China Treads With Caution On Reforms as Economic Growth Sags

China is treading with caution, when it comes to radical reforms, as the world's second largest economy posted lower-than expected economic growth data.

Analysts from top government think-tanks say the room for reform is limited in China as any dramatic shift in policy could exacerbate a growth slowdown and push the government to revert to tightly controlled market controls. They add that any economic shocks will force the government to rely on age-old investment-and-credit-driven growth, prolonging the very economic model it is trying to unravel.

Last week, China's cabinet announced minor stimulus measures to boost slowing growth in the country's economy.

Beijing will abolish taxes on six million small businesses, reduce costs for exporters and increase government investments in the railway companies. China has also eased its lending rules, allowing banks to set their own rates.

The government is mulling land reforms, easing property registration rules, fiscal and tax overhauls.

However, radical reforms, such as full interest rate liberalisation, are ruled out for now.

Reforms Pushed Back?

Sweeping reforms could be introduced in October when the Communist Party hosts a key meeting that will decide its economic agenda for the next decade.

Zhang Bin, economist at the Beijing-based Chinese Academy of Social Sciences highlighted that while the direction of reform is clear, the question remains as to how the government will implement them.

"The government has to safeguard its bottom line in growth, while restructuring the economy. It's very difficult to balance," added He Qiang, an economist at the Central University of Finance and Economics in Beijing and an adviser to parliament.

Nonetheless, "(The government) dare not to liberalise deposit rates now as that could push up borrowing costs," said Liang Youcai, an economist at State Information Centre.

The working assumption is that lending rates would rise to pay for the higher cost of deposits, he added.

Land reform will reduce restrictions on farmers' right to own land. A flexible household registration system makes it easier for migrant workers to settle in cities, therefore attracting more of the rural Chinese population into urban areas.

Fiscal and tax revamps will help local governments reduce their dependency on land sales and borrowing for income which has led to a splurge of building and high local government debt.

However, the reforms drive in industry is expected to put pressure on the labour market, particularly in a year when growth is expected to drop to a 23-year low.

China's labour ministry has warned that restructuring traditional industries could lead to job losses as Beijing steers the economy towards domestic consumption and demand and away from its dependency on manufacturing and exports.