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News Analysis: Economy needs stronger policy support

Xinhua, September 14, 2015 Adjust font size:

Despite signs of stabilization in some economic indicators released on Sunday, China's economy needs more policy support to keep its head above water.

Retail sales remained robust in August, posting a growth of 10.8 percent, up from 10.5 percent in July. Factory output in August grew 6.1 percent, up from the 6-percent rise in July.

Weak readings in other key indicators, however, mean China's economy still faces huge downward pressure.

In the first eight months, fixed asset investment grew 10.9 percent year on year, retreating from the 11.2-percent growth registered in the Jan.-July period.

Property investment growth continued to slow in the first eight months, indicating caution from builders and challenges facing the industry.

Real estate investment rose 3.5 percent year on year Jan.-Aug, with the growth rate 0.8 percentage points lower than that registered in the first seven months.

The weak data led analysts to expect further monetary easing by authorities following five interest rate cuts since November. The reserve requirement ratio, the money banks are required to park to cushion risks, has been cut four times.

"We expect one more interest cut in the remainder of 2015, and two more 50 basis points (bps) RRR cuts," China International Capital Corporation Limited (CICC), China's biggest investment bank, said in a research note.

On the fiscal front, CICC expects an increase of government investment, mainly through infrastructure projects, to mitigate the downside risks.

On Sept. 7 and 8, China approved eight infrastructure projects worth 147 billion yuan (23 billion U.S. dollars).

The country has lowered the capital ratio requirement of infrastructure investment projects, with the minimum requirement for ports, waterways and airports cut from 30 percent to 25 percent; that for railway, highway and urban rail transit revised down from 25 percent to 20 percent.

"We believe infrastructure investment would have to grow by 20 percent or more (instead of our previously anticipated 18 percent to 20 percent) in 2015, in order to cushion the larger headwinds from the property downturn," said UBS in a research note.

However, economists believe China must move beyond these short-term measures and press ahead with more market reforms to generate sustainable growth.

"While cyclical management policies may be effective in mitigating slowing growth momentum in the short term, only market-oriented reforms, including reforms of the fiscal regime and the SOE model, would materially and sustainably boost investment returns and investment growth in the long run," CICC said.

China on Sunday issued a guideline to deepen reforms of state-owned enterprises (SOEs). With the aim of making SOEs more creative and internationally competitive, it pledged measures to modernize SOEs, enhance management of state assets, promote mixed ownership and prevent the erosion of state assets. Endi