By SHEN HONG
SHANGHAIâ€"-China's government has responded to a deep economic slowdown with a slew of policy initiatives in recent months that together underline a strategy to spur a recovery, while allowing market forces to play a bigger role in reforming an economy still dominated by the state.
The measures include small-scale infrastructure investments and a mix of financial reforms that let the yuan move more freely, give banks more freedom in setting interest rates, open the door a bit wider to foreign capital, and give private firms more freedom to invest in key sectors such as banking.
China's economy has been under pressure, with growth falling to a more than three-year low in the first quarter as a result of Beijing's efforts to temper a property boom, the European debt crisis and a weak U.S. recovery. The stimulus is unlikely to give a big boost to growth. But the reforms will likely bring about structural changes that over time could make the world's second biggest economy more efficient and increasingly driven by domestic demand.
"The authorities have got a global shock under way and a cyclical slowdown caused by previous monetary tightening. That has complicated the landscape of policymaking. These are challenges but they clearly also present more opportunities for them (to reform)," said Tim Condon, economist at ING.
Economists said the steps reflect a push to reorient the way the economy and capital markets function. In rapid succession since April, Beijing has let the yuan float in a wider daily trading range around a parity rate set by the central bank, granted private capital greater access to sectors traditionally dominated by the state, offered more room for foreign investors in China's stock and bond markets, and given banks more leeway to choose lending and deposit rates.
Mr. Condon characterized the reforms as "baby steps" but said they take China in the direction of a further opening of its capital account. That goal remains a long way off. But if achieved in the years ahead, an open capital account would increase the efficiency of resource allocation and integrate China more closely with the global economy.
Beijing in mid April doubled the yuan's daily trading band against the dollar, effectively kicking off the latest campaign. The yuan has since demonstrated more flexibility, long a demand of Washington, while its recent weakness has bolstered Beijing's argument that the currency was close to fair value. The move is another step toward increasing the appeal of the yuan for use in international trade and investment, a long-term goal of China.
The authorities in following weeks unveiled a number of other initiatives, surprising investors with the rapid pace and scope of the reforms.
Among the more significant steps, Beijing announced in May it would encourage private capital to enter strategically important but guarded sectors such as railways, banking, insurance and securities. It allowed private firms to own more shares in lenders and insurers.
The securities regulator also eased restrictions on investment by foreign firms in China's stock and bond markets, giving them higher quotas and broadening the range of eligible investments.
Some China watchers question whether the latest string of initiatives represents a push for lasting change.
The launch of the infrastructure investment-heavy stimulus program suggests the government and state-run companies remain the driving forces behind Beijing's effort to prop up the economy.
Some analysts also question Beijing's motivations in some of the reforms it has introduced.
Among the first sectors opened up to private capital, for example, were railways and banking. The railway industry needs funds mainly as a result of an expensive, scandal-ridden high-speed train project. Banks are looking for capital to cover charges on rising non-performing loans, the result of a state-led lending binge during the global financial crisis.
Still, the pace and extent of the policy changes, especially in the capital markets, point to a sharper focus on reform in Beijing.
Although the latest financial reforms may cut into entrenched economic and political interests, "they are yet another sign that the pace of reform is continuing," Louis Gave, chief executive officer of investment research firm GaveKal, wrote in a recent note.
Write to Shen Hong at hong.shen@dowjones.com
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