China's slowdown puts pressure on its new leadership

BEIJING - The global economic malaise has knocked the stuffing out of Luo Yan's business making toy animals.

Sales of Hello Kitty dolls and plush rabbits have fallen 30 percent over the last six months, according to Luo, owner of Tongle Toy Enterprise, which employs 100 people in the southern city of Foshan, near Hong Kong. Orders from the United States and debt-crippled Europe are down 80 percent.

"We don't talk about profits anymore," said Luo.

China's shaky recovery is losing steam, adding to pressure on its new leaders to shore up growth after a surprise first-quarter decline and launch reforms to support entrepreneurs like Luo who create its new jobs and wealth.

"The current leadership is not taking this issue very easily," said Li Daokui, a Tsinghua University economist and former central bank adviser, at a financial conference organized by the investment bank CLSA. "This is their first item: Make sure the economy doesn't slow down too much," Li said. "Second, regenerate the enthusiasm for reform."

President Xi Jinping and other leaders have pledged to make the economy more productive but have yet to make clear how far they will go in curbing the dominance of state industry and making other changes reform advocates say are required.

April factory output and investment fell short of forecasts, adding to pessimism after forecasts of an upturn in growth were dashed by the decline in the first three months of the year, though to a still-healthy 7.7 percent from the previous quarter's 7.9 percent.

Potential areas for change range from allowing private competitors into state-run industries such as telecoms to making it easier for entrepreneurs to get credit from banks that now channel most lending to government companies.

The World Bank and other advisers warn that if China fails to allow more free-market competition, annual growth could fall as low as 5 percent by 2015 - dangerously low for a Communist Party that needs rising living standards to underpin its claim to power.

Analysts expect no major decisions until a party meeting in October. "These people are true believers in reform," Li said. "They have a strong sense of urgency that unless reforms are done, then social discontent may brew and then create conditions for drastic changes which will do no favor to anybody - that is, revolution."