China has capacity to deal with major challenges: European experts

BRUSSELS - European experts said China's lower growth target is a good sign as it reflects reality and that although China faces a number of urgent economic problems, it has shown the capacity to deal with major policy challenges.

China's economic growth target has been set at 6.5 percent to 7 percent in 2016, with an average annual growth rate of at least 6.5 percent through 2020, Premier Li Keqiang said recently when presenting the government's work report to an annual parliamentary session.

"The lower growth target is a good sign as it reflects reality. Moreover, given that it applies to a longer period it means that growth could gently decelerate until 2020," Daniel Gros, director of the Center for European Policy Studies (CEPS), said in an interview with Xinhua.

"Whether the target of 6.5 percent to 7 percent can be reached will depend largely on domestic developments in China, because the current external environment in developed economies like the United States, the EU and Japan is not good," said Duncan Freeman, senior research fellow at the Brussels Academy for China and European Studies.

Freeman said the traditional drivers of the economy are no longer playing the same role as they did in the past, so success in maintaining growth in China will depend on whether new drivers of growth can be found.

The Chinese economy has stepped into a transition period. As part of its economic restructuring, China announced to initially cut some 1.8 million jobs in the steel and carbon sectors in mainly state-owned companies.

Freeman said the reduction of jobs in the steel and coal sectors reflected what was already happening as demand falls and overcapacity increases in these and other heavy industrial sectors.

Some of the lost growth and jobs can be replaced in new sectors like renewable energy which are growing very rapidly but a key challenge in the transfer of workers from the old to new sectors will be whether they can gain new skills through investment in retraining, Freeman added.

Freeman's view was echoed by Gros. "Getting rid of over-capacity is always difficult. It is good that the problem has been recognized, but it will not be easily solved," Gros said.

It took Europe 20 years to deal with its own overcapacity problem in the same sectors during the 1970s and 80s.

China faces significant external risks as the United States, EU and Japan will have difficulty in sustaining growth.

"But there is little that China can do by itself to diminish the risk of policy failure in other major economies, although greater policy coordination on a global level will help deal with the problems of sustaining growth," Freeman said.

China also must deal with domestic risks, and the financial system remains one of the major challenges. However, Freeman believes China has greater policy scope to take action in the domestic arena, and should continue pushing forward with reform in the financial sector to ensure that problems are dealt with.

"Though China faces a number of urgent economic problems, in the past it has shown the capacity to deal with major policy challenges," Freeman added.

Freeman said this would depend on China's continuing commitment to reform to push through the necessary changes to sustain the ongoing economic transition.

"Although these challenges are huge, China still has policy space to continue the path of reform, and there are significant potential gains if reform is sustained," he said.

Gros pointed out that the service sector, especially those connected with web-based services could be the new driver of Chinese economy.

"This is one area where China might have an advantage of the 'old' industrialized countries, which often have old, established companies which resist change," Gros said.