China economy still on the right track

Signs of stabilization seen amid downward pressure, says nation's top economic planner

China will channel more capital into the real economy, including manufacturing and services, during the second half of 2015, the nation's top economic planner said on Tuesday.

Though the economy has shown signs of stabilizing, it still faces a complex external environment such as the changing monetary policy expectations in the United States and commodity price movements, Li Pumin, spokesman for the National Development and Reform Commission, told a news conference in Beijing.

At the domestic level, many companies still face operational difficulties and a real challenge is to channel more capital into the real economy, he said.

The regulator said its priority for the second half is to optimize the allocation of financial resources, further expand channels for direct financing and lower financing costs.

Economists said concerns about the fluctuations in the stock market during June and this month are likely to hurt the healthy development of the economy.

"Fundamentals have started to stabilize and this will help maintain the healthy development of capital market, including the stock market," Li said.

The People' Bank of China, the central bank, released a statement on Tuesday before the stock market opened, saying it will continue a "prudent" monetary policy in the second half while maintaining proper liquidity to stabilize financial market expectations, reduce financing costs, and keep a stable currency exchange rate.

Guo Tianyong, head of the research center of the Chinese banking industry at the Central University of Finance and Economics in Beijing, said the speculative activities in the stock market were against the healthy development of the real economy.

"A great amount of capital has entered the equity market and squeezed capital for investment and consumption, resulting in insufficient investment in the real economy and a contraction in demand," Guo said.

"The Chinese economy has increasingly been divided among industries and regions," said Guo.

Computers, telecommunications and other electronic manufacturing industries saw robust growth in the first half, with value-added output growing by 10.8 percent, about 4.5 percentage points higher than the average of enterprises with an annual income of more than 5 million yuan ($806,450).

In contrast, traditional sectors such as steel, cement and power industries are struggling with difficulties such as overcapacity, rising costs and depleted natural resources.

The latest energy consumption data underscores the trend. Coal imports fell by 37.5 percent, while coal production plunged 5.8 percent in the first six months of the year.

Li Yunqing, deputy director of the economic operations department at the NDRC, said that as a result of restructuring, energy consumption by emerging and services industries has inched up along with an increase in the share of non-fossil fuels in the total energy mix.

Pork prices will return to reasonable levels after some adjustments and China's CPI will remain "basically stable" and rise mildly within the expected range in the second half, said Li.

Wang Tao, chief economist in China at UBS AG, said that the rising inflation led by surging pork prices will not stop the central bank from maintaining its stance on the monetary policy, as both the real economy and the financial sector will require more liquidity along with low interest costs in the second half.

"There is unlikely to be a fast rise in inflation during the coming months as deflation pressure is still great in the industrial sector due to the overcapacity problem," she said.

Wang forecast a 6.8 percent full-year growth, partly because of less contribution from the financial services to GDP due to the recent equity market turmoil.