China's economy caught in balancing act

BEIJING - Attempting to balance economic development in the face of a global meltdown with reform efforts that will likely slow the economy is proving to be difficult for Chinese authorities.

However, Premier Li Keqiang gave some suggestions on dealing with the conundrum in a speech delivered during an inspection tour of South China.

"Economic operations should be managed in such a way that ensures that the growth rate, employment and other indicators don't slip below the lower limit and inflation does not exceed the upper limit. In such circumstances, the country can focus on restructuring and reform," he said.

Li's statement, as perceived by analysts, has shown to what extent the government will tolerate an economic slowdown.

"The possibility of a dramatic economic fall is small. The government has the bottom line in mind -- employment and social stability are important references," said Zhuang Jian, an economist at the Asian Development Bank.

China's stock markets have responded with drastic gains in the past two days, although official data released during the period showed year-on-year drops in June exports. The fading trade growth has renewed worries of a further slowdown in China's second-quarter growth.

Concerns that the economy might stall were renewed after the country's central bank refused to inject liquidity to ease a cash shortage crisis that pushed interbank borrowing rates into the double-digits in June.

The government's calm has drawn criticism, as a cutback in credit is likely to weigh on investment, another key growth driver, and will therefore put pressure on the economy.

However, Zhuang said there is no need to worry too much as long as the slowdown does not quicken.

"The new government seems to be less interested in the speed of economic growth. The focus is now on fixing problems in the economic growth pattern," he said.

Despite years of reform, China has never truly succeeded in getting rid of the high-input, high-pollution growth mode. After going through the turmoil of the 2008 global financial crisis, the government realized that stimulus policies only prolong economic changes and that it must stay the course regarding economic reform.