Will Slow and Steady Win China’s Economy Race?

Policymakers are trying to balance economic reform and stability in a climate of slower growth

(Beijing) – China’s faster-than-expected economic slowdown is testing the ability of government policymakers to maintain near-term stability without compromising the nation’s long-term reform goals.

The government said the gross domestic product growth rate sank to a six-year low 6.8 percent in January and February. Figures for those months came in far short of the average 7.7 percent forecast by economists from 14 financial institutions previously surveyed by Caixin. Fixed-asset investment growth and lending growth slowed as well during the period.

Early-year GDP growth also came in below the 7 percent target for 2015 set by the government, as spelled out in an annual report on the government’s work delivered by Premier Li Keqiang on March 5 to the opening session of the National People’s Congress.

Officials have acknowledged this year’s slow start in the context of what Li and others have called the “new normal” for China’s economy. GDP growth for “the first quarter will be below 7 percent,” said Zhu Baoliang, director of the economic forecast department of the State Information Center (SIC), a government research agency.

State banks have responded to the slowdown by cutting 2015 profit targets. Sources close to banks said Industrial and Commercial Bank of China (ICBC) and the Bank of China (BOC) were each expecting to post a decline of net profit from 2014. China Construction Bank has forecast a mere 1 percent net profit growth from last year, down from 11 percent annual growth in 2013 and 14 percent in 2012.

The government is pressing forward with transformational economic reforms, but pressure to modify the official approach to these long-term changes has been building as slowing growth affects banks, the overall business climate and local government finances.

“Pressure is building as the real economy turns downward,” said Xu Gao, chief economist at Everbright Securities.

Zhu said how quickly the government is able to strike a balance between the slowdown and economic stability will largely depend on the ability of policymakers to maneuver and adjust fiscal policies.

Many analysts expect further easing of monetary controls by the central bank. They predict, for example, that the central bank in coming months is likely to make deeper cuts in mandatory bank reserve-requirement ratios or benchmark interest rates in step with economic reform. Others foresee more support for small businesses and the real estate sector.

“Monetary policy easing is designed to buy time for reform,” explained Fan Jianping, SIC’s chief economist.

Following a first-quarter slowdown, Fan sees potential for a revival in the second half of the year. He said, however, that reform efforts must continue so that China can maintain economic stability, improving relations between government and the market.

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Original text: Caixin Online By staff reporters Yu Hairong, Xing Yun, Wu Hongyuran, Zhang Yuzhe and Wang Liwei  (Rewritten by Han Wei)

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