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China's government promises more market-oriented reform as economic slump deepens

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(Globalpost/GlobalPost)

BEIJING, China - China promised Thursday to give entrepreneurs a bigger role in its state-dominated economy to boost productivity as two manufacturing surveys suggested its slump might be deepening.

The comments by Cabinet planning officials reflected mounting pressure on Beijing to mollify public anxiety about the slowdown that has dragged growth to a two-decade low. Communist leaders say they are determined to stick with painful changes meant to lead to more sustainable growth and are resisting pressure for a stimulus to reverse the slowdown.

"The government is going to create an environment of fair market competition for business and will press ahead with the restructuring of the state economy and encourage development of the non-state economy," said Wang Yiming, deputy director of macroeconomic research for the Cabinet's National Development and Reform Commission.

Also Thursday, two surveys showed weak manufacturing in July.

HSBC Corp. said its purchasing managers index fell to an 11-month low and showed activity contracting. A separate indicator by a Chinese industry group edged up but still was barely above the cutoff level for a contraction.

"With weak demand from both domestic and external markets, the cooling manufacturing sector continued to weigh on employment," said HSBC economist Hongbin Qu in a statement.

The ruling Communist Party is trying to shift China to more self-sustaining growth driven by domestic consumption, reducing reliance on trade and investment. Changes that include a clampdown on bank lending have caused growth to decline abruptly while consumer spending is growing more slowly than Beijing wants. That has raised the risk of politically dangerous job losses and prompted suggestions Chinese leaders might need to backtrack temporarily and launch a stimulus.

Economic growth slowed to 7.5 per cent in the three months ended in June from the previous quarter's 7.7 per cent. That is stronger than the United States, Europe or Japan. But it is barely half 2009's explosive 14.2 per cent expansion. The slowdown has battered industries such as construction that depend on high growth to drive demand for new factories and other assets.

Chinese President Xi Jinping, in a rare public comment on the economy, promised this week to keep growth stable in the second half of the year and to press ahead with market-opening reforms.

Wang, the planning official, pointed to changes Beijing already has made, including a tax cut for small businesses. But he acknowledged an overall plan still is under discussion and won't be approved until a ruling party meeting late this year.

The government has also pumped extra money into the economy by stepping up spending on building railways and public housing.

Communist leaders have given no sign how they will cope with what the World Bank and reform advocates say is one of the most pressing issues — the need to curb the dominance of state industry in areas from banking to energy to telecoms. Government companies often are heavily subsidized, draining public money while they suppress competition and innovation.

In a reflection of determination to stick with its plans, the government ordered more than 1,400 companies in industries including steel, copper and cement in which supply exceeds demand to close some factories. Excess production in areas such as solar panel manufacturing has led to price-cutting wars and threatened the financial survival of some companies.

"We see overcapacity in industrial fields but we do not have enough supply in service fields such as medical and retirement services," said Wang.

The ruling party's confidence in sticking with plans to trade short-term pain for sustainable longer-term growth appears to stem in part from the fact that the economy still is creating new jobs.

There were more than 7 million new jobs in the first half of the year, according to the government. But some analysts point to indicators that show future hiring is declining, which might erode official support for the plan.

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National Development and Reform Commission (in Chinese): www.ndrc.gov.cn

http://www.globalpost.com/dispatch/news/the-canadian-press/130801/chinas-government-promises-more-market-oriented-reform-econo