China's slower growth raises rebalancing stakes

On a humid summer afternoon, roadbuilder Zhang Hongxin from rural Shaanxi province offered living proof of the country's increasingly urgent need to rebalance its economy towards domestic consumption and away from fragile foreign demand that yesterday was revealed to have dragged economic growth down to its lowest in a year in the second quarter.

Domestic demand was a relative bright spot in an otherwise gloomy second quarter that saw annual growth slip to 7.5 per cent from 7.7 per cent in the first three months of the year, but economists doubt it can do the heavy lifting to turn the entire economy around - especially while the likes of Zhang earn only 100 yuan (HK$126) a day, subsist on a diet of rice soup and steamed buns - never meat - and live roughly in temporary sheds by the side of the road he is building.

"We expect consumption growth to remain fairly steady even though we would not expect consumption to be an independent driver of the cycle" is how Louis Kuijs, an economist at Royal Bank of Scotland in Hong Kong put it in a note to clients.

In other words, until Zhang and the about 260 million migrant workers nationwide like him can be turned into an army of free-wheeling consumers, Beijing cannot fully replace the spending power of the fickle foreigners who have slashed purchases in the wake of the 2008-09 global financial crisis.

Net exports were the big drag on second-quarter growth, shaving 1.4 percentage points from gross domestic product from the same period last year, putting the economy back on the barely interrupted downward trend it has been on since early 2010.

Add in the structural shift that economists anticipate pushing economic growth closer to 5 per cent by the end of this decade than the average annual 10 per cent seen for the past 30 years, and the enormity of the challenge facing policymakers is clear.