Economic Watch: Half-Year Growth

Lack of confidence in the market and a rising jobless rate among graduates will last for a long time and contribute to a severe downward trend in the economy, he says.

Cai believes less demand for investment is the main reason for the slowdown, especially in the manufacturing sector. Because of the government's determination to restructure the industry, it has arrived at a turning point. It will take a long time for it to achieve real technological innovation, upgrade production equipment and reassign the factory market.

Also, risk has been further increased by the use of short-term financing for long-term projects regarding basic urban infrastructure. Although currently there is much room for more basic infrastructure, it would be better to arrange the capital to comply more closely with the significance of different projects, he argues. Private capital could also be introduced into the sector.

Furthermore, the government's reliance on domestic consumption to drive the economy in the process of transformation is still questionable. Although its contribution to China's gross domestic product has repeatedly exceeded 55 percent in recent months, the emphasis on boosting the proportion of consumption within the total economy is not sustainable as a long-term strategy, Cai argues.

Consumption relies heavily on salary increases, which are based on efficiencies in production. Increasing investment and improving technology are the most important factors in solving efficiency problems. Investment should play a bigger role in pushing the economy, the academic believes.

Foreign trade has merely edged up this year, unlike in past years when it positively surged ahead.

Cai maintains there is no need to exaggerate existing financial problems, such as real estate loans and shadow banking.

Nevertheless, China is experiencing a reasonable level of debt, the capital quality of commercial banks is in a good condition and there are enough foreign exchange reserves.

However, more attention should be paid to adjusting the nation's financial structure and dealing with potential risks in some sectors. Increasing financial risk will be a bad move.

In general, Cai suggests the government should speed up building a better and more loose commercial environment and encourage private investment to boost substantial enterprises.

Realizing the long-term nature of reform and working to stabilize the market are very critical to improving people's confidence in the market, he adds.

Fiscal gap widens at local government level

Ma Haitao dean of the School of Public Finance at the Central University of Finance and Economics

The gap between local governments' fiscal expenditures and revenues continues to widen. Slower economic growth is weighing on fiscal revenue, but local governments' fiscal expenditure has increased rapidly.