Economists Cautious About China's Recovery

While China's recent economic data cheered up the country's entity markets, many economists remain cautious about whether the economy's rebound will be carried through the rest of the year.

Last week saw the release of a string of key economic indicators, pointing to some improvement in the world's second-largest economy, if not for all its sectors.

Chinese stock markets responded with a three-day winning streak last week despite the mixed signals the data. And the shares further rallied on Monday with the benchmark Shanghai Composite Index climbing 2.39 percent and the Shenzhen Component Index surging 2.59 percent.

"Most figures released lately indicated that the economy reversed a downward trend in July. But I will call it a rebound, not a trend," said Lian Ping, chief economist with the Bank of Communications.

Official figures delivered good news in the growth of the country's industrial production, foreign trade and lending in July, which eased market blues about a persistent slowdown.

China's economic expansion dropped to 7.5 percent in the second quarter of the year and 7.7 percent in the first quarter, which choked a rebound to 7.9 percent in the final quarter of 2012.

"Looking into the economy, possibilities still exist for it to continue moving downward in the last two quarters of this year, but we may see improvement and stabilization in terms of quarter-to-quarter changes," Lian said.

He believes that the economy still faces downside pressures because the impetus to drive the country's endogenous growth remains insufficient, which was reflected by the lackluster manufacturing sector.

Sharing this view, Wang Jun, an economist with the China Center for International Economic Exchanges, said that the country's real economy may not be out of the woods yet.

Data released last week showed that despite a relief in inflation levels, the producer price index, which gauges prices of goods when leaving factory gates, was stuck in negative territory for a 17th consecutive month in July.

"It showed that market demand remains weak and more efforts should be made to deal with over-capacity," Wang said, adding that more time is needed to establish whether the positive signs will consolidate to form a trend.

In addition, Lian said that it remained questionable whether the rebound in July's trade, boosted largely by overseas Christmas consumption, will continue in subsequent months.

"After all, the economy is losing its advantages in cheap-labor products to other more competitive developing countries. Its market territory is shrinking rather than expanding," he said.

Both exports and imports recorded unexpectedly high growth rates after sharp declines in June. Customs data showed that China's foreign trade grew 7.8 percent in July from a year earlier, compared to a decline of 2 percent in June.

Another focus of market concerns was pinned on the property market. Recent government statements suggested that it might stop addressing regulation over the sector, leading to suspicions that it intends to ease its control to shore up growth.

"This is the biggest risk that I think the economy will face in the second half. If there are strong rebounds in housing prices, the government will be forced to introduce tighter control, thus causing market fluctuations," Lian said.

Investment in the country's property sector increased 20.5 percent year on year in July, accelerating from 20.3 percent in the first half.

However, July's data assured economists that the 7.5 percent economic expansion target set by the government for the full year of 2013 is attainable.

Li Xunlei, chief economist at Haitong Securities, projected the economy's growth at 7.4 percent in the third quarter and the whole year's at 7.5 percent.

"We had expected that the slowdown would be more serious coming into the second half, but right now we think it looks increasingly likely that the economy will achieve its expansion target," said Lian. He forecast a 7.4-percent growth for the remaining two quarters.

Given the positive changes in July, analysts believe the government will continue to keep its macro-control policies stable. "The need to back growth while controlling risks in the property sector, local government debts and shadow banks requires government polices to stay steady," according to E Yongjian, a financial analyst with the Bank of Communications.

Authorities have been trying to strike a balance between stabilizing growth and pushing ahead with reforms. They pledged at a recent meeting that they would continue to coordinate the tasks of "stabilizing growth, restructuring the economy and promoting reforms."

The new government has so far demonstrated greater tolerance for slower growth in its efforts to switch the country's growth pattern from dependence on exports and credit expansion toward one driven by consumption and innovation.

Liu Shijin, deputy head of the Development Research Center of the State Council, said in an interview that the economy is in a crucial period of shifting from super-high rates to "moderate growth."

"The economy's expansion will ease to between 7 and 8 percent from 2013 to 2014, then stabilize at about 7 percent or lower after two or three years," Liu forecast.