Zhuang Jian, senior economist at the Asian Development Bank, China Representative Office:

No Need to Panic

After blistering growth in early 2010, the Chinese economy has showed signs of slowing down, with investments and bank credit tapering off. China's GDP in the second quarter grew 10.3 percent year on year, compared with a strong 11.9 percent in the first quarter. Meanwhile, the once-robust manufacturing sector is also losing some steam while exports face bleak demands amid world economic gloom.

If China adheres to present macroeconomic policies, the slowdown is likely to continue for the rest of the year. But there is no need to panic. The downward trend is in large part because the quarterly comparison base is becoming more demanding. A severe government clampdown on the roaring property sector also played a big role.

The economy remains on solid footing and has the potential to regain lost ground. Despite uncertainties looming ahead, China is on its way to achieving growth well above 8 percent for the entire year. This should be a reason to cheer, given the fact that many other nations are still reeling from painful recessions.

One priority of China has been to rebalance the economy and rely more on domestic demands. The good news is the efforts are already yielding results. Reflected by booming retail sales, consumption has held up well to fill in the gap left by lackluster exports. In addition, the economies in the less developed western regions are picking up momentum. Investments in high-polluting and energy-depleting industries also declined in the first half of this year. While this may require a compromise on short-term growth rates, given its positive implications for growth sustainability, it is well worth the effort.

The pro-consumption shift is a long-term project that requires patience and persistence. Efforts are still needed to improve the social safety net and provide more incentives for the Chinese to spend.

The government's measures to cool property fever are necessary. The overheating real estate sector allowed room for speculation, posing a threat to the stability of the economy. Besides, many residents had saved every penny to buy expensive houses, making a dent in consumption. But the question is whether the property gloom is likely to drain the life out of the economy as it affects a string of related sectors, like steel and cement. It is necessary for the government to let some air out of the housing bubble and at the same time avert too heavy a blow to the property sector.

Derek Scissors, a research fellow at The Heritage Foundation's Asian Studies Center:

Worsening Imbalance

China has again announced fast growth with low inflation. But persistent imbalances within the economy are no smaller and may be worsening. Growth, while still strong, is waning as the stimulus disappears.

Fixed-asset investment rose 25 percent to near $1.68 trillion—equal to almost two thirds of GDP, a ratio that climbs as the year goes on. Retail sales—the official benchmark for consumption—gained 18 percent to reach $920 billion. The gap between the sizes of investment and of consumption in the first half has ballooned more than $750 billion. Stimulus was investment-driven and worsened this imbalance. There are also powerful reasons at the sector level to worry about comparatively inadequate consumption, despite its robust growth.

Areas of oversupply are well-known. Steel overcapacity is close to 250 million tons in 2010, while a retrenchment plan addresses only 25 million tons. Domestic overcapacity in cement is headed 1 billion tons this year. Consolidation of cement, autos and other industries have sputtered, as the primary goal is to enhance the position of selected state firms rather than curb capacity. Heavy industry is the top use of electricity, so it is no surprise that first-half electricity consumption rose over 21 percent—twice as fast as GDP—past 2 trillion kilowatt hours. Industrial consumption rose 24 percent and comprised three fourths of this first-half electricity use.

In the financial equivalent of overcapacity, real estate has an unsustainable role in the economy. The ratio of the housing stock as compared to GDP is higher than the United States in 2006, before the bubble burst. Yet in the first quarter of 2010, loans for property were nearly a third of total lending and growing twice as fast. For the first half, as a whole, real estate investment expanded 38 percent, easily outrunning overall investment, which was itself too rapid. The value of land purchases skyrocketed 84 percent.

While foreign attention is focused on the exchange rate and trade trends, China has finally moved toward internationalizing the renminbi. A trial program to use the Chinese currency in trade was greatly expanded. The trade program is quite substantial, but it can achieve little without a means of investing held renminbi.