International investment banks and credit rating agencies have recently voiced pessimism about the Chinese economy. After JPMorgan Chase suggested cutting Chinese stock holdings in a report in mid-March, several other investment banks, such as Goldman Sachs and UBS, made similar suggestions. In April, Fitch and Moody's, two of the leading international credit rating agencies, downgraded China's sovereign rating. Gloomy predictions about the country's economic future have once again prevailed in international capital markets.

Although China's economic slowdown has brought to light structural defects and potential risks, an economic hard landing is unlikely, experts said. Foreign institutions obviously exaggerated the country's problems when touting a Chinese economic recession, they argued, adding these institutions might plot to grab local assets at low prices by downplaying the prospects of China's economy.

False alarm

The month-long campaign to paint a bleak picture of the country's economy peaked recently when James Chanos, President of short-selling investment firm Kynikos Associates, made a high-profile forecast about China's economic recession.

International investment banks, credit rating agencies and hedge fund managers represented by Chanos have all made their case for being bearish on the country. They believe bubbles in the Chinese real estate market and investment-driven growth may lead to huge non-performing loans in the country's financial system. In particular, they have expressed concerns about mounting systemic risks resulting from local government debt and shadow banking.

Sun Lijian, Associate Dean of the School of Economics, Fudan University, told People's Daily Overseas Edition that foreign institutions' bearish comments should be viewed from two perspectives. On the one hand, it is true that some of the comments show enmity toward China. They are meant to cause the panic selling of local assets so that foreign investors can purchase them at low prices. Some hostile forces even attempt to disrupt China's diplomatic and political strategies by playing up economic problems. On the other hand, given the current slowdown of the domestic economy, doubts aired by some institutions about the potential for China's future economic growth may be well-intentioned. It is unreasonable to label all these comments as plots against the country.

Foreign investment banks and hedge funds have invested heavily in China, said Zhang Monan, Deputy Director of the World Economic Research Office at the State Information Center's Economic Forecast Department. In the hope of cashing in on the new round of microeconomic regulations in the country, they seek to engage in arbitrage for profits by causing asset price drops, she added.

Structural problems

The prime reason for foreign investors' pessimistic outlook is the slowdown of the Chinese economy. In particular, the country's annual GDP growth in the first quarter of this year was lower than the widely expected 8 percent. However, China's shifting economic growth model should not serve as a justification for pessimism, said Liu Shijin, Vice President of the Development Research Center of the State Council. After experiencing rapid growth of about 10 percent annually for more than 30 years, the impetus of development will naturally decline. China's economy is projected to grow at 7-8 percent in the next two years and post only moderate growth in the future.

"It should be admitted that the domestic economy is plagued by structural problems," Zhang said. For instance, economic growth relies excessively on the expansion of venture capital and government-led infrastructure investment, which have driven China's economic recovery. The momentum of endogenous growth, however, is still weak. Despite a satisfactory macroeconomic performance, many microeconomic indexes have deteriorated. Many small and medium-sized enterprises, in particular, have plunged into difficulties. Unless it addresses these deep-seated problems by changing its economic development model, China will hardly be able to reverse its economic slowdown with the adoption of fiscal or monetary stimulus measures.

Sun said the country's real challenge is that the market is becoming less dynamic. Driving forces behind China's long-term growth—the demographic dividend, benefits from globalization as exemplified by soaring foreign trade and investment, natural resources and economic reforms—are all weakening.

Government's role

"Some people in foreign countries are always touting the impending collapse of China's economy in the belief that the country will suffer a major crisis, which is impossible," Sun said. The country has a big government capable of stabilizing the market, he added. Prophecies about the collapse of the Chinese economy have never materialized because doomsayers do not understand the local economic governance system. In the West, a vigorous market is closely related to a country's social stability. If the market becomes stagnant, the country is bound to run into trouble. In China, however, the two are not interrelated. The Chinese Government has enough resources to deal with possible crises. While possessing large foreign exchange reserves, it has yet to liberalize its capital account. China is therefore fully able to cope with the panic selling of yuan-denominated assets to safeguard the stability of its currency and wealth.

"While maintaining macroeconomic stability, how to explore and make good use of new opportunities for growth will pose a challenge for China in the future," Liu said. There remains huge potential for growth, which will be exhibited in new areas such as urbanization, industrial upgrading, consumption upgrading and innovation, he said. Unlike in the past, when the country worked to expand the size of its economy recklessly, it will focus on upgrading its industries with the introduction of sophisticated technology. It will spur growth by boosting the industrial transition, promoting competition and overseeing all segments on the industrial chain. To realize these goals, China needs a smart government, coupled with an efficient market. It should lay greater emphasis on equal rights, opportunities and rules. It should also attach greater importance to the enthusiasm and creativity of individuals, businesses and society than ever before. These will be the key issues the country should address in the next round of reforms.

Sun echoed Liu, saying China has many options to cope with current challenges. Most importantly, the government should pursue deregulation so that businesses and consumers can have a bigger say. It should also beef up the protection of consumer rights and interests as well as intellectual property rights. Sun believes there is much room for the sustainable development of the domestic economy.