China’s economic slowdown tests reform plans

JIANAN YU/REUTERS - A laborer welds a steel frame at a residential construction site in Hefei, Anhui province July 15. China's annual GDP growth slowed to 7.5 percent in April to June - the ninth quarter in the last 10 that expansion has weakened.

BEIJING — China’s economic slowdown continued in the second quarter, putting to the test its leaders’ resolve for reform and raising questions about just how much financial pain they will be willing to endure.

China’s 7.5 percent growth during the second quarter of this year continued a downward trend — 7.7 percent in the first quarter and 7.9 in the three months prior.

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Some experts, however, view the continued slowdown as a positive sign and proof that Beijing is willing to tolerate short-term pain in favor of pushing the country toward a more sustainable, stable long-term economy.

After almost two decades of double-digit growth, China’s new leaders since taking control last year have talked repeatedly about the need to overhaul the system. The country is facing overcapacity and the challenge of transitioning from an economy that relies on state-driven and increasingly unproductive investments to a more balanced one.

In 2008, leaders reacted to a bubbling financial crisis with enormous state-funded stimulus, but this time around leaders have talked of cutting off such often-bloated infrastructure investment projects and reducing debt. They have said that central and local governments need to wean themselves off a long-running obsession with gross domestic product growth and focus instead on quality growth that will create better jobs and increase the nation’s value.

At a news conference Monday, Sheng Laiyun, spokesman for China’s National Bureau of Statistics, described the slower second-quarter growth as a result of deliberate actions by China’s leaders to revamp the economy — as well as of slowing productivity and international factors.

“These policies have had some short-term impact on the economic growth, but in the long run are all favorable conditions,” Sheng said.

The overarching goal, according to key leaders such as Prime Minister Li Keqiang, is to transform China from the world’s factory, dependent on exports and investment, into a more balanced economy driven by domestic consumption.

Doing that, however, will require significant political control and stamina. The leaders will need to reform a system that is lucrative to political elites who control China’s massive state-owned enterprises. They also will need to juggle the continuing slowdown with worries that unemployment may trigger increased social unrest.

The country’s official growth target for this year is 7.5 percent — an enviable figure for most countries, but one that would mark China’s slowest rate in 23 years.

Last week, Chinese Finance Minister Lou Jiwei said during a trip to Washington that this year’s growth could end up as low as 7 percent. Within a day, China’s state news media erased initial reports of his quote and replaced them with accounts that he had actually said 7.5 percent.

In the broader picture, experts say, the exact statistics matter little. Many analysts suspect that Chinese government statistics — and GDP figures in particular — are manipulated or manufactured to suit the government’s needs.

“Last year the economy officially grew at 7.8 percent, but the consensus is that it was probably closer to 5.5 percent, and even that probably overstates it,” said Michael Pettis, a Peking University finance professor. “GDP growth numbers will continue to decline in the next few years. We might see a pop in the third quarter, but it will be temporary.”

If the government succeeds at rebalancing the economy, the growth rate could dip dramatically lower to 3 or 4 percent, Pettis said. “Is that a disaster? Not necessarily,” he said, as long as China’s consumption grows faster than GDP.

Asked at Monday’s news conference whether the lowest growth rate officials want to allow is 7 percent, Sheng, of China’s National Bureau of Statistics, said, “I think it is the best growth speed if it is good for economic development, employment, reform and transformation of the development model.”

According to the state-run Xinhua News Agency, the weak numbers may “prod new leaders to roll out more reforms to prop up an economy beset by overcapacity and financial uncertainties.”

Last week, Lou called it a “painful process” but insisted that Chinese officials are adamant about tackling China’s long-term problems even if it means short-term losses.

Ultimately, experts say, the leaders’ willingness and plans for reform may not become clearer until this fall during the annual meeting of the Communist Party’s key decision-makers, who are expected to announce some long-term priorities.

Simon Denyer and Li Qi contributed to this report.

 
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