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Nikkei Editorial

Stable Chinese growth requires open markets

Bold reforms, not the usual stimulus steps, are key to harnessing the power of SMEs

Slowing car sales are just one of many emerging signs that China’s economy is faltering.   © Reuters

The economic warning signs are flashing brighter for the Chinese economy. The country's push to achieve stable growth is being hampered by a combination of excess debt held by regional governments and companies, and the struggle with the U.S. for economic, trade and technological dominance.

To put the economy on a favorable trajectory, Chinese policymakers need to quickly introduce bold measures to open the country's markets and help small and midsize companies thrive.

The Chinese economy grew by a real 6.6% for 2018, the slowest growth since 1990, when the effects of the Tiananmen Square incident squeezed economic activity. The growth rate for the October-December quarter stood at 6.4% on the year, a slowdown from the previous quarter.

Beijing put a positive spin on the annual result, saying it was in line with the growth target. But insiders tell a different story, pointing to numerous bloated estimates. Just days before the latest data for 2018 was released, the authorities downgraded the growth rate for all of 2017 by 0.1 percentage point. More cynical observers say the change was made to make the growth figures for 2018 look stronger.

Such tactics, if they indeed were used, are unacceptable; the Chinese government has a duty to produce credible statistics, which are paramount to gauging the true state of the global economy.

Other statistics also point to a deterioration of the Chinese economy. New car sales in 2018 sank below year-earlier levels for the first time in 28 years, and China's total trade value in December sagged on the year. Consumer spending, the main engine driving China's growth, is not growing at its former clip.

Meanwhile, higher wages are prompting foreign manufacturers -- once so eager to set up shop in China -- to relocate to Southeast Asia. And, of course, the trade war is placing further strain on the economy. Decreases in order backlogs at Chinese factories -- core components of the supply chain for many multinationals -- have global repercussions. Major Japanese companies said their manufacturing output in China dropped 30% to 40% in November and December last year, a plunge they described as "unprecedented."

The situation is also dire for China's small and midsize private companies. Ever since banks began curbing lending last year, these businesses have struggled to scrape together the funds needed for daily operations and capital investment. Their woes are in fact a side effect of government policies to make state-owned enterprises even bigger. This problem has a direct impact on whether rural migrant workers can find work in cities or whether China's more than 8 million fresh college graduates can land jobs.

Chinese authorities have said they are ready to implement tax cuts and other support measures for smaller companies, but such temporary steps will never be enough. True economic change will require more than just pumping large sums of cash into railroads and other traditional stimulus strategies. There needs to be a fundamental shift in Beijing's policies -- one that funnels more funds into smaller private companies.

The outcome of the current trade talks with the U.S., set to conclude by March 1, will go a long way toward deciding whether companies will start investing more for the future. The Chinese economy may be under strain, but given the country's gigantic growth markets, it still has ample room to expand. Now is the time for the leadership in Beijing to make that happen -- and also serve its goal of securing stable growth -- through market-opening measures.

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