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China May Launch "Substantive" Economic Reforms

07-15 19:36 Caijing
Reforms in areas such as taxation, finance and energy, which are well-prepared, will first kick off, Caijing learned.

By Caijing reporter Li Qiyan

A new round of key economic reforms, with "substantial" elements, is brewing in China, as the new leaders are seeking ways to power a sustainable growth four months after they officially took office, Caijing learned.

"The restart of a new round of economic reforms will have a vital impact on the Chinese economy," a source close to China's top policy making agencies told Caijing, referring to a guideline expected to be announced at a plenary meeting of the Central Committee due this fall.

Reforms in areas such as taxation, finance and energy, which are well-prepared, will first kick off, said the source.

The planned reforms come at a time when policymakers are facing new tests in the next half of the year to "stabilize growth" with the absence of large investments the country had seen before, following a delicate and complex macro-economic situation they successfully maneuvered in the first half.

China's gross domestic product rose 7.6 percent from a year ago in H1, data from the National Bureau of Statistics showed on July 15. That compared with a growth rate of 7.7 percent in the first quarter and 7.5 percent in the second quarter.

Despite the moderate slowdown, officials believe growth of China's economy remains in a "relatively stable" range, having maintained a speed of between 7.4 percent-7.9 percent for the fifth consecutive quarter.

"The current slowdown should be inevitable, to some extent," said Sheng Laiyun, spokesman with the NBS, ascribing it to a transformed structure in the economy, with labor force, land and markets are changing.

Marginal benefits from the same investment are falling with no breakthroughs in technology, resulting in declining potential productivity, Sheng added.

Fixed investment rose 20.1 percent year-on-year in H1, compared with 20.9 percent in the first quarter and 20.4 percent in the same period a year ago, the NBS data showed. In consumption, retail sales of consumer goods were up 12.7 percent in the six months, down 1.7 percent from that a year ago. In addition, both exports and imports grew at a slower pace -- an increase of 10.4 percent for export and 6.7 percent for imports-painting an even more darker picture for the world's second-largest economy.

The slowdown in the second half has largely reflected the negative impacts to rising productivity and the expansion of investment demands from factors including housing bubbles, high financing costs for SMEs and overcapacity in some industries, CICC economist wrote in a research note.

 "Some measures, like those in the real estate sector, are still gathering strength while the ruling party's crackdown on lavish banqueting and gift-giving has dented consumption in catering and food," Sheng said, explaining the slowdown, "The orderly exit of some old stimulus, in particular, has inevitably had some influence on growth."

He said he was optimistic about China's growth as the new leadership focuses on restructuring the economy, and promoting reforms, which in the long run are benign for the economy's development.

Some economists, meanwhile, hold the opposite. Economic data like trade and PPI -- which fell for the 16 straight month to 2.7 percent in Q2, pointing to weaker demand in the economy, as well as a growth rate of 7.5 percent just at par with the official target, has given them reasons for pessimism.

 "[China's] economic growth is heading to a slowdown," Li Daokui, a renowned Chinese economist, told a recent economic forum. He referred to "severe structural problems", reflected as the lack of investors' confidence, as hidden risks behind China's growth.

The World Bank anticipated a growth rate of 7.7 percent for 2013 in its June Economic Outlook, warning that high investments rate in China could hardly sustain, and that a disorderly exit of investment could lead to a sharp decline in the economy.

Facing the dilemma, Chinese policymakers are widely watched for their response. In November 2012, China's premier Li Keqiang gave an answer: "Reform is China's biggest dividend."

In early July, the premier rolled out possibilities of a government-led investment stimulus, while stressing the importance of reforms along with "stabilizing growth" and "restructuring the economy" at a local conference.

"Quicken the pace of reforms in major sectors and key links such as public administration, taxation, finance and pricing," Li said, in order to "make the market system function better", and encourage private investment.

Calls for reforms yielded "a list of economic reforms" for 2013 this May, but few of them have been implemented. The new leadership has targeted the transformation of government functions, by slashing approvals by government authorizes, a major source of red tape.

"Economic sectors should exploit more of the market functions in allocating resources while the social sectors should make better use of social power, including that of social organizations, giving away the roles that should be rightly for the market and society," Li said, calling it "the direction of reforms."

Releasing dividends through reforms, that's exactly what the current leadership is striving for.

Note: The article was translated from the Chinese version, and any divergence please refer to the Chinese text.


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