Chinese economy still on sound footing

SINGAPORE -- Chinese policymakers are maneuvering to continue economic restructuring despite a slowdown. Analysts say the world's second largest economy remains on track for sustained growth.

Official statistics released last week show that China's GDP slowed to 7.6 percent in the second quarter, the lowest level in three years. Industrial production growth also dropped to a record low of 9.5 percent year-on-year since 2009, below market expectations of 9.8 percent.

Economists told Xinhua that the market has fully digested the news and remains comfortable with the economic fundamentals of China after initially mixed responses to the relatively weak figures.

Beijing has set a full-year growth target at 7.5 percent for 2012 but the actual growth has typically exceeded the mark in the past.

"The last couple of numbers are at the lower end of the comfort zone. That's why they (market economists) are a bit worried. They are OK with the numbers slowing down ... still in the comfort zone," said Song Seng Wun, a regional economist at CIMB Research in Singapore.

Wellian Wiranto, an Asia investment strategist at Barclays Wealth, also said that the second quarter GDP growth figures, though relatively low, came well within market expectations and are likely to be the trough for the year.

Song said the numbers reflected a slowdown in economic activities in the beginning of the second quarter, but the latest advancing indicators, such as the purchasing managers' indices for key services, showed that activities have been slightly firmer toward the end of the second quarter.

Ample policy scopes

Beijing announced several cuts in interest rates and the reserve requirement ratio, the proportion of capital banks are required to park in a central bank, in recent weeks to encourage investment in and lending to certain industries while at the same time holding a tight rein on the real estate sector. The People's Bank of China said new bank lending in June rose 16 percent year-on-year to 919.8 billion yuan ($144.3 billion).

The government also unveiled a series of new export tax rebate measures in June, effective on July 1, to support small and medium businesses.

Economists expected one or two more cuts in the reserve requirement ratio but were divided on the likelihood of interest rate cuts. Song said there might be one or two interest rate cuts in the coming months "essentially to allow the momentum of lending to be sustained at around current level."

Hu Yifan, head of research and chief economist at the Hong Kong-based research house Haitong International, said there could be another interest rate cut, though the likelihood is not high given the expected rise in inflationary pressure in July.

Wiranto said China's domestic economy looks to be on a firmer footing despite the apparent slowdown in GDP growth.

"Chinese policymakers continue to have the space and incentives to boost growth, particularly because inflation has come down recently, and this has given them the comfort zone to do so," he said.

Wiranto said he continued to see considerable prospects for a second half rebound for the Chinese economy and projected a full-year growth of 8 percent.

"It is likely that there will be a re-focus on investment activities to help growth, even as the overall economy continues to benefit from a structural shift towards consumption," he said.

Song, echoing Wiranto's view, also said he expected China's economic growth would be able to move back to "around eight plus" in the second half of the year unless the European economy falls apart.

Song said feedback from CIMB's technological firms in Singapore and Malaysia, which have been closely watching factories' order flows in the region, pointed to slightly higher growth in the second half.

"So, it should be the case where we can tackle the headwind from the developed economies," he said.

Structural shift

Economists say China's economic slowdown is a result of both weak external demand due to the eurozone debt crisis and sluggish US economic growth and a tightening domestic approach to deal with the legacy of a 4-trillion-yuan ($627.9 billion) stimulus rolled out in 2008.

Moody's Analytics economist Alaistair Chan said he has downgraded China's full-year GDP growth forecast from 8.4 percent to 8 percent, primarily because industrial production came in a bit of a surprise on the weak side.

Hence, he said, the rebound in the coming quarters might be a bit weaker than expected.

Nevertheless, economists told Xinhua that China should be able to avoid a hard landing.

The term, though defined differently by various companies, usually refers to a situation where the government, in an effort to prevent the economy from overheating, lands the economy below a certain level in two consecutive quarters. Moody's Analytics set that level at 7 percent for China.

However, Chan said that even 8-percent growth for the Chinese economy this year and the projected 7.8-percent growth for 2013 are remarkable given the growing size of the Chinese economy, which has sustained a longer period of high growth at its peak than economies like Japan and South Korea.

Carl Astorri, senior economic adviser to Ernst & Young, said he expected China's growth to slow from an average pace of 11.2 percent in 2006-2010 to 8.7 percent in 2011-2015 and further to 7.4 percent in 2016-2020.

He noted challenges ahead such as a smaller contribution from capital stock, a rapidly ageing population, and slowing technological progress as China catches up with the developed countries.

However, Albert Hu, an associate professor at the National University of Singapore, said the Chinese economy remains on a sound footing given China's continued urbanization from 50 percent to 70 percent in the next 20 years.

"China has accumulated quite a significant human capital ... Its investment in science and technology is huge, too. While its effect is not to be seen in a short term, it forms part of the strong fundamentals together with human capital and urbanization," Hu said.

Some of the economists highlighted China's growth potential from the diverse development stages of its provinces, especially the inland west which has been mostly growing at a much faster speed in the recent two years than the relatively developed provinces and cities in the coastal east.

Barclays Wealth's Wiranto said the market "remains comfortable with the pace of reforms that China has adopted recently", citing efforts by policymakers to continue to undertake important reforms, including the capital account liberalization.

Hu said Beijing is taking a more prudent approach to the slowdown this time than during the global financial crisis. It refrained from hastily putting in place huge stimulus measures like in 2008, when fears of huge job losses prompted the government to roll out massive investment plans.

"The Chinese government is adjusting its macroeconomic policies to achieve its goals in restructuring. This inevitably leads to slower growth in the short term," Hu said. "The slowdown to below 8 percent is not irreversible."