China's GDP growth slipped slightly to 6.2 percent year-on-year in the second quarter of 2019, down from 6.4 percent in the first quarter, according to the National Bureau of Statistics.

Investments showed weakening but were stable on a quarterly basis. Fixed-asset investment growth increased 5.8 percent in the first half of the year, down from 6.3 percent in the first quarter.

Although manufacturing-investment growth slowed to 3 percent in the first half from 4.6 percent in the first quarter, high-tech services investment rose 13.5 percent year-on-year during that period. In terms of foreign trade, after the trade talks with Washington broke down and it threatened to apply higher tariffs on Chinese goods, China's exports to the United States slowed.

However, China's total foreign trade expanded at a stable pace of 3.9 percent year-on-year in the first half of the year. Trade growth with the Belt and Road countries was even more encouraging, growing by 9.7 percent year-on-year, according to the General Administration of Customs. Consumption contributed 60 percent of economic growth in the first half, down from 76 percent in the whole of 2018.

Recorded in the second quarter are an increase of 8.4 percent year-on-year in retail sales and the increase of 17.8 percent year-on-year in online sales, 2.5 percentage points faster than the previous period.

Admittedly, the fallouts from the external and domestic economic situations have caused China's economy to undergo a period of volatility, with the GDP growth in the second quarter its slowest in recent years. However, China's economy continues to grow on a sound footing within a reasonable range, with increasing innovation and declining energy use.

While the deceleration of China's economic growth has been caused by various factors, the trade dispute with the US is nevertheless a key factor dragging on China's economy. Although at the Osaka G20 Summit the two heads of state broke the impasse in trade negotiations and the two sides are now in contact again, the recent US arms sales to Taiwan and Beijing's retaliation have fueled worries about whether the two nations can resolve their differences and ink a deal.

To avoid the potential burden of the proposed 25 percent duties on $300 billion of Chinese goods which might be imposed, some foreign manufacturers are shifting production out of China, fueling further worries about layoffs and declining demand.

But, the US economy is not exempt from the trade dispute. As anxiety over an economic downturn grows, many people in the US are gloomy; manufacturing companies are wary and business confidence is tumbling. Investors are nervous at one of the riskiest markets for corporate debt, which has been sounding the alarm.

For many weeks the yield on three-month Treasury bills has exceeded that of the benchmark 10-year notes by as much as 0.259 percentage point, the most since May 2007 before the financial crisis, often a harbinger of the economy heading for a recession.

Some economists suggest Beijing roll out broad-based measures to boost business confidence, such as additional tax cuts, infrastructure investment, easier credit conditions for local governments, lower interest rates. Specific measures proposed to stimulate consumer spending include subsidies for the purchases of cars, home appliances and other big items, and easier limits on home purchases in big cities.

However, policymakers should be extremely careful about the likelihood of the above fiscal and monetary incentives inflating the level of public debt, which is already at high levels. International experience from developing countries shows that unsustainable and growing government debt often leads to a major economic crisis down the road.

To alleviate the struggles of companies and combat the downward pressure on economic growth, the government early this year decided to slash roughly 2 trillion yuan ($291 billion) in taxes and fees, which includes reductions on the value-added tax rate from 16 percent to 13 percent and the employer contribution rate to the social-security fund from 18-20 percent to 16 percent (with some variation across regions).

Those were on top of a previously announced reduction in the corporate income tax.

The policy move was followed by a boost in business sentiment, a pickup consumer spending and business activity and recovery, although modest, in the second quarter. However, it has added to the risk of a potential debt crisis. The loss of government revenue of some 2 trillion yuan this year alone, about 2.1 percent of GDP, will certainly raise the central government's fiscal deficit and debt over the medium term.

Together with the liabilities implicit in closing the funding gap in the social security system and massive local-government debts, overall public debt could grow much larger, potentially approaching or exceeding the alert level in a few years.

At this critical time, the following policy mix might be more fruitful and less risky.

The first is to introduce a new digital tax along with tax cuts, following the example of France and other G7 countries.

This move could be a substantial boost to government revenue and contribute to the global attempts to improve global governance over tech companies.

The second is to take actions to clean up the financial system while relaxing credit controls. Some government programs could be set up to help banks dump toxic assets, as the ill health of banking system with huge nonperforming loans sitting on banks' balance sheets is a potential source of a debt crisis. Banks could sell bad loans outright or package them into a special-purpose vehicle that issues securities backed by the loans.

Once banks remove most of the loans from their books, even though they retain part of the risk through new securities, they have sufficient capital to back fresh lending to the economy. The government has to do more to make credit growth sustainable when the economy is getting flooded with credit.

The author is a senior fellow at the ICC of the National Development and Reform Commission of China.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.