Chinese economy at the crossroads

The Chinese economy is sending mixed signals to China watchers who are keenly looking for the direction policy will take and the growth trend in the second half of the year.

Primarily, they are wondering whether policymakers will cut banks' reserve requirement ratio (proportion of money they must keep aside as reserves, something that can be used to increase or drain market liquidity) and whether the policy stance, to be changed or not, would save the economy from sliding further in the second half.

China could be facing its most complicated economic situation in the past three decades. Having become the world's second-largest economy, China is also facing the Herculean task of resolving many problems — such as the pile-up of local government debts and hovering housing prices — that have been accumulated in the many years of fast-pace growth.

Worse, as its economic restructuring continues, growth has slowed, which makes it more difficult to deleverage and regain growth momentum.

Premier Li Keqiang and his colleagues have shown adequate resilience in tackling those problems. On the one hand, they have refused to resort to large-scale stimulus, which is easy to implement but could make more trouble. On the other hand, they have resorted to targeted stimulus measures to keep the economy going.

In his trip to the Inner Mongolia autonomous region last week, Li vowed to maintain a prudent and stable monetary stance and make good use of existing capital in the financial system to boost the economy. Financial institutions, in particular, must provide more support for development of small companies and enterprises in the western regions, he said.

His remarks are an unequivocal reflection of the central government's consistency in implementing its reform-centered policy stance. While reforms targeted at improving long-term economic vitality unfold, a fine-tuning approach has been adopted in tackling current problems.

The heightened tolerance toward economic turbulence means the possibility of an across-the-board reserve requirement cut is not high as the job market remains resilient and some economic indicators are showing signs of improvement.

China's real export, for example, could have risen by nearly 7 percent in the first four months year-on-year — it fell by 4.8 percent in official statistics — if the value of inflated false exports were deducted from the January-April data last year, according to State Information Center economist Zhu Baoliang. Early last year, false export activities were believed to have contributed to inflated trade figures, pushing up the base level for calculating export growth this year.

If the current economic slowdown worsens in the second quarter, additional policy support could be introduced, such as an acceleration of growth-enhancing reforms, greater fiscal support via policy bank or special construction bond issuances, plus maintenance of China's exchange rate at its current low levels, according to UBS economist Wang Tao.

Those measures, together with previous supportive policies whose effect is unfolding, would make it unnecessary to cut the banks' reserve requirement ratio unless there appeared an economic "black swan".

The downside risk lies in the property sector. Housing inventories are on the rise, adding to pressure on real estate developers and related industries, such as raw materials and building materials. The extent of correction in the sector would to a large extent set the pace for China's economic policy in the coming quarters. In other words, whether it is a real tempest or just a storm in the teacup would determine if authorities will substantially loosen its monetary stance.