The Chinese government has never been a model of efficiency, with layers of bureaucracy atop layers of bureaucracy. It’s also not been a particularly able steward of national capital, spending trillions of yuan over the years on unneeded office buildings, roads and bridges to nowhere and other ill-advised infrastructure projects.

In terms of economic development, China’s leadership has in many cases been its own worst enemy. But with recently released data showing that the country’s gross domestic product grew by just 7.5 percent in the second quarter and is likely to slow further, a clearly worried government is taking decisive action that will rebound to the benefit of investors.

A bevy of public officials, ranging all the way up to the premier, have reiterated the government’s target of 7.5 percent growth this year, which most interpret as a signal that the government will get the job done.

However, rather than relying on another stimulus program like the massive spending spree of 2008, the government has decided to try to squeeze out more growth by improving economic efficiency.

For starters, tax relief for small businesses is on the way. China has a fairly high corporate tax rate of 25 percent, with an additional value-added tax (VAT) of about 17 percent.

As in most countries, smaller enterprises make up the base of China’s business pyramid, employing tens of millions of people. To help widen that base, the government has announced a VAT and operating tax holiday for businesses with monthly sales of less than RMB20,000, which encompasses most mom-and-pop operations in the country. The hope is that the reduction in taxes will have the dual effect of spurring hiring and lower prices, both of which will encourage consumption.

And while the government still aims to transform the orientation of the Chinese economy from exports to domestic consumption, it also understands that it must keep business humming in the meantime.

Bureaucracy has always been a major challenge for Chinese businesses, particularly those in the export sector, which face multiple layers of inspections with associated fees at each level. No real details are available yet, but to streamline that process the government has said it will simplify customs inspections for manufacturers and temporarily waive inspection fees for commodity exporters in order to boost flagging exports.

The government also reaffirmed its commitment to its ambitious railroad development program, with a focus on high-speed rail connections between urban centers. Authorities plan to spend RMB690 billion on railroad development this year, with the goal of spending RMB3.3 trillion by the end of 2015. It also plans to grant ownership and operating rates on some city and regional connections to local governments and private investors.

Improved transportation connections, particularly between China’s interior and the coastal regions, would vastly improve the country’s economic efficiency, easing the flow of goods and travelers between regions. The news has buoyed shares of companies such as CSR Corp (Hong Kong: 1766), which manufactures and exports high-speed trains.

The government also announced a number of financial reforms, the most significant of which is the removal of the floor on commercial banks’ lending rates. While mortgage loans are still subject to fairly strict regulation, banks are now able to set their own minimum rate, which will encourage greater competition in the sector.

That will be a boon for Long-Term Holding China Minsheng Banking Corp (Hong Kong: 1988), one of China’s leading banks not owned by the state. With strong risk-management practices already in place, the leeway to undercut loan prices offered by other banks to high-quality borrowers will give the bank a distinct competitive advantage, coupled with its wide geographic footprint.

Most of these reforms are simply common sense measures to loosen the reins on private enterprise. They also mark another, if tentative, step towards economic liberalization. As long as social unrest doesn’t become an issue, it appears as though China’s new generation of leadership is serious about making China’s business environment freer, even if it’s still unwilling to delve too deeply into social reforms. That’s good news for the Chinese economy and the rest of the world.

Portfolio Updates

While the bulk of American companies have already made their second-quarter earnings announcements, we’re currently in the quiet period for most of our Global Investment Strategist holdings. Their earnings season kicks off next week, starting with announcements from Cimarex Energy (NYSE: XEC) and Ecopetrol (NYSE: EC). We’ll cover them in the next issue of this publication.