China's economic deceleration appears to be continuing. The country's gross domestic product grew by 6.7% year on year in the January-March 2016 quarter, the slowest growth since the January-March term of 2009, just after the Lehman shock of 2008. Any signs of problems in the Chinese economy are bound to have impacts on the world economy. The Chinese government should take steps to heighten growth potential for the medium to long term, such as an overhaul of state-owned enterprises.
Industrial production, which has long served as the main engine of growth, has shown slower increases amid the current supply glut. Shadows are also being cast over consumer spending, which is expected to be an alternative motive force. Construction investment and plant and equipment spending have picked up, due partly to an easing of rules on mortgage lending, but housing markets in major Chinese cities appear to be slightly overheated already. There is a limit to how much Chinese policymakers can rely on property development to boost overall business activity.
Earlier this year, the government set its economic growth target for 2016 at 6.5-7%, and a goal of at least 6.5% annually for the next five years. Chinese Premier Li Keqiang expressed confidence in managing a shift from the high growth of the past to "medium-to-high growth," but the latest economic indicators suggest that the envisioned soft landing is likely to be accompanied by difficulties.
If the economic slowdown continues, warning bells will begin to sound over the possibility that the economy will miss the target. Alarmed, the Chinese government has begun to take multiple steps to keep the economy from faltering. For instance, it has raised import duties on goods people buy abroad, such as luxury watches, alcoholic beverages and cosmetics. The measure is aimed at discouraging lavish spending by Chinese tourists abroad, leading them to buy more within their own country instead.
MARKET-ORIENTED REFORM Such tweaks to policy measures can have only limited effects. What's more, Chinese government officials lack an important point of view -- they are overlooking the fact that the Chinese government has yet to make good on the reform pledges it set out in order to ensure stable growth over the medium to long term.
When the Chinese Communist Party held the third plenum of its 18th Central Committee in November 2013 -- a conclave intended to outline the future direction of economic policy -- it pledged to deepen structural reform by giving a decisive role to market forces, while reducing government involvement, and to overhaul state-owned enterprises in the context of the stated policy.
Now, two and a half years later, a string of structural reform plans have made little headway. It is notable that the Communist Party leadership has tightened its grip, and state-owned enterprises have become even more bloated. The lack of respect for market mechanisms has led to delays in weeding out "zombie" enterprises -- companies that need bailouts in order to operate -- which are mainly to blame for oversupply.
Economic experts in China who have hoped for market-oriented reforms are voicing strong discontent. The lack of sincere dialogue with the markets at home and abroad has dampened overseas investors' appetite for China.
What China must do is continue to make structural reforms based on the policy to which the government has committed. Doing this would pave the way for the "new normal" of slower but more stable growth over the medium and long term, on which China's leadership under President Xi Jinping is putting great emphasis.