INNOVATION MATTERS: Business leaders discuss the importance of innovation for the Chinese economy at a sub-forum at the Summer Davos (JIANG BING)

The Chinese economy is growing, but at a slower pace. Is this growth healthy and sustainable? The question was on the minds of many economists gathered in Dalian, capital of China's northeast Liaoning Province, for the World Economic Forum (WEF), September 14-16.

The domestic economic landscape is anything but flat. Inflation is easing, although still worryingly high. The United States has left open the possibility of a third round of quantitative easing, threatening to complicate inflation in China. Meanwhile, crisis-stricken exporters are regaining lost ground, but clouds are gathering over their prospects due to uncertainties facing Western economies.

The once-sizzling growth engine has showed signs of tapering off. As China twists harder on credit screws to tame stubborn inflation, worries abound that the country has gone too far in tightening its monetary policy and may suffer a sharper slowdown.

Despite the headwinds, China remains a calm port while storms sweep through the developed world. In addition, China improved its ranking from 27th to 26th on the WEF's Global Competitiveness Report 2011-12, while the United States continues the decline it began three years ago, falling one more place to the fifth position.

"China is one of the world's least indebted countries, boasting a high savings rate and moderate budget deficits," said the report. "Those factors, combined with a favorable macroeconomic environment and relatively high standards in healthcare and basic education, contributed to an improvement in competitiveness."

However, the report points out that China's fairly poor results in financial market development and technologies are pulling down its overall competitiveness.

Given the complicated situation, many people looked to the five-day meeting, which adopted the theme Mastering Quality Growth, for insights on China's economic outlook. The meeting brought together more than 1,500 industrial and government leaders from at least 90 countries and regions, representing a 10-percent increase in participation from 2010.

The WEF began hosting annual meetings in the Swiss skiing town Davos in 1971. In September 2007 the WEF held the first Summer Davos Forum in China as the world became increasingly interested in the thriving Chinese economy.

Slower, healthier

China's GDP growth for the second quarter dropped to 9.5 percent from 9.7 percent in the first quarter. Though well below the turbo-charged growth rate it previously enjoyed, the progress should still be the envy of the recession-weary Western world.

"Quality growth should be a comprehensive, balanced and sustainable growth," said Premier Wen Jiabao at the forum. "In addition, the economy should maintain a relatively rapid growth rate with a low level of inflation," he said.

"Hi-tech, low-carbon and environmentally friendly industries should be driving forces of China's quality growth," he said. "To achieve that, the country must properly shrink the rural-urban divide, foster technological research and development, and reduce carbon emissions and heighten energy efficiency."

The goal is to share the economic benefits with the Chinese citizens and improve their livelihood, as well as accelerate social progress, he added.

"The lower speed of growth is mostly the result of proactive macro-regulation," said Li Daokui, member of the Monetary Policy Committee of the People's Bank of China and Director of the Center for China in the World Economy at Tsinghua University.

For example, the government has stepped up a stringent clampdown on the sizzling real estate industry, taking some steam out of the vibrant economy, said Li. As a pillar force of the economy, the property sector previously contributed at least 2 percentage points to the annual growth rate.

"But it is well worth the effort as the slowdown provided a powerful catalyst for the country to rebalance its economy," he said.

There is no need to worry about a hard landing since the foundations of the economy—investment and consumption—remain solid, he added.

Jing Ulrich, Managing Director and Chairman of China Equities at J.P. Morgan, said China's efforts to optimize the growth model are already bearing fruit.

"We are glad to see that China's dependence on exports is decreasing," she said. "In the first half of this year, foreign trade had a negative impact on growth, with the trade surplus shrinking significantly."

Klaus Schwab, founder and Executive Chairman of the WEF, believes another challenge for China is to narrow the widening gap between rich and poor provinces.

"Moreover, it is necessary to strike a balance between consumption, investments and exports on the one hand, and the economy, ecology and environment on the other," he said.

With the benefits of low labor costs diminishing, China has to move up on the ladder of industrial production and make a push into high technologies, Schwab said.

"The world now sees China mainly as a production place, but in my opinion, China, in the future, will become a formidable force in terms of technology and research," he said.