Foundation for economic transition needed

Theory of secular stagnation suggests there must be enough investment to support long-term growth

Once again, Chinese investors' confidence was put to a stress test recently after a small rally that lasted less than two weeks. It seems despite the economy's reasonable performance in the first half of the year, there are still many stumbling blocks that China must try to steer clear of in the second half.

China will have to keep up its domestic growth momentum considering the uncertainties in the global market, such as the Middle East, Ukraine and the eurozone; and in the United States, the risk of so-called secular stagnation - where savings are greater than investment and lead to higher than normal rates of unemployment.

Whether the same is true of China is hard to say, although on the macro level, many cities could be facing a lack of investment in the industries and services that would generate more jobs in the future.

In the Beijing Development Area in the city's southeastern suburb, the city's largest new industrial zone, the former mobile phone maker Nokia's production center, once one of the largest taxpayers in the city, has long passed its heyday.

Mercedes-Benz sustains a large number of jobs from there. But the market for luxury cars is no longer accelerating at previous speed, partly because of the largely environmental regulations on car ownership in some of the largest cities.

With the rising demand for smart phones and tablet computers, the liquid crystal display manufacturer BOE is growing "like a currency printing press", as one of its executives said, but its ultramodern assembly line hardly needs any workers.

There are many cities without such diverse opportunities. The local governments may have, and may continue to, generate some funds from land auctions for what the Chinese call people's livelihoods-related projects, such as better roads and wastewater recycling. But a lack of new industries and services will eventually make local land prices unsustainable - especially if there aren't many job opportunities around and many younger residents are lured by the industries and services elsewhere.

If many cities, instead of just a few cities, fail to invest in the industries and services with high future growth potential, the problem would probably morph into a national crisis.

Concerns of that sort can be derived from chewing on some of the economy's latest data. For instance, from January to July, average growth in fixed-asset investment (which includes the money that went to the building of new factories) showed an increase of 17 percent year-on-year, in comparison with 20.1 percent growth in the same period last year.

The growth from January to June, released only one month earlier, was 17.3 percent, or 0.3 point higher than the January-July figure.

The comparison indicates a more serious slowdown in July. It was attributed largely to three factors by the National Bureau of Statistics: falling investment in property development, overcapacity in so-called traditional industries, and a decline in the local governments' capability to finance their investment programs.

The overall industrial growth rate came down a bit at the same time. In July, it was a 9 percent month-on-month growth from June. In June, it was a 9.2 percent growth from May.

In a three-sector breakdown, the mining industry's value-added growth was 6.2 percent month-on-month from June; while that of manufacturing was 10 percent; and utilities, 1.9 percent.

The money supply data showed a much more marked fall. The increase in new loans, totaling 385.1 billion yuan, nearly half of the anticipated amount, was the smallest since December 2009.

So far, in no area has the decline, either in investment or in loans, suggested a contracting economy. Despite a 0.2 point fall from June, industry could still register 9 percent year-on-year growth in July, the second highest record in the year.

However, as the theory of secular stagnation suggests, there must be enough investment to support the economy's long-term growth. It is as true of the United States, in order to take full advantage of the opportunity to revamp its manufacturing, as of China, which also needs new investment to phase out factories built 20 to 30 years ago.

The central government will still protect growth in the second half of the year. The most important thing, as Chinese leaders rightly say, is not just to achieve a certain GDP target, but rather to lay the foundation for the country's transition.