Chinese economy at the crossroads

The Chinese economy is sending mixed signals to China watchers who are keenly looking for the direction policy will take and the growth trend in the second half of the year.

Primarily, they are wondering whether policymakers will cut banks’ reserve requirement ratio (proportion of money they must keep aside as reserves, something that can be used to increase or drain market liquidity) and whether the policy stance, to be changed or not, would save the economy from sliding further in the second half.

China could be facing its most complicated economic situation in the past three decades. Having become the world’s second-largest economy, China is also facing the Herculean task of resolving many problems — such as the pile-up of local government debts and hovering housing prices — that have been accumulated in the many years of fast-pace growth.

Worse, as its economic restructuring continues, growth has slowed, which makes it more difficult to deleverage and regain growth momentum.

Premier Li Keqiang and his colleagues have shown adequate resilience in tackling those problems. On the one hand, they have refused to resort to large-scale stimulus, which is easy to implement but could make more trouble. On the other hand, they have resorted to targeted stimulus measures to keep the economy going.

In his trip to the Inner Mongolia autonomous region last week, Li vowed to maintain a prudent and stable monetary stance and make good use of existing capital in the financial system to boost the economy. Financial institutions, in particular, must provide more support for development of small companies and enterprises in the western regions, he said.

His remarks are an unequivocal reflection of the central government’s consistency in implementing its reform-centered policy stance. While reforms targeted at improving long-term economic vitality unfold, a fine-tuning approach has been adopted in tackling current problems.

The heightened tolerance toward economic turbulence means the possibility of an across-the-board reserve requirement cut is not high as the job market remains resilient and some economic indicators are showing signs of improvement.