Economists are at odds over whether Chinas ongoing growth slowdown is yielding to a “new cycle” period of expansion.

Supporters of the new-cycle argument point to a recent rally for commodity prices in the face of apparent softer demand， which was underscored by disappointing economic activity data for July.

The supporters， led by Ren Zeping， chief economist at Founder Securities， contend the governments supply-side reform campaign and a prolonged slump in the producer price index （PPI） —a gauge of prices at the factory gate — have paved the way for a new wave of industrial expansion.

The campaign and 54 months of negative PPI growth until August last year have successfully cut excess industry capacity. As a result， industrial profits are up， and company balance sheets have been shored up， they noted.

The government started trimming excess capacity in the steel and coal industries in 2016 after prices tumbled， plunging companies， many of them stateowned， into deep losses and increasing their risks of bank loan and bond defaults. Similar capacitycutting is now underway in other sectors， including the aluminum， cement and glass industries.

Countering the expansion cycle argument， however， are economists who caution that the rebound for upstream industrial profits and product prices —mainly driven by the governments supply-side squeeze— has put more pressure on downstream sectors. The result， they say， is that downstream companies have found their investments and expansion abilities constrained.

Given that Chinas economic growth relies heavily on investment in infrastructure projects and property development， the new cycle naysayers maintain， its simply too early to call the current environment a manifestation of a new， expansionary leg of the nations economic cycle.

“Its not the starting point of a new economic cycle looking from either the short， medium or long term，” argued Li Xunlei， chief economist at Zhongtai Securities.

Indeed， Li said， any capacity expansion would be difficult now， based on the government infrastructure spending spree over the past few years. A bottomingout is a long way off as economic growth has yet to emerge from a long period of downward pressure， he said.

Bolstering Lis argument are results from a survey of companies released in August by Tianfeng Securities. It found many midstream companies， whose profits have been rising in recent years， remained reluctant to step up fixed-asset investments after years of excessive capacity expansion.endprint

Rather， survey respondents said their companies spent the proceeds of their profits on research， mergers and acquisitions， or stakeholder dividends.

In the paper-making industry， for example， combined company profits surged to 4.6 billion yuan（$694 million） last year from 400 million yuan in 2013. But capital expenditures declined to 6.8 billion yuan from 9 billion yuan over the same period.

“The campaign to cut overcapacity has made important progress，” Wang Tao， an economist at UBS said. ”But excess capacity has yet to be completely eliminated.”

Wang said the Chinese economys recent pickup— marked by a stronger-than-expected 6.9% gross domestic product growth rate for the first half of this year， compared to 6.7% for all of 2016 — was partly supported by demand underpinned by government infrastructure spending and the property market. But she said all signs are pointing to declines for these sectors， which traditionally supported Chinas growth.

Now， Wang said， the supply-side reform campaign should take aim at debt-laden， money-losing “zombie”companies as well as improving the efficiency levels at state-owned enterprises （SOEs）. The goal should be to spur sustainable， spontaneous recoveries for corporate profits and investment.endprint