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Less speed, but no more stimulus


13:15, September 13, 2012

With China's economy slowing for six straight quarters, global perceptions regarding the country's breakneck economic growth have changed.

However, a massive stimulus plan to boost the economy is not only unlikely, but would be detrimental to the country's sustainable growth.

Economic data for August has demonstrated weak points in China's economy. An uptick in inflation, as well as faltering industrial production, fixed-asset investment, retail sales and trade, have put the government in a bind.

Many have expected the government to announce an aggressive plan, similar to the 4 trillion yuan ($632 billion) stimulus package issued in 2008, to keep the economy from stalling for a second time.

The government has been cautious about making any bold moves. However, its hesitation should be seen as a pragmatic move, as authorities are aware of the limitations of a possible stimulus plan and do not want to upset the timing regarding the rebalancing of the economy.

The 2008 stimulus package played an undeniable role in shielding the economy from a recession, as large amounts of money were spent to build roads, railways and airports, providing jobs and preventing social turbulence.

But the package also resulted in large local government debts and bad loan risks, as well as left questions regarding the rebalancing of the economy unanswered.

Just four years after the last stimulus plan took effect, the Chinese economy faces the same challenges, albeit with a much more complicated external environment. The economic cycle is accelerating at a dangerously high speed.

But this time, China is looking to invigorate the private sector and market forces by cutting taxes and encouraging small businesses to invest in areas previously controlled by the state, as well as raising social security, constructing affordable housing and widening the trading band for the country's currency, the yuan.

These moves will help build a new economy driven by liberalized market forces and unleash potential fueled by massive domestic spending.

Infrastructure investment is still playing a role as well. The country's economic planner has approved infrastructure projects worth 1 trillion yuan thus far, although the scale of the investment is much smaller than before.

China still has plenty of ammunition in terms of stabilizing growth. There is room for further interest rate cuts and the country's fiscal strength is ample, giving the government room to boost growth through public spending.

The government may also loosen its grip on the property market, although few expect this to happen. It seems that the government is ready to give more control to the market in the interest of maintaining sustainable economic development.

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