(Yicai) July 16 -- The Chinese government is likely to have a more detailed action plan on two main areas, namely innovation-driven development as well as the reform of unreasonable systems and mechanisms, at the third plenary session of the 20th Central Committee of the Communist Party of China that kicked off in Beijing yesterday, setting the direction of China’s economic and social development for years to come.

Top Party officials are expected to give the plan of the two main points raised at a symposium of experts and entrepreneurs chaired by Premier Li Qiang on July 9. The first is to adhere to innovation-driven development, cultivate and strengthen new growth drivers, as well as expand new growth spaces, and the second is the reform of unreasonable systems and mechanisms.

Overall, the economy performed stably in the first half with continuous structural upgrading, members of the symposium said. However, it was pointed out that the factors affecting economic growth have become more complex, and the difficulties and issues in economic operation require significant efforts to address.

China’s gross domestic product growth rate slowed 0.6 percentage point in the second quarter from the first quarter to 4.7 percent, according to economic data released by the government yesterday. The slowdown was partly due to short-term factors such as extreme weather and frequent flooding. But it also reflected rising challenges, especially from weak demand and an unsteady economy at home.

In terms of external demand, the momentum of global economic recovery gained pace in the second quarter. In the first half, exports did better than expected, contributing 0.7 percentage point to GDP growth, a dip of just 0.1 percentage point from the first quarter.

The total retail sales of consumer goods advanced 3.7 percent in the first six months year on year, a dip of 0.1 percentage point from the first quarter, due to weak consumer confidence and sluggish income growth. Year-on-year growth in June was only 2 percent.

People are still willing to spend, but their spending power and confidence are still weak. The trade-in policy for consumer goods will continue to be implemented, which will boost sales of major consumer items such as household appliances and communication equipment. Coupled with the gradual decline in the base line last year, this will help to lift the year-on-year growth rate in the second half.

Fixed asset investment climbed 3.9 percent year-on-year, a drop of 0.6 percentage point from the growth rate in the first quarter. However it contributed 1.3 percentage points to GDP growth, a gain of 0.7 percentage point from the first quarter. Specifically, investment in real estate development plunged 10.1 percent, while investment in the high-tech sector surged 10.6 percent.

More Stimulus

As the external environment becomes increasingly complex and severe, more efforts are needed to boost effective domestic demand and stimulate the vitality of market entities.

At the macroeconomic policy level, due to the better-than-expected economic performance in the first quarter and the concentrated use of last year's additional CNY1 trillion (USD137.6 billion) of treasury bonds, fiscal policy has been somewhat restrained in the first half. It is expected that there is still significant room for fiscal policy to exert force in the second half.

There is still a fiscal space of around CNY6 trillion (USD825 billion) in the budget for the second half. Considering the current domestic situation where effective demand needs to be stimulated, fiscal measures may include optimizing tax and fee preferential policies, approving an additional CNY1 trillion quota of special refinancing bonds, increasing the volume of pledged supplementary lending to leverage key infrastructure projects, and raising the proportion of profits to be remitted by state-owned enterprises.

GDP growth is likely to reach 4.9 percent in the third quarter year-on-year and 5.1 percent in the fourth quarter, which will ensure that the target of around 5 percent growth for the whole year is met.

(Wen Bin is chief economist at China Minsheng Bank and Wang Jingwen is the director of the Macroeconomic Research Center at the CMBC Research Institute)

Editor: Kim Taylor