SLOWLY BUT SURELY

Despite more slumping growth in China, economic restructuring is progressing as planned By Lan Xinzhen

DEVELOPED TRANSPORTATION: Jiaxing-Shaoxing River-Crossing Bridge, Hangzhou-Ningbo Expressway and Shangyu-Sanmen Expressway get crossed at Guzhu in Shangyu, east China’s Zhejiang Province, on July 6, 2013

For the past two years, China’s economy has slowed down. According to statistics released by the National Bureau of Statistics (NBS)on July 15,China’s gross domestic product (GDP)grew by 7.6 percent in the fi rst half of the year.In the second quarter, the GDP growth was a mere 7.5 percent, the second lowest showing since the fourth quarter of 2010.

But skeptics be warned: The slower growth doesn’t mean you can dismiss China’s economy just yet. NBS spokesman Sheng Laiyun says China’s economic growth is stable and economic restructuring—that is, shifting China toward more consumption—was progressing steadily.

China is trying hard to reduce its dependence on investments and shift its economy to a growth mode that is more sustainable in the long run. Its growth rate is in line with the Central Government’s expectations and plans to transform the economy.

Liu Yuanchun, Associate Dean of the School of Economics at Renmin University in Beijing, suggests that the harm to China’s economy does not stem from a slowdown but comes from rapid growth during the restructuring phase. Therefore, the slowdown is a good thing for China’s long-term plans. Skeptics should look beyond the slowdown and pay more attention to the government’s ambitious economic reforms and restructuring instead.

A temporary slowdown

Statistics from the NBS show that China’s agricultural output experienced a steady increase in the first half year, and food security was secured by a summer grain crops harvest,which witnessed a 1.5-percent increase from the previous year. Industrial manufacturing saw steady growth; and corporate pro fi ts continued to increase. These fi gures suggest that China’s economy rests on a solid foundation.

Statistics also show that during the same period, the per-capita disposable income of China’s urban residents registered a nominal in-crease of 9.1 percent year on year and the percapita income of rural residents increased 11.9 percent, a clear indication that slower growth hasn’t dragged incomes down.

Lian Pingyan, chief economist at the Bank of Communications, noted that concerns over a slowdown are exaggerated because fi gures like the employment rate and commodity prices were normal.

Zhang Liqun, a research fellow from the Development Research Center under the State Council, China’s cabinet, believes that China had entered a period of moderate economic growth, one that is moving at an appropriate pace. “China’s economy is bottoming out and seeking a new balance,” said Zhang.

Zhang said he is con fi dent in the economy in both the short and long term since China is still in the midst of high-speed industrialization and urbanization.

Throes of transformation

China has been harassed by environmental pollution and resource waste during the past three decades of unbridled economic growth.Since the new government came into power in March, plans for more sustainable economic development and upgrading have assumed more focus.

As a result, plenty of red tape has been cut in a push to create more ef fi ciency in the economy. In two meetings held in April and May, the Central Government decentralized its power and put more decision-making capability in the hands of provincial and municipal governments.

Three economists at Barclays Capital coined the term Likonomics named after Premier Li Keqiang’s bold initiatives designed to maintain steady and healthy economic development,with less focus on raking in high GDP growth.Likonomics is composed of three parts—ending stimulus policies, deleveraging and structural reforms.

Pursuing the above three won’t be easy,and the road to economic transformation could be a bumpy one, if it isn’t already, with plenty of sacr ifi ce to be made. When the transformation finally ends, China’s economy will obtain healthier and more sustainable development,says Zhang.

On June 20, the overnight interbank repo rate shot up to over 30 percent, and the overnight Shanghai Interbank Offered Rate surged 578 points to 13.44 percent, which caused a panic in the capital market. Rumors of a “cash crunch” spread far and wide, and China’s stock markets slumped the next day. Unexpectedly,the People’s Bank of China didn’t come to the rescue, a strategic choice on its part.

As the American economy shows signs of picking up, the Federal Reserve has begun to shake off quantitative easing monetary policies,and the world economy is speeding up its deleveraging. The central bank’s refusal to infuse more money into the banking system brings an end to expansionary monetary policies.

In fact, the Central Government has laid emphasis on steady credit growth for the real economy. Recently, Premier Li has reiterated“activating the stock of money and credit,”implying an intention to cease the use of expansionary monetary policies.

Although the transformation underway has led to slower growth, the government has no intention of changing course. On July 9, at an economic symposium in Guangxi Zhuang Autonomous Region, Li said, “Macrocontrol should focus on the pursuit of longterm benefits and ensure the economy is fl uctuating within a reasonable range. That is to say, indexes like the economic growth rate and the employment rate shouldn’t break the bottom line, and price rises shouldn’t exceed the upper limit.”

Although Li didn’t offer spec ifi cs, experts say his “bottom line” refers to a minimum of 7.5-percent annual economic growth and at least 9 million new jobs for rural and urban residents. His “upper limit” refers to no more than a 3.5-percent rise in the Consumer Price Index (CPI)this year, as laid out in former Premier Wen Jiabao’s government work report in March.

At present, employment and consumer prices are stable. Statistics from the Ministry of Human Resources and Social Security showed the market offered 107 jobs per 100 job hunters in the second quarter, slightly lower than the 110 jobs in the first quarter. According to statistics from the NBS, the CPI rose 2.7 percent year on year.

There are concerns over whether China’s economy can stay above the “bottom line,”since the 7.6-percent growth in the first half is very close to it. Zhang Monan, associate researcher with the Economic Forecast Department of the State Information Center,suggests the ‘bottom line’ indicates the government is more tolerant of a slowdown.

“Some people may ask whether the new government can help keep China’s economy above the “bottom line.” It’s dif fi cult to give an answer. But one thing is for sure: Reform means pain,” said Zhang Monan.

Guan Qingyou, Deputy Director of Minsheng Securities Research Institute, argued that China should maintain its “bottom line”well into the future. “It’s of sign ifi cance to stabilize growth during economic transformation.”

Difficulties ahead

The fi rst half of 2013 has been one of signi ficant changes—some good, some bad—as China continues to upgrade its economy. For instance, many energy-consuming and highpolluting industries are undergoing technical renovations to prepare for the new economy. On the fl ip side, domestic consumption hasn’t been as robust as the government expected despite plenty of effort over the past few years to get Chinese consumers to open their wallets.

According to the NBS, total retail sales of consumer goods in the first six months grew 1.7-percentage slower than in the same period last year. Weak domestic consumption could put a dent in the country’s plans to build an economy more dependent on domestic spending.

In addition, import and export figures are hardly inspiring. Statistics from the NBS hint China’s import-export trade is also in the midst of a slowdown. In the fi rst quarter, imports and exports totaled $975.25 billion, up 13.5 percent year on year; in the second quarter, it was $1.02 trillion, up 4.3 percent year on year, although in May, imports and exports only grew 0.3 percent.In June, the fi gure even slid to negative 2 percent.

Zheng Yuesheng, spokesman for the General Administration of Customs, said gloomy foreign markets cramped China’s export growth, and the substantial appreciation of the yuan in combination with rising labor costs made exports more expensive.

Statistics from the Bank for International Settlements showed that the yuan’s real effective exchange rate was 116.3 in late May, up 5.6 percent from the end of last year. At the same time, domestic labor costs keep going up.Several provinces and cities have increased their respective minimum wage standards so far this year. Of the 2,000 enterprises that participated in a monthly customs survey, at least 70 percent regularly said they were under mounting cost pressure, and the competitiveness of their products was eroding.

Quarterly GDP Growth

Consumer Price Index (CPI)and Producer Price Index (PPI), H1 2013

Foreign Trade, H1 2013 ($bln)

What’s worse, China’s trade environment is deteriorating due to frequent outside frictions.According to the Ministry of Commerce, 18 countries launched 22 anti-subsidy investigations against China in the fi rst quarter. In May,the European Commission declared an antidumping and countervailing probe into some of China’s telecom equipment makers. On June 6, the commission announced an 11.8-percent anti-dumping duty on China’s photovoltaic products. All these investigations and duties slapped on Chinese products have greatly undermined the country’s international competitiveness.

Economic outlook

The Central Government is scheduled to hold a series of symposiums to gather economic data in July and unveil a number of reform policies in September. In the meantime, the outlook of China’s economy over the next six months is mixed.

Economists predict growth of China’s GDP in the second half of the year will remain more or less the same as the fi rst. Li Daokui, Director of the Center for China in the World Economy at Tsinghua University predicted that the economy would grow 7.8 percent in the second half,a slight increase over the fi rst half. A report released by China Investment Consulting on July 1 stated that China’s GDP would grow 7.5 percent and 7.3 percent in the third and fourth quarters respectively, and the growth rate for the whole year would be 7.5 percent.

The Three Contributors

But Anbound Consulting, a renowned think tank for public policy in China, says in a report that the three pillars of the country’s—investment, consumption and net exports—have not shown signs of any rebound.

In terms of investment, tight policies, high local debt and declining corporate profits will not get the economy back on a track of rapid growth. Additionally, great employment pressures, poor income prospects and restrictions on government spending have dimmed investment as a strong driver of economic growth.Finally, external demand for Chinese-made products is still weak.

“Given the above-mentioned reasons, the economic outlook for the second half is not so optimistic,” reports Anbound.