Need for structural reform seen growing

The pressure for structural reform in China is increasing amid slowing growth but policy adjustment and reforms expected to be rolled out in the coming months will restore investors' confidence, a former advisor to the country's central bank said Sunday.

"The problem with China's economy lies in investors' lack of confidence in the economy now. Investors who invest in the real economy seem to have bearish sentiment and such sentiment cannot support structural adjustment of the economy," Li Daokui, director of the Center for China in the World Economy (CCWE) at Tsinghua University and a former central bank advisor, said at a forum in Beijing Sunday.

The government will hold a series of workshops in the first half of July to collect feedback and make policy adjustments. Reforms will be rolled out in September and October to boost investors' confidence and more bullish market sentiment may appear, he said.

The latest indicators on manufacturing activity in China showed fresh signs of weak growth in the economy.

The official purchasing managers' index (PMI) fell to 50.1 in June from 50.8 in May, just slightly above the threshold of 50 that divides expansion from contraction.

"The slowdown of China's economy is an irreversible trend. An annual growth of 7.5 percent in the economy in the next few years will be considered a very good outcome, and the growth may further slow down from 2016 onward," Zhang Chenghui, director of the finance research institute at the Development Research Center of the State Council, said at the same forum.

China's economic growth stumbled to 7.7 percent in the first quarter, falling short of expectations for a robust rebound. The first-half GDP figures are due to be released in mid-July. China is aiming for GDP growth of around 7.5 percent in 2013.

"The current slowdown is partly due to the medium- and long-term structural problems in the economy, but the short-term factors such as the problems resulting from loose monetary policy in 2008 cannot be ignored," said Yang Ruilong, dean of the School of Economics at Renmin University of China.

The slowdown was also complicated by the recent interbank liquidity crunch, which saw China's overnight money-market rate, a key gauge of liquidity for the country's banking system, rise to 13.85 percent on June 20.

The People's Bank of China chose not to inject more cash into the money market in an effort to curb excessive credit expansion.

"Since January 2011, every time when the money-market rate rose above 8 percent, the central bank would release liquidity, but this time, the central bank chose not to do so," said Zhang.

This represents a medium-level test of the country's banking system, Zhang noted.

Some banks should have learned to avoid over-expansion of credit, so another liquidity crisis is unlikely to occur again, she said.