Reform a priority as economists turn bearish

So just how real are the fears among some in Hong Kong that the Chinese economy is heading for a hard landing?

There is a growing feeling among the more bearish economists that China is within a whisker of deflation and fears that the landing could indeed be a bumpy one.

Economic growth fell to 7.5 per cent year-on-year in the second quarter, a very different scenario from a few years ago when double digit growth rates were the norm, and there are concerns about rising debt and a preponderance of poor and wasteful investments.

A meeting of the Politburo of the Communist Party at the end of last month underlined that China's policy focus was aimed at "stabilising growth" and it also stressed the need for structural changes and reform.

Lombard Street Research's Diana Choyleva believes that weak external demand, an overvalued yuan, decimated corporate profits and high real interest rates could well push the Chinese economy into a technical recession in the third quarter.

She believes that slowing growth, or even contraction, will test Beijing’s dedication to much needed economic reforms.

“But if China wants to move on to a new sustainable growth path it can’t avoid sharp economic and financial pain in the short term. Even though this could turn out to be destabilising, the authorities have little choice but to push through with the reforms. If they relent and go for growth again, they will set the economy up for much more turmoil later,” she said.

The World Bank believes that reform is necessary, and there have been a series of leaks lately which indicate that the lender is working on a raft of proposals to help kick-start the Chinese economy, including measures to privatise one of the country's major banks, probably either Bank of China or Bank of Communications.

Premier Li Keqiang has asked the World Bank to cooperate with the top economic advisory body, the National Development Research Centre.