China's economic growth, already at its slowest in decades, will get worse before it gets better, as economists say it will take time before liberalizing reforms turn net positive, and Beijing needs to bite more such bullets for a sustainable turnaround.
GDP growth slowed to 7.4 percent last year, its weakest since 1990, and Beijing is calling for around 7 percent growth in 2015. The IMF recently predicted 6.8 percent growth this year, and 6.25 percent in 2016.
That's still a ripping rate for a $10 trillion economy, so few economists believe a crisis is imminent, but even fewer believe an upturn is around the corner, as reform itself is partly responsible for the slowdown.
"For this year, unfortunately, we have not seen the bottom," said Wang Jun, economist at the China Center for International Economic Exchanges, a think-tank set up to help Beijing navigate choppy waters after the global financial crisis.
"Growth should stabilize, but it's hard to judge for next year because that depends on the progress that we make in structural adjustments."
Though Beijing has repeatedly cut interest rates and freed banks to lend more, that has done more to fuel debt-funded stock market speculation than spur productive investment.
The resilience of the stock market surge is in part a recognition that government will have to keep injecting fresh cash, since nearly every indicator of economic performance has been lackluster or worse in 2015, with manufacturing output sliding, deflationary pressure rising, and demand weak both at home and abroad.
Unemployment, a key benchmark of social stability, remains low at around 4 percent, but even officials doubt the reliability of that figure.
Private surveys show rising unemployment stress, and local governments are moving to protect jobs at state-owned enterprises.
Officially, non-performing loans remain manageable at below 2 percent, but most analysts believe real rates are far higher, since many firms and local governments tapped the opaque shadow banking market.
L-SHAPED RECOVERY
On Saturday state media published comments by a state think-tank economist predicting recovery would be "L-shaped", not V-shaped, and even that would be in doubt once the impact of recent monetary easing wears off. Sustainable recovery, he said, needs deeper reform.
In the first phase of China's economic revival, stripping away the most distorted aspects of Chairman Mao Zedong's command economy delivered immediate benefits. Reopening universities and allowing private ownership in real estate and business unleashed the aspirations of 1.3 billion Chinese, fuelling decades of double-digit growth.
But now China's economy is more complex, more market-driven and more exposed to overseas factors, reform is a riskier balancing act.
"The problem is, there are two sets of reforms that have to take place," said Michael Pettis, professor of finance at Guanghua School of Management in Beijing.
"The first set of reforms was to remove the sources of the imbalances: the undervalued currency, low wage growth related to productivity growth, and finally financial repression."
Those are largely sorted, he said, but the next phase is to transform an economy based on investment into one driven by domestic consumption.
"If investment goes down, unemployment pressure increases," he said, which drags on consumption just when you need it to rise.
Beijing struggles with this dilemma.
Much of China's current malaise is attributable to the end of the real estate boom, which Beijing encouraged to redirect capital away from an overheated sector.
But that slowdown hit related sectors such as steel, glass and furniture, cut revenues for local governments dependent on land sales, and continues to drag on growth.
"There are 55 million empty housing units in China," said China economist Nicholas Lardy. "These aren't doing anything (for the economy)."
MIDDLE-INCOME TRAP
China's debt overhang has also made it hard to stimulate productive investment. Private firms, facing stubbornly weak customer demand and high real interest rates, prefer to repay debt than invest in new capacity.
Policymakers fear reform will not be aggressive enough to steer the world's second-largest economy around the so-called middle-income country trap, where rising labor costs halt economic progress without accompanying rises in productivity or innovation.
Some studies suggest China put a foot in the trap after the global financial crisis, which juiced financial speculation at the expense of product innovation.
Finance Minister Lou Jiwei said in April that China had a 50-50 chance of escaping.
"The execution risks are real, and in fact you could argue that as the economy becomes more market-oriented, the risks go up and the volatility increases," said Andy Rothman, investment strategist at Matthews Asia in San Francisco.
"But they are doing exactly what we would want them to do. We have to accept the fact that as in the developed world, a market-based Chinese economy will be more volatile."
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