Overcoming growing pains

Government needs to push forward with reforms to achieve balanced and sustainable development via restructuring

The government will maintain a proactive fiscal policy and a prudent monetary policy due to the country's slower economic growth. However, the policy space for carrying out short-term macroeconomic measures in China is already quite limited. Therefore, reforms must be promoted to achieve stable economic growth in the course of restructuring.

China's GDP was 7.7 percent in the first quarter of this year, slower than expected. It declined 0.2 percentage points compared with the last quarter of 2012, and was 0.1 percentage points lower than the average growth rate last year. Although it is a slight drop, it was a continuation of the slowdown trend that appeared in 2011. The relatively weak growth is mainly reflected in the low added value in manufacturing, which is rooted in weak investment by manufacturers. Generally, the inventory level is relatively high in China, so the willingness of enterprises to invest is weak.

To be more specific, in the first quarter, the recovery of fixed investments has been largely driven by urbanization and investment in infrastructure and real estate. The investment has been dominated by government projects, investment by private enterprises and in non-governmental projects continued to decline.

The latest data also show that infrastructure investment increased by 25.6 percent in the first quarter this year, which is a substantial year-on-year growth, this rapid increase happened just after the new central leadership took office, and such investment has been the case after previous leadership changes in the past. In fact, manufacturing has continued its declining tendency, and it has dropped 6.1 percentage points compared to last year. The slump in manufacturing and private investment shows that autogenous growth is weak, which reflects the difficulties inherent in China's economic transition and restructuring.

The decrease in the long-term average rate of profit in manufacturing has affected investment confidence, and the corporate debt deleveraging has made the situation worse. Statistics show that the industrial growth of above-scale enterprises rose by 9.5 percent in the first quarter, 2.1 percentage points slower than the growth during the same period last year. Although in the first two months of 2013 above-scale enterprises achieved a profit rate of 5.18 percent, which is a rebound from the last quarter of 2012, investment confidence has been adversely affected by the declining long-term average rate of profit. The large decline in productivity and gross demand has restrained the expansion of manufacturing and resulted in worsening sustainability in enterprises' follow-up capital expenditure.