Key growth targets well within reach

ZHANG CHENGLIANG/CHINA DAILY

China's economic growth recovered slightly in the second quarter to reach 7.5 percent, a strong indication that the world's second-largest economy has been stabilizing after it dipped to a multi-year low of 7.4 percent in the first quarter.

With improving global markets, the expanding effects of mini-stimulus policies and loosening of monetary policies, the economy, more likely than not, will gain more momentum during the rest of the year. With this trend, the focus of the government in the second half of the year should move toward accelerating reform measures, especially in such industries as finance and services.

Positive signs of the Chinese economy can be seen in three aspects: trade, government policies and the housing market.

Though foreign trade's contribution to Chinese economic growth has declined in recent years, it remains a major factor.

Trade improved remarkably in May and June.

In May, exports rose by 7 percent, outpacing the 0.9 percent increase in April and 6.6 percent drop in March. However, imports in May fell by 1.6 percent year-on-year, compared with a rise of 0.8 percent in April and an 11.3 percent fall in March.

But both exports and imports did better in June. Exports expanded 7.2 percent year-on-year, the strongest pace in five month. Imports rose 5.5 percent year-on-year.

The recovery was a result of the disappearance of statistical distortion. Last year, from January to April, trade figures were hugely exaggerated by fake trade - hot money flows in the guise of trade - building a high base for this year. The distortion ended only after the government clamped down on such practice starting in May last year. That explains why this year's trade growth has improved since May.

With a smaller base in the second half, trade is expected to do better.

In addition, external markets have been improving in recent months. In the United States, China's largest single-country export market, it is becoming clearer that the economic recovery is solidifying. After cold weather reduced production and consumption at the beginning of the year, business activity revived in the second quarter. The purchasing managers index, which gauges manufacturing activities, hit 55.2, a remarkable increase from 52.7 in the first quarter.

US retail sales grew 4 percent year-on-year from March to May, much better than the 1.6 percent in the January-February period. Rising US consumption is an especially good sign for Chinese exports.

Europe, another major Chinese export market, did not do as well as the US, but the continent is also undergoing a weak recovery. Its consumption rose in the second quarter and the labor market improved slightly. The scenario points to steady demand for Chinese products.

With China's trade performance stabilizing and probably improving, the yearly economic growth target of 7.5 percent is well within reach.

Since GDP growth had slowed to 7.4 percent by the end of March, the government has introduced a number of policies to boost the economy. Collectively called mini-stimulus, these measures included increased investment in railways, affordable housing and agriculture. Their effects are expected to surface in coming months.

More important, the central government has visibly loosened its monetary stance. Since April, it has decreased the required reserve ratio for lenders twice, marking a significant turnabout in its policy orientation. Although the ratio cuts were for selected industries and selected lenders, this "targeted loosening" approach is expected to become normal if economic growth slows again.

Premier Li Keqiang said early last month that this was the top task for the government. Earlier, he often emphasized that reform was the top task. The change shows that he now leans toward growth after first-quarter figures missed the yearly target.

Recently, a central bank official said cuts in reserve ratio and interest rates were necessary to prevent the decline in GDP growth from worsening. This shows the government is now open to an interest rate cut.

The loosening stance has translated into increased liquidity. New yuan-denominated lending amounted to 1.08 trillion yuan ($175.64 billion) in June, compared with 870.8 billion yuan in May and 774.7 billion yuan in April. M2, a broad measure of money supply that covers cash in circulation and all deposits, increased 14.7 percent year-on-year to 120.96 trillion yuan at the end of June. The growth rate was at a 10-month high.

Clearly, the credit situation has markedly improved with the government loosening its tight grip.

In the second half of the year, authorities have room to resort to greater loosening if they deem it necessary.

The Consumer Price Index reached 2.3 percent in the first half, well under the safe line of 3.5 percent, allowing the central bank to inject more liquidity.

With government policy support, the yearly target of 7.5 percent is now more secure.

The general weakness in the first half of the year came after the housing market cooled. Growth in fixed-assets investment, much of which usually comes from the property market, slowed. In the first half of the year, the growth was about 17.3 percent, compared with 17.6 percent in the first. This showed that investment was far from recovery.

But investment is expected to stabilize, as the central government accelerated construction of affordable housing projects and a number of local governments lifted restrictions on property purchases.

Investment sentiment is likely to recover slightly in the second half, providing a stable foundation for economic growth.

With economic growth expected to stabilize in the second half, the government should refocus on reforms.

Economic growth and reforms are not contradictory. In fact, reforms can help boost long-term, sustainable development.

One recent example is the stable job market. Although economic growth slowed in the first half of the year, the labor market as a whole showed little effect. Newly created jobs amounted to about 7.3 million from January to June, slightly more than in the same period last year. That performance defied the economic slowdown trend and was bolstered by earlier reform policies such as tax exemptions for micro, small and medium-sized enterprises, simplified corporate registration and administration management, and a lower threshold for Internet sellers. This shows reforms can lead to long-term benefits and help buffer the impact of an economic slowdown. Thanks to the stable job market, this round of economic slowdown did not cause a panic. So, reforms must gather pace to ensure people can benefit even if the size of the economic pie grows less quickly.

The next step of reforms should focus on the financial, public and services sectors. Rate liberalization must be continued by widening the yuan trading band, accelerating the trial of certificates of deposit to pave the way for the scrapping of the deposit rate ceiling, and allowing private investors to set up banks.

In the public sector, mixed ownership reforms must be deepened to let state-owned companies exit non-strategic industries. Powerful, independent supervisory boards can be tested in state companies while private and foreign investors are given their say when they hold stakes in state companies.