Cost of economic restructuring

China must adapt to the 'new normal' of slower growth and resist the temptation of a quick stimulus-driven GDP pick-up

As the Chinese economy weakens, a number of high-profile economists and investment gurus have rung alarm bells - and concerns have worsened following the World Bank's move to trim its China growth forecasts on Monday.

Such worries are well-grounded, but moderate growth slowdown is a must-pay price for China to continue its economic restructuring drive so that the economy can gain renewed growth momentum for the middle term, at least.

Admittedly, the Chinese economy is facing serious challenges. Apart from the growth slowdown, it has to face the risks of a potential crisis if the real estate market continues to sour and effective solutions cannot be found to the pile-up of the local government debts. Growth slowed to 7.4 percent year-on-year in the first quarter of this year, the lowest since the first quarter of 2009, sparking concerns that growth may not be sustained if policymakers do not mete out new stimulus.

Latest data show that industrial production growth fell to 6.9 percent year-on-year in August, significantly lower than in June and July, which was 9.2 percent and 9 percent, respectively. Retail sales growth remained flat in July and August.

On the external front, year-on-year export growth dropped sharply to 9.4 percent in August from 14.5 percent in July, although it remained higher than in June, when export growth was only 7.2 percent.

All data have pointed to China's economic softening and it is not surprising for the World Bank to downgrade its China growth forecasts. The bank said growth was likely to slow to 7.4 percent this year and further to 7.2 percent in 2015, before dropping to 7.1 percent in 2016.

In an April report, the bank had forecast that China's growth may come in at 7.6 percent this year and 7.5 percent in 2015 and 2016.

The forecast adjustments by the World Bank and other institutions are well in line with China's economic realities. After 10 years of fast expansion that has sprouted a real estate boom but colossal amounts of local government debts, China needs to slow its pace and focus on economic rebalancing and restructuring, because the current economic development pattern has proved unable to deliver the country's next-phase growth.

China now more than ever needs to restructure its economy to shake off its excessive reliance on investment and exports and shift to a more sustainable consumption-based growth pattern. Unfortunately, China's restructuring attempt has coincided with the necessity to delever-age the real estate sector and the local governments and, externally, the lingering recovery uncertainties of the global economy, making the road of restructuring especially bumpy.

As restructuring is set to be a drag on the economy - at least temporarily - the real estate price corrections, which will affect a number of related industries, will also add to the downside pressure for the economy. The local government debt pile-up, if not resolved, could pose new financial uncertainties. Worse, the fragile global economic recovery has failed to generate strong growth for China's exports.

Those unfavorable conditions have prompted many economists and government officials alike to urge the authorities to take new stimulus measures to prevent the economy from diving. But central policymakers have rightly put forward the idea of adapting to a "new normal", a phrase that virtually rules out the possibility of returning to the old stimulus-based growth pattern even if growth temporarily slows.

Instead, the authorities have made more efforts to push systematic reforms to lay the groundwork for future growth. For example, the administrative approval power has been streamlined to facilitate doing business and some monopoly sectors, such as oil, have been opened to non-State investors. Meanwhile, policymakers have taken measures to restructure the economy by curbing shadow banking and tackling excess capacity, high energy demand and high pollution.

Along with such reform and restructuring measures is the country's raised tolerance toward lower economic growth. Premier Li Keqiang said on Wednesday that although China has set its GDP growth target at 7.5 percent this year, it does not mean it's the bottom line. It does not matter if it turns out to be slightly lower than 7.5 percent, the premier told ministers at a State Council meeting.

Such a down-to-earth attitude no doubt is crucial for China to continue to carry out its reform agenda and push economic restructuring to unleash the growth potential of the economy in the middle term. If China cannot face up to the current economic difficulties and resist the temptation of a quick stimulus-driven economic pick-up, it will only cost the economy growth opportunities in the coming decade.

Policymakers, of course, are well aware of the pros and cons of those options. But they cannot afford a sharp economic slowdown, either. Facing the weak economic data in the third quarter, they may have to temporarily loosen their purse strings to keep a hold on the growth rate.

To what extent the policymakers will re-open the capital tap, therefore, will become crucial in deciding China's development track in the next phase. It will also become a barometer for observing China's resolve in implementing its reform and restructuring agenda.