic growth in 2006. However, many difficulties and challenges still exist in the industrial and transportation sectors: the supply and demand issues of coal, electricity, oil and transportation remain to be completely solved; and a few industries suffer increasingly serious surplus problems and uncertainties increase in economic development.

(I) Coal, electricity, oil and transportation issues remain to be completely solved

Generally, as macro-control continues, enterprises with a higher rate of energy consumption will be closed if they are not in line with national industrial policies. The energy and transportation industries will boost their production and supply, which will lessen the shortage of coal, electricity, oil and transportation. However, shortages will continue to affect some regions, products and periods in the business cycle. Though the overall supply and demand of coal will be balanced, shortage and oversupply might occur simultaneously in different areas. Though the shortage of electricity tends to ease, electricity supplies will continue to be tight to varying degree among China's many regions, for example, North, East, Central and South China, with seasonal and cyclical fluctuation. In some areas where a high proportion of electricity is generated by hydroelectric facilities, electricity supply might deteriorate when water is in short supply during winter and spring. Demand for natural gas is expected to grow rapidly, making the overall shortage of this resource more significant. It will remain difficult to ensure the supply of finished oil products. Unbalanced transportation capacity across different regions will be more of a challenge. Transportation shortages will ease relatively in Central, South and North China; but railway transportation will continue to suffer shortages of availability in West, Northeast and Southwest China.

(II) Overproduction in some industries is an increasingly outstanding problem

Though macro-control measures have significant results, oversupply in some industries has worsened as new production projects begin to have negative effects. Currently, overproduction remains a serious challenge in steel/iron, electrolytic aluminum, ferroalloy, coke, calcium carbide, automobiles, and copper smelting industries, with potential overproduction in cement, electricity, coal, and textile industries. Serious oversupply has forced prices to fall and in some cases drop below costs. Enterprise profitability decreases as more enterprises are losing money. In the steel/iron industry, increasing overproduction and oversupply resulted in price markdowns for steel/iron since the second quarter of 2005. In the end of 2005, the comprehensive index of domestic steel/iron market prices dropped by 31.03 points, compared to the beginning of the year, of which the prices of steel products for construction decreased by 22%, and the prices of steel strips decreased by 28%-43%, both from peak levels in 2005. The monthly profits of the ferrous metal smelting and rolling processing industries had started to drop significantly since August. For the first 11 months, accumulative profits grew only by 3.9% on an annual basis, with the growth rate dropping by 62.4 percentage points compared with the previous year. In the electrolytic aluminum industry, the current production capacity was as high as 10.30 million tons with a 2.60 million ton of production capacity remaining idle. Because the prices of aluminum oxide remained high and those of electrolytic aluminum continued to drop, production operations were threatened. In the first 11 months of 2005, the profits of 86 independent electrolytic aluminum manufacturers decreased by 61% on an annual basis, among them 56 manufacturers, comprising 65.1% of the 56 manufacturers, were facing losses of more than one billion yuan.

(III) More uncertain factors exist in economic development

Trade friction has recently increased in the world market. International crude oil prices remain at high levels, driving up the prices of related products and leading to higher operating costs for downstream enterprises. Domestically, Chinese economic development is confronted by many challenges, for example, reckless use of natural resources, environmental pollution, extensive economic growth, more unexpected public crises and unsatisfactory safety conditions in production facilities.

III. Strong economic regulatory measures will be taken to ensure stable, rapid social and economic development

In 2006, the Scientific Concept of Development will be implemented and macro-economic regulation will continue to play a strong role in fine-tuning economic development, change the economic growth mode for the better and maintain stable and rapid economic and social growth.

First, coal, electricity, oil and transportation will be better coordinated. Coal, electricity, oil, petrochemical products and transportation suppliers will be organized and led to stabilize production and supply, improve safety support, and strengthen inter-regional coordination between upstream and downstream industries and trans-regional electricity sharing. The supplies will be arranged in order of importance. Coal, electricity, oil, gas and transportation will be supplied to key areas and during peak hours.

Second, industrial structure will be adjusted. The plans, Provisional Regulations on Promoting the Industry Restructuring and Guiding Catalogue for Industry Restructuring, made by the State Council, will be implemented. Industrial development plans and industrial policies will be executed in addition to maintaining the continuity and stability of macro-regulation policies, rectifying key industries and curbing blind production expansion. Economic and legal measures will be encouraged to establish a mechanism for superseding outdated production methods. To facilitate the adjustment of product structure and enterprise organization, leading enterprises will receive support to grow more powerful to improve industrial concentration and enterprise competitiveness by acquisitions, mergers and restructuring.

Third, demand-side management will be strengthened. Strong measures will be considered in facilitating the establishment of a long-term, effective mechanism for demand-side management to enhance the management of energy and resource consumption, introduce energy-efficient technologies and use products with economic efficiency. Technological transformations will be conducted to help enterprises to reduce their energy consumption and do away with energy-consuming, polluting and outdated processes, products and technologies.

Fourth, an emergency support system will be established, as planned by the 11th Five-Year Plan that calls for a system and mechanism dealing with unexpected public crises. Logistics support will be ensured to fight highly contagious bird flu and other unexpected crises.

Fifth, homegrown brands will be encouraged. Enterprises will be assisted in fostering innovation. The formation of a system, mechanism and policy environment favoring innovation will be promoted. All the industries and their groups are encouraged to build their own industrial brands and regional brands. A number of leading enterprises will receive major assistance to develop their own world-class brands and increase contribution of their own brands to domestic production and exports.

Sixth, the development of modern logistics will be facilitated. A good overall environment will be built up for modern logistics to develop, reduce China's total logistics costs, and build a complete, high-quality, swift and efficient system of modern logistics services. Opinions Regarding the Facilitation of China's Modern Logistics Industry approved by the State Council and the spirit of the National Modern Logistics Work Conference will be implemented to facilitate the growth of China's modern logistics industry.