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Slower GDP growth fresh signal for reforms

Xinhua, July 15, 2013

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  The Chinese economy slowed for a second straight quarter this year, but the weakness may prod new leaders to roll out more reforms to prop up an economy beset by overcapacity and financial uncertainties.

  China's GDP growth slid to 7.5 percent from a year earlier in the April-June period, official data showed on Monday. The figure came down from the 7.7-percent growth logged in the first quarter, and it is also significantly lower than last year's 7.8 percent, the lowest in 13 years.

  The government, however, has been reluctant to spur growth with monetary easing or state-led investment this time, as local government debt and real estate bubbles bloated to risky levels amid previous stimulus.

  Instead, to revitalize the Chinese economy, the new leaders have been calling for economic upgrades and reforms since taking office in March.

  The first half-year's downturn may be a fresh signal to the nation that it is time to deepen and accelerate economic restructuring, which will rebalance the world's second-largest economy toward a service- and consumption-led model.

  "The Chinese economy faces an unprecedented complicated situation. To adapt to the fundamental changes, China must accelerate reforms," said Zhang Liqun, a senior researcher at the Development Research Center of the State Council.

  "Time waits for no man. It's necessary to have that sense of urgency. We must be decisive and committed to practical reform plans," Zhang urged.

  No pain, no gain

  Pain is unavoidable as China breaks away from the old growth model. The structural reforms may push the gross domestic product (GDP) growth further down to or even lower than the government's bottom line.

  For instance, China needs to endure the collapse of some private and state-owned companies in industries plagued by overcapacity.

  Cutting funding to "zombie" enterprises and local government financing vehicles too drastically and rashly may lead to a wave of defaults and hurt the financial sector. Some lenders may fall because of rising non-performing loans.

  "We may sacrifice some growth, but it's necessary," said Yu Yongding, an economist at the Chinese Academy of Social Sciences, a government think tank. "The Chinese economy is slackening, but it has not broken the bottom line. The new government is right about deepening structural reforms."

  "There is no need to be pessimistic or fearful about China's potential growth. As long as the GDP growth can stay between 7 and 8 percent, there will be no problem advancing reforms," according to Yu.

  But as the government pushes forward the market mechanism, it will also refrain from implementing structural reforms too fast, which can cause an economic "hard landing."

  Last week, Premier Li Keqiang told provincial governors that the policies need to keep growth and employment above a "floor" and inflation below a "ceiling."

  "People need to be patient. Reforms can not be realized overnight," said Chang Jian, China economist at Barclays. "The government is preparing for the worst but still sticks to a bottom line."

  Upgrading economy

  Time is on the new government's side. The fear of massive workforce downsizing is diminishing while public understanding of slower GDP growth is rising.

  Demand for workers seems to exceed supply as the expanding service sector has been absorbing workforce shed from the manufacturing sector, according to jobs data.

  There were 107 job opportunities for every 100 job seekers in the second quarter, down slightly from 110 jobs for 100 seekers in the first quarter, according to the Ministry of Human Resources and Social Security.

  Despite the economic slowdown, President Xi Jinping said last month the Party should no longer assess the performance of an official simply based on his record of improving GDP growth.

  Premier Li also pledged in a nationwide meeting in May that the government would boost the economy through deepened reforms, including widening market access and reducing government intervention.

  The new cabinet has eliminated 133 items that were previously subject to central government administrative approval after Li promised at his first premier press conference that the central government would cut more than 560 such items in five years.

  "We do not really care about what the government will do to help. We actually care about what the government will not do," said Shao Xiaofeng, chief risk officer at Alibaba Group, the world's biggest e-commerce company.

  "Reforms in fiscal structure, resource pricing and government interventions are expected to be announced in next few months," said Jing Ulrich, managing director of J.P. Morgan Chase China.

  "Service sector and high-end manufacturing should be China's new economic drivers. The government needs to support emerging industries like e-commerce. That will reverse current difficulty investors face," Ulrich said. (Xinhua writers Yao Yujie, Guo Xinfeng contributed to the story) Endi

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