News Analysis: Chinese economy likely to hold steady in H2

Despite weak economic figures and a volatile capital market, the Chinese economy is still resilient and will likely hold steady in the latter half of the year as government measures take effect, according to economists.

While the 7-percent growth posted for the first half (H1) is in line with the government's target, China is facing challenges and downward risks from home and abroad, Xu Shaoshi, head of the National Development and Reform Commission, said Thursday during the ongoing bimonthly session of the top legislature.

He said the weaker-than-expected global economy, weak producer prices and flagging corporate profits were barriers to major economic targets this year.

China's producer price index (PPI) dropped by 5.4 percent year on year last month, the largest drop in over a year, showing weak domestic demand and pointing to looming deflation risks. Industrial profits in July also fell faster than June.

But Xu remained upbeat about the second half (H2), saying that China's growth was still resilient and had huge potential.

"As measures to sustain growth gradually take effect, the economy will likely see steady growth in H2," Xu said.

The central government will continue to implement its proactive fiscal policy and a prudent monetary policy, offer taxation and financial support to innovation, a key sector, give preferential tax breaks to small businesses, and pay more attention to defusing financial risks, he said.

Drastic fluctuations on the Chinese stock market have stoke concern about the weakness of China's real economy.

The benchmark Shanghai Composite Index has plunged more than 37 percent since its mid-June peak of 5,178 points, partly due to high leverage and panic selling.

UBS chief China economist Wang Tao said a weak stock market will likely shave up to 0.5 percent from GDP growth in H2, but the government will do whatever it takes to stabilize growth at 6.5 to 7 percent.

In a bid to reduce financing costs and bolster the real economy, the central bank announced cuts to the reserve requirement ratio (RRR) and interest rates on Tuesday, the fourth time it has done so since the beginning of this year.

As investors responded to this, the Shanghai index stabilized with sharp rises of 5.34 percent on Thursday and 4.82 percent Friday.

Wang expects the central bank to cut the benchmark interest rate again late this year to further reduce costs.

Zhu Baoliang, an economist with government think tank the State Information Center, said monetary easing measures since November have helped reduce real interest rates and promote growth.

Efforts to streamline administrative approvals, reduce company tax and promote private investment will facilitate innovation and create an equitable market environment, Zhu said.

"[This round of] fiscal and monetary policies are boosting domestic demand better than previously; partly reducing the downward pressure on economic growth," Zhu said.

Taking into account the time lag for macroeconomic policies to take effect, domestic demand will remain steady, and investment into infrastructure, the service sector and high-tech industries will continue to see relatively fast growth, he said.

Zhu forecast that it was "highly possible that China would hold its economic growth at around 7 percent this year." Endi