News Analysis: China's economy sailing in right direction

While the latest manufacturing activity data points to lingering weakness, economists have been quick to reassure the market that the Chinese economy remains on course to achieve its annual growth target.

On Wednesday, the Caixin flash China general manufacturing PMI, a preliminary gauge of factory activity, plunged to a 78-month low of 47.0 in September from 47.3 in August. A figure below 50 indicates contraction.

With exports, investment and manufacturing all gearing down, the heady days of breakneck, hectic expansion are a thing of the past. The economy posted 7-percent growth in the first half. While this is the slowest pace in nearly a quarter of a century, it is too early to say the economy is veering off course.

It is not all doom and gloom, however, as 7-percent growth is within the targeted range. Further, signs of mild recovery and the effect of reform measures will support the economy in the second half (H2) of 2015, many economists believe.

Certain economic indicators are showing signs of picking up. China's value-added industrial output expanded 6.1 percent year on year in August, up slightly from 6 percent in July. The same month, total-power use rebounded from a drop of 1.3 percent in July to an increase of 1.9 percent year on year.

This gradual improvement in power use shows that the economy is still holding steady, said Shan Baoguo from the State Grid Energy Research Institute.

Although traditional manufacturing slowed down markedly, new industries such as robotics, electric vehicles and smart devices have seen rapid growth this year, said Niu Li, an economist with the State Information Center.

"The fundamentals for economic stability have not changed," said Ning Jizhe, deputy head of the National Development and Reform Commission, the country's top economic planner.

China has maintained a medium-high growth rate and its restructuring and upgrading drive continues to make progress, he commented.

To shore up growth, the government has reduced interest rates four times this year, cranked up fiscal spending, cut fees and taxes, and rolled out major projects to boost investment and consumption.

Red tape has been slashed for small businesses and innovators, and private and foreign investors are benefiting from expanded market access.

The effect of these measures will become more apparent in H2, helping the economy and, with the base effect taken into account, will ensure the annual GDP growth target, of around 7 percent, is achieved, Niu forecast.

Michael Menhart, chief economist of German reinsurance company Munich Re Group, has faith in China realizing its annual growth target, assuring observers that there is no reason to panic.

The country's top brass have projected confidence, too. "The Chinese economy is under a downward pressure...China has the capacity and is in the position to maintain a medium-high growth in the years to come," President Xi Jinping said in a written interview with the Wall Street Journal published on Tuesday.

Xi said, to understand China's economy, one needs to take a longer view. "If you liken it to a large ship on the sea, the question you ask is whether it is sailing in the right direction, does it have sufficient engine power and energy to stay long."

"Any ship, however large, may occasionally get unstable sailing on the high sea," Xi said.

There remains huge growth potentials in China thanks to substantial domestic demand, and ongoing urbanization and industrialization, according to Wang Baoan, head of the National Bureau of Statistics.

Reforms in areas like government administration, market access and state-owned enterprises will help tap the economic potential, said Cai Fang, vice president of the Chinese Academy of Social Sciences.

"Whatever happens, China will stay strongly committed to deepening its reform on all fronts while opening still wider to the outside world," Xi said.

With a plan to overhaul state-owned enterprises released earlier this month, and confirmation that more businesses will be allowed to accept foreign investment from 2018, China looks on course to navigate the choppy waters of structural transformation and economic growth. Endi