Beijing in tough balancing act to ensure slower economic growth does not become too slow

Bill Xiang Yang says relentless downward pressure on the economy means tough calls on how much government intervention is just right

PUBLISHED : Friday, 17 July, 2015, 2:48pm
UPDATED : Friday, 17 July, 2015, 2:48pm

China's economy expanded 7 per cent year-on-year in the second quarter of this year, unchanged from the first quarter. Perhaps the country has entered the so-called "new normal" of slower growth, in line with its more mature economy.

Beijing seems determined to put structural reform before high-speed growth, no matter how painful. Many Chinese don't believe their country can continue along the old path of heavy dependence on government investments to stimulate growth. But nobody knows how slow is too slow. Economists have warned that China has to maintain growth at a certain rate to generate enough jobs and prosperity to prevent youth unrest.

Yet, the reality is that downward pressure on the economy has been intensifying. For now, none of the three traditional growth engines are roaring. The outlook for foreign trade is worrisome, with exporters struggling against sluggish overseas demand, rising labour and currency costs. Meanwhile, expanding domestic consumption will take time and effort.

As for investment, Wednesday's data was a mixed blessing. China's fixed-asset investment rose an annual 11.4 per cent in the first half of the year, the slowest in nearly 15 years.

To deal with the challenges, the government has rolled out a series of policy measures. Since last November, the central bank has cut interest rates four times and reduced the amount of cash that banks must keep on their books in a bid to boost lending and spur growth.

In May, Beijing released a list of more than 1,000 proposed projects in sectors like transport and water conservancy, totalling nearly 2 trillion yuan (HK$2.5 trillion), to attract private investors.

Further action is widely expected because the government is keen to reverse the weakness in infrastructure spending, especially after industrial production and retail sales have stabilised in recent months. The hope is that financial spending and monetary policy easing could lead to growth stabilisation in the third quarter.

Beijing is careful to avoid an across-the-board tax reduction. Instead, it embraces robust economic interventionism - the latest example being its handling of the freefall in stock prices. Measures such as the suspension of initial public offerings and a ban on sell-offs by big shareholders have lessened the panic. However, the heavy-handed intervention has also raised concerns about China's market liberalisation.

Beijing is currently considering policies for its 13th five-year plan beginning next year. With the days of breakneck expansion gone and strong headwinds blowing, leaders have to think carefully how they can achieve sustainable development. As the old adage goes, the devil is in the details.

Bill Xiang Yang is an independent investor