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China Daily Website

Economic food for thought

Updated: 2012-08-02 14:37
( China Daily)

President Hu Jintao said at a central meeting on Tuesday that more priority should be given to stabilizing growth, which reflects China's preparedness to cope with the harsh challenges this year.

But unlike what was done during the 2007-08 global financial crisis China may not have as many cards to play this time.

Hu said the fundamentals of China's economy remain sound, but many unfavorable factors, including the turbulent international situation and domestic problems, could affect economic growth this year.

The two major manufacturing activity surveys, released on the same day, conform to Hu's remarks. The official purchasing manager's index fell to an eight-month low of 50.1 in July, reflecting lingering economic weakness, although it remained above the critical 50 mark, which divides expansion and contraction. The HSBC PMI rose to 49.3 in July, the highest since February, indicating continued but slow recovery.

That both indices have stayed around 50 means China's economic activity remains at a low level. It is in line with the country's growth data, though; China's GDP growth hit a rare low of 7.6 percent year-on-year in the second quarter.

In such a situation, policymakers have few options but to take measures to boost growth so that the economy can gradually bottom out in the coming months.

Many people are still expecting a massive stimulus package - similar to the one that bailed out the economy during the global financial crisis. Unfortunately, things are different now. The external situation is very serious, because there is no sign of a satisfactory resolution to the eurozone crisis. So outside demand will remain weak.

Domestically, the last round of the massive stimulus package has left a legacy of rising inflation, surging housing prices and accumulating local government debts. A byproduct of that is the soaring cost of labor, which threatens to undermine China's advantage in the labor market.

Therefore, the right cure for China is to tap into other resources, such as tax cuts and building low-cost affordable homes, to boost consumption and improve people's livelihood. Options also include more fiscal and policy support for small enterprises, which can help absorb labor and stabilize local economies.

We should not expect a knee-jerk economic rebound like the one that happened in the wake of the global financial crisis. The best result would be for China to gradually step out of the difficulties while trying not to leave the major problems for the next economic cycle.