During last few weeks, China's economic performance has been grim. Paradoxically, it reflects the shift to new kind of growth.
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A customer looks at jewelry inside a store in Macau, China.
July was not a good economic month in China, except for exports. More bad signs of sluggishness came with the preliminary August manufacturing data.
In China, an array of indicators seem to reflect faltering growth, from industrial output and retail sales to electricity production, imports and government revenues.
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The new normal is reflected by a sharp decline in credit, weak domestic investment demand and a third consecutive monthly decline in housing sales.
What's going on?
Recently, the great challenge of Premier Li Keqiang has been to manage the housing market volatility, while continuing deleveraging in the local government.
It is a precarious balancing act. If deleveraging moves ahead too aggressively, housing sales will suffer. Conversely, if deleveraging is too slow, it would continue to boost housing markets artificially, which would give rise to new bubbles.
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The efforts to tame the volatile housing markets and develeraging in the local government share a common denominator. Both reflect huge economic reforms, which are vital to support China's massive shift toward post-industrial society.
So where is the Chinese economy in terms of housing markets, deleveraging and reforms?
In July, a record 64 of 70 Chinese cities tracked reported a drop in new home prices. Despite the relaxation of curbs in over 30 cities to stimulate demand, the property market downturn seems to be broadening. That, in turn, is adding pressure on local governments, banks, and developers.
Even as Beijing seeks to ensure infrastructure investment, the great local and regional government (LRG) deleveraging is under way. In mid-2013, the LRG debt amounted to some $1.8 trillion, which reflects an average annual growth of some 20 percent since 2008, relative to annual growth in nominal GDP of 13.5 percent. This debt now accounts for some 20 percent of GDP.
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Meanwhile, Beijing is restructuring most of Chinese public finance, including public accounting, budget planning and execution, debt management, taxation, and intergovernmental relations. As the reforms are implemented gradually, the debt growth is expected to be about the same as nominal GDP growth in the next three years.
In the past, LRGs got into the trouble by borrowing from banks. Today, banks represent 50 percent of these LRG borrowings, and local bonds only 5 percent. As Beijing is pushing the LRGs to use more bonds issued in their own names for public investment, this ratio is expected to change dramatically.
According to Western critics, China is now in the middle of a hard landing. In reality, China is now in the middle of a soft or long landing, hoping to subdue the housing markets and local debt, even as the very foundations of the economy are under reforms.
In 2014, real GDP growth will be around 7.2 percent to 7.5 percent in annual terms and could remain around 5.5 percent to 6.5 percent until the early 2020s. Inflation will stay around 2 percent to 2.5 percent.
This outcome, however, does require more support from policy makers. While "big stimulus packages" are now history, Beijing could deploy temporary increases in fiscal spending, targeted cuts in reserve requirement ratio, new supplementary lending, as well as support for consumption and investment.
Structurally, China is in a transformation to a post-industrial economy, even as it seeks to manage volatile property markets, deleverage in local and regional governments, while easing growth pains with social financing.
That´s the kind of multifocal structural transition that purely economic reports often fail to understand.
Commentary by Dan Steinbock, a research director of International Business at India China and America Institute (USA), visiting fellow at Shanghai Institutes for International Studies (China) and in the EU-Center (Singapore). See also www.differencegroup.net.