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Experts Question China’s Economic Policy

Workers ride a scissor lift as they install banners for the grand opening of a home electronics store in Beijing, Wednesday, July 15, 2015.

Workers ride a scissor lift as they install banners for the grand opening of a home electronics store in Beijing, Wednesday, July 15, 2015.

China reported Wednesday that its economy grew at a steady seven percent in the second quarter, which is better than most outside analysts had expected, but in line with the government’s target for 2015.

Last year’s China’s 7.4 percent growth rate was the lowest in 24 years, and so far 2015 is on track to be even lower. But just how much China’s economy is slowing remains unclear, and outside analysts have long been skeptical of the official statistics.

Tuesday’s economic numbers referred to the period before June 30 when the stock market was on the rise. The market peaked on June 12, followed by a tumble, in which it quickly lost $4 trillion – a 32 percent drop. The impact of the market crisis may be clear in the next quarter, analysts said.

Reassuring Investors

China’s premier, Li Keqiang, in recent days has reassured investors that the country’s economic fundamentals remain strong. But the government will take “more precise and effective” measures to promote stable and reliable economic growth.

That reassurance is important, because the market losses reflected poorly on the government’s economic policies.

"The losses of many middle-class families in the crisis will truly reduce their trust on the credibility of the Chinese government, and that will affect their consumption and investment decisions," said Liu Jianxiong, associate professor at the Institute of Economics at the state-run China Academy of Social Sciences.

Beijing’s moves that imposed strict new rules on selling shares, froze trading on many stocks, and forced investment funds to pump in billions of dollars stopped the steep market fall. But it also led to more uncertainty among investors.

Liu, who works for a government owned think-tank, explained the credibility issue. "The Chinese government needs to reflect on its role in the stock market," he said.

Liu said that the state media organs that had praised the Chinese stock market’s rapid rise over the past year need to reassess their approach. "The propaganda machines in China also need to take a more professional, rational and objective stand on the stock market, or them will play a misleading role and cause loss to those ordinary people who trust in their opinions on stock market,” he said.

Tumbling Stocks Hit Consumption

Premier Li has promoted policies aimed at enhancing domestic consumption to make up for the business losses suffered by Chinese industries from declining exports. Analysts say the $4 trillion stock market losses hit millions of consumers who are important to those plans.

"The net worth of some middle-income families declined significantly, which can depress consumption," said Li Xiaoyang, assistant professor of economics and finance at Cheung Kong Graduate School of Business in Beijing.

The market’s precipitous fall also led to the government’s heavy handed intervention, to prevent the falling prices from stressing other parts of the economy.

"The government is trying to avoid a spiraling of prices. Occasional ups and downs are fine. But a spiral can hit the ability of investors to repay loans, and harm banking liquidity," said Song Zhongzhi, assistant professor of finance at Cheung Kong Graduate School of Business in Beijing.

More Pain for Small Companies

But those efforts to halt the market losses are also seen as presenting new challenges for local companies.

Officials had promoted the stock market as a place where small companies that struggled to get loans from traditional banks could raise money from investors. But already, some routine financial activities, like issuing initial public offers, refinancing and stock acquisitions have come to a halt. And that intervention has seeded confusion about what role the stock markets will play going forward.

Trading is still suspended on about one-fifth of all companies listed on China’s two stock exchanges, and government rules are barring big investors and companies from selling shares for the next six months.