Chinese Economy 'Very Strong' in Long Term

Chinese economy might suffer ups and downs, but its long-term prospect remains bright, Daniel Gros, director of the Centre for European Policy Studies (CEPS), told Xinhua.

The senior expert painted a much rosier picture for the world's second largest economy than a handful of experts in the West who have been claiming that the economy was about to collapse amid signs of slowing down.

"There might be ups and downs, but, in the long term, the Chinese economy is very strong," Gros said in a recent interview.

Official figures showed that economic growth fell to 7.5 percent in the second quarter this year after declining for 10 straight quarters, the longest slowdown since China's market-oriented reforms began over three decades ago.

When the Chinese economy hit the brakes after three decades of double-digit growth, some experts had been crying wolf on it. In the eyes of Gros, these people are alarmists who were seeking public attention.

"If you say something sensible, some people say 'yes'. But when some people say 'Ah, tomorrow the world ends,' this would be much more popular. They say that basically to get attention," Gros said.

He pointed to the "accumulation of human capital and physical capital" as the fundamentals that would guarantee the Chinese economy a bright future in the long run.

"Education of the population is very strong and your people have very high savings. If you take these two things together, you can have another 10 to 15 years of what is called 'extensive growth'," Gros said.

He attributed the current slower growth to the fact that "the grow rates over the last six or seven years for the Chinese economy were above potential, so the next seven years maybe below potential."

"As the potential for China's annual economic growth rate is 7 to 8 percent, maybe it would be less than 7 percent in the next few years," he said.

"So it's not a collapse and no disaster. It is just that there are certain cycles, and you can easily have these investment cycles," he added.

Even if it is very unlikely for the Chinese economy to collapse, China is faced with a daunting challenge in its economic restructuring, Gros said.

"The readjustment away from investment towards consumption, the so-called rebalancing, is much more difficult than many people think. Because when you have had investment rate of close to 50 percent, that is a very slow process," he said.

The rebalancing would also be hindered by "a lot of inertia," which means that "once it goes in one direction, it tends to go a long time in that direction. That is called the accelerator model in economics," he said.

The economist expected the "spiral downward" resulting from less investment to last two, three or five years, saying that "this spiral downward is moving very slow, but very persistent."

While saying that the biggest risk in the Chinese economy is that this spiral goes down too quickly, Gros said, "The risk exists, but I don't think it will materialize."

Gros also said China should have what was in Germany called a "steady-hand" policy, keeping on reforming the pension system and the social security system, which would "create the security for people to consume a little bit more than today, and can calm down the economy," and do not change the exchange rate and interest rate too quickly.