Uncertainty over China's growth lingers

CHINA - Having met market expectations with its 7.5 per cent expansion in the second quarter of this year, China's economy is now under scrutiny for where it is headed in coming months and years.

Investors had breathed a sigh of relief on Monday that the world's No. 2 economy did not repeat the nasty surprise it sprung in the first quarter, when its 7.7 per cent expansion missed analysts' forecasts of 8 per cent.

Statistics official Sheng Laiyun also sought to boost confidence by declaring that China has the right conditions to meet its 7.5 per cent official target for the year. That would mean China just needs to average around 7.4 per cent in the next two quarters.

Still, a sense of uncertainty - and even unease - continues to linger amid growing signs that China's growth could keep moderating, not just for the rest of this year, but also well into next year and beyond.

Some analysts say growth could drop to 6.9 per cent next year, and between 3 per cent and 6.5 per cent in a few years' time.

Not that the new leadership has not given ample warning of this downward trajectory. "The top leaders have made clear on several occasions that they are prepared to accept and tolerate much slower growth so as to implement reforms," said Central University of Finance and Economics professor Guo Tianyong.

Finance Minister Lou Jiwei hinted last week that top leaders were prepared to tolerate growth rates as low as 6.5 per cent.

And many now expect Premier Li Keqiang to announce a lower gross domestic product target next year of 7 per cent at a top economic work conference in December, said Nomura economist Zhang Zhiwei on Monday.

In the previous decade under Mr Li's predecessor Wen Jiabao, Beijing's annual target, set at 8 per cent, was almost sacrosanct. But this time, what is weighing on investors' minds is how closely the new leadership would stick to its own targets. And here, Beijing is not providing much guidance.

Asked by reporters about the government's bottom line for slower growth, Mr Sheng said only that the threshold "is definitely changeable, it won't be fixed at one point".

Still, a number of economists have been downgrading their 2014 GDP growth forecasts in the past few days. Nomura and Macquarie have dropped their expected growth rate to 6.9 per cent, from 7.5 per cent previously.

Nomura's downgrade takes into account a shrinking working- age population, which curbs its potential growth. It also expects that the leadership will take tough action to rein in credit growth and bring down debt levels in the financial system.

This resolve to get tough on one of the pressing problems in China's economy has prompted optimism among analysts like Barclays Capital economist Huang Yiping that Premier Li will push through drastic reforms even if they cause short-term pain.

He predicts Mr Li's restructuring and deleveraging efforts will drive China into a hard landing of 3 per cent annual growth before long-term gains kick in.

So the real question for investors is less about growth statistics than if Mr Li will live up to this bold reformist persona.

His daunting challenges will include breaking China's banking monopoly and allowing private enterprises to go into sectors dominated by state-owned enterprises, said Moody's Analytics economist Alistair Chan. If successful, this could help ease China to a healthy 6 per cent growth rate by 2020.

The "critical wild card" is the labour market, Mr Zhang said, noting that the risks lie in a sharp slowdown, "with big factories closing and a lot of people laid off". This could spark social turmoil and would pressure the government to stimulate growth rather than push structural reforms.

graceng@sph.com.sg

Get a copy of The Straits Times or go to straitstimes.com for more stories.