China faces bumpy road to achieve stable growth

BEIJING -- For safety reasons, drivers slow down when travelling on bumpy roads. Chinese policymakers appear to be using the same reasoning in directing the world's second-largest economy through global and domestic difficulties.

China's GDP expanded 7.6 percent in the second quarter from a year ago, down sharply from 9.5 percent a year earlier and half a point below the 8.1 percent rise for the first three months of this year.

Although the pace is still enviable for economies elsewhere, it marks an uncomfortable ebbing for China. It was the lowest rate since the 2008-09 global recession, when China's growth eased to 6.6 percent in the first quarter 2009 before a massive government stimulus package provided double-digit growth.

The slowdown is partly because of the global economic woes. The eurozone, China's largest trade partner, is in recession, while the recovery in the United States is moving in fits and starts.

The International Monetary Fund on Monday cut the projected world economic growth rates of this year and the next, as downside risks to the global growth loomed large.

The IMF also trimmed the growth forecasts for emerging economies, including China, against the backdrop of the simmering eurozone debt crisis.

Foreign trade, once a major bedrock of China's expansion, remains weak. Minister of Commerce Chen Deming said last month the country would reach its 10 percent growth target for foreign trade this year "if lucky".

To some extent, China's slowing growth is also a self-induced outcome. The government expected a slight slowdown as it tried to tame the runaway real estate prices and high inflation.

The government's policies have largely worked with real estate regulation curbing the rising momentum of home prices and June's inflation rate eased to 29-month low.

However, these efforts have coincided with the global downturn and domestic economic rebalancing, sparking concerns that the slowdown might be deeper than initially expected.

The ripple effect of slowing growth is beginning to weigh on enterprises' profitability, exacerbating their financial stress amid rising costs and dwindling demand, as warnings of lower profits or even losses set to overshadow the market in the coming weeks.

On Sunday, Premier Wen Jiabao warned the economy has not formed a stable recovery and the economic difficulties may continue for some time.

Wen said the country's employment situation "will become more complex and severe".

The country has announced a series of measures, aiming at stable growth, which included benchmark interest rate cuts, lower reserve requirement ratio for banks, encouraging private investment in previously state-controlled sectors, and increasing government spending on affordable housing projects, airports and highways.

However, analysts worry that relying on the government to increase investment, a quick way to spur growth, will set back efforts to wean the economy off its reliance on state investment, lead to the construction of unneeded factories and saddle the economy with bad debts. China has been striving to shift its economy to more self-sustaining growth based on domestic consumption.

"Accelerating structural reforms and economic transformation is the only sustainable road to stable growth," said Wang Tao, a China economist of UBS Securities.

"After more than 30 years of vigorous growth, China has entered a period of transition," Sheng Laiyun, spokesman of National Bureau of Statistics said at a press conference. "The potential growth rate will slow down."

Despite mounting challenges, Sheng expressed confidence that the national economy will stabilize and China will meet its full-year growth target of 7.5 percent in 2012.

He was upbeat about China's economic prospects, saying "the country is still undergoing a process of industrialization, urbanization, internationalization and marketization, which will unleash huge investment and consumption potential to bolster the economy."

The government repeatedly stated the country will continue the proactive fiscal policy and prudent monetary policy for the rest of the year.

To ensure stable growth, Standard Chartered estimated three more cuts in the reserve requirement ratio of 50 basis points each and one more interest rate cut of 25 basis points in 2012.

"With lower interest rates and more infrastructure spending, we expect a gradual economic recovery in the third quarter and a better second half for China," Standard Chartered analysts Li Wei and Stephen Green wrote in a report.