BEIJING — The Chinese government is engaged in the economic equivalent of holding its nose and swallowing nasty medicine as it increases investment spending, local government debt and real estate sales to push up growth.
Eight months of policy fine-tuning have yet to arrest an economic chill that has lasted six successive quarters and that is at risk of infecting a seventh, forcing Beijing to opt for near-term expedients to bolster growth before a once-a-decade leadership transition this year.
It is not easy for a government sensitive to the social impact of inflation and speculation like that set off by its last investment binge, in 2009-10, which priced millions of middle-class Chinese out of property markets in city centers.
But the apparent recoil by Beijing from the pursuit of economic rebalancing that eschews short-term spending on more infrastructure capacity in favor of policies promoting services and consumer-driven growth in gross domestic product simply highlights the urgency for more change.
“Because consumption is still only 35 percent of G.D.P., the reality of that being able to drive the economy when fixed-asset investment is falling and industrial production is slowing is unlikely,” said Jeremy Stevens, a China economist at Standard Bank in Beijing.
“In fact, the ability of the government to massage and orchestrate economic momentum is less than it was two years ago because it is now more reliant on the corporate sector, and that is struggling,” Mr. Stevens added. “It does mean that they are having to look at things they didn’t want to do six months ago.”
China said Friday that growth in the second quarter had slowed to 7.6 percent compared with the same period a year earlier, just above the government’s 7.5 percent full-year target. It was also the weakest quarter since the first quarter of 2009, when the global financial crisis was choking world trade flows and 20 million Chinese jobs were cut in a matter of months.
With China, the world’s second-biggest economy after that of the United States, set for its slackest year of growth since 1999, when growth was 7.6 percent, and investors fretting about the risk of a lurch toward even slower growth, there is evidence that Beijing is relying on trusted methods to stimulate activity.
Investors have latched onto Prime Minister Wen Jiabao’s comments this month on the importance of investment spending to sustain growth as a signal that the government is going back to what it knows best.
Adding to that perception was a record price fetched at a Beijing real estate auction last week, after June land sales snapped an eight-month decline and signs indicated acceptance of limited local loosening of tight property controls.
“Exports are weak, and it takes time to spur consumption, so boosting investment is the easiest way,” said Liang Youcai, senior economist at a top government research organization, the State Information Center.
Commerce Minister Chen Deming said last month that the country would hit its 10 percent target for trade growth only “if lucky.”
Capital spending, meanwhile, was fully 50 percent of China’s growth in the first half of 2012, government data show. The International Monetary Fund has started to worry, given the risks of overcapacity and bad bank debt — and it was using a figure of 45 percent capital spending.
Banks are already believed to be nursing huge undeclared losses on government-directed investment projects mandated as part of the economic stimulus plan worth 4 trillion renminbi, or $585 billion at the time, that was conceived in 2008 and rolled out in 2009 and 2010.
Zhang Hanya, head of the China Investment Association — a research group affiliated with the National Development and Reform Commission, the most pro-growth arm of the government — said local governments were so starved of cash after two years of a credit clampdown that they did not have the money to start work on the projects getting fast-track approval.
Mr. Liang of the State Information Center said easing credit controls was not only possible for local governments with sound fiscal positions, it was also vital. “I think such relaxation is needed because it will be riskier if you cut the financing channels for all local governments,” he said.
For ysts focused on the changes needed to make the Chinese financial markets deeper and more liquid, the way in which policy loosening is delivered is the crucial point.
So while China may have allowed banks to roll over loans from local government financing vehicles to stop them from defaulting, the more significant development is the speeding of approvals of bond issues made by companies run by the local authorities.
Bonds issued by urban construction and investment companies, typically the bigger and healthier financing vehicles, totaled 169 billion renminbi as of July 5, almost matching the 174 billion renminbi they issued in all of 2011, according to data compiled by Pengyuan Credit Rating in Shenzhen.
ysts say a vibrant corporate bond market is one of the surest ways to help China build a dynamic private sector with access to abundant capital.
And completing part-finished changes is the only way to replace the credit-constrained and state-dominated corporate environment that persists.
There are clear signs of a commitment to deliver on change, even while at a headline level the government may be reaching for the familiar props of state-directed lending and spending, according to Ronald Gould, managing director in the Hong Kong office of Promontory Financial Group, a consulting firm that advises on financial regulation.
“I think policy makers are taking advantage of the short-term circumstances in exactly the right way to address some of the longer-term structural issues they have to address too,” he said. “Rate cuts and liberalization are exactly the right moves at exactly the right time.”
China recently cut interest rates twice in the space of a month while also allowing banks more freedom to set differential rates for borrowers and depositors in clear steps toward letting the market set the price of capital.
“I’d be worried if we were seeing nothing other than an adjustment of bank lending terms,” Mr. Gould said. “Then I would say that is not enough of a change. But they are doing many other things. It’s just not all going to happen by tomorrow morning.”
