China's economy is on the right track

Song Yu, chief China economist at Goldman Sachs. [Photo/China Daily]

A1: The most encouraging sign at the macro level was that growth held up yet inflationary pressures declined and liquidity moderated. This means potential growth levels could be stronger than previously estimated.

In terms of growth drivers, there are signs of a rebound in private business activity, which is not government directed. This is different from rebounds we saw during the past five years, which were mostly government fueled and infrastructure focused.

A2: We expect growth to moderate but remain robust. The government's policy stance has turned more supportive of growth in the second quarter, although it still has a mild tightening bias. The current cyclical policy can be summarized as "supply enough, and just enough, liquidity to achieve broadly defined growth and price stability".

This goal has largely been achieved and the government is likely to be satisfied with the current picture. External demand remains firm, which has been partially fueled by the recovery.

A3: The biggest challenge facing the Chinese economy is the pace of market-based reforms. This is the only way to achieve sustainable long-term growth, and become a high income economy. Maintaining stability during this process will be vital, and the government is doing a good job in this respect.

A4: It is equally important that the reform measures are carried out swiftly. After the 19th National Congress of the CPC, it will be crucial to define the goals and accelerate the pace. There is a danger that this benign, cyclical picture will lead to complacency or over confidence. This in turn could delay reforms.