China's economy shows steady improvement in second quarter

TIANJIN: China's Premier Li Qiang said on Wednesday he was confident the world's No.2 economy could maintain a "relatively rapid" growth rate as it transitions from a manufacturing-led model to a consumer-driven one, a shift analysts say is key to securing its future.

Li's keynote speech, delivered at a World Economic Forum meeting in Tianjin, comes as Chinese officials seek to cushion the economic damage caused by the trade war with the United States through policy support - a particularly daunting challenge for authorities grappling with the pressing need to undertake painful structural reforms.

Most analysts believe China's $19 trillion economy faces two broad paths: it can sustain relatively high, albeit slowing, growth driven by strong exports - a trend likely to fade as trade tensions with the West escalate - or it can endure several years of slower growth while implementing reforms aimed at unlocking longer-term gains through its vast consumer market.

But China's second-ranking official told delegates he was optimistic that Beijing could pull off both.

"We are confident in our ability to maintain a relatively rapid growth rate for China's economy," Li said.

"China's economy showed steady improvement in the second quarter," he added. "Regardless of how the international environment evolves, China's economy has consistently maintained a strong momentum for growth."

Beijing has set an ambitious 2025 growth target of "around 5 per cent", although most analysts expect China will struggle to keep expanding at those rates in the coming years if a lasting truce cannot be secured with Washington.

Oxford Economics expects average annual GDP growth this decade to halve from the 1999-2019 average to 4.5 per cent and slow to 3 per cent in the decade after.

Economists say more policy support for households could ease the transition to consumption-led growth, but the shift remains politically sensitive for the ruling Communist Party, which has long tied its legitimacy to high growth - a key reason why policymakers have delayed seriously pursuing it for over a decade.

Household consumption has remained at around 39 per cent of GDP over the past two decades, according to analysts at Rhodium Group, a China-focused US think tank, far below averages in OECD economies of 54 per cent.

On Tuesday, China released guidelines aimed at using financial tools to boost consumption, including pledges to support employment and raise household incomes.

The International Monetary Fund last year said deeper reforms are needed to convert China's economy to one led by consumption, including pension reforms, and erecting a social safety net to reduce the need for massive precautionary savings.

"We aim to help China transition from a major manufacturing power to a colossal consumer market," Li said. "This will open up vast and untapped markets for businesses from many countries."

China on Tuesday released guidelines aimed at using financial tools to boost consumption, with pledges to support employment and raise household incomes as part of broader efforts to bolster the economy.

The guidelines, drafted jointly by six government departments and released by the central bank, said China would support eligible companies across the consumer industry chain to raise funds through stock market listings and other channels.

China will "guide financial institutions to strengthen financial services from both the supply and demand sides of consumption, meet the diversified financing needs of various entities and promote the expansion of high-quality consumption," the central bank said.

Banks will be encouraged to establish and improve internal structures to provide efficient and convenient services in the field of consumption, innovate credit products while managing risks, according to the guidelines.

China aims to boost residents' employment and income growth, and raise consumer confidence, according to the guidelines jointly drafted by the central bank, the state planner, the finance ministry, the commerce ministry, the financial and securities regulators.

The central bank will use various policy tools such as reserve requirements, relending and rediscounting, and open market operations to maintain liquidity and reduce overall social financing costs, it said.

Last month, the central bank unveiled a 500 billion yuan ($69.71 billion) relending facility for elderly care and services consumption, in a bid to encourage banks to offer financial support to the accommodation, catering, educational and elderly care sectors.

China will support qualified firms in the consumption sector raise funds via initial public offerings (IPOs) and support eligible firms in service consumption areas to issue bonds, according to the guidelines.

The country will also encourage the issuance of consumer-focused exchange-traded funds, and support eligible projects in issuing Real Estate Investment Trusts (REITs) in the infrastructure sector, the guidelines showed.

Reuters