China will seek a balance between stable growth and risk prevention in the second half of the year, a senior official said on July 27, indicating that the country is willing to tolerate slower growth to push reforms and curb systemic financial risks.
The government will focus on deepening supply-side structural reforms, resolving risks in local government debt, addressing chaotic activities in the financial markets and stabilizing the property market and private and foreign investment, according to Yang Weimin, deputy head of the Office of the Central Leading Group on Finance and Economic Affairs, China’s top economic policy-making body.
Yang said reducing the high debt ratio of State-owned enterprises is one of policymakers’ top priorities, adding that the government is capable of striking a balance between maintaining growth and cutting corporate leverage.
“China will not stabilize growth at the cost of a further increase in economic leverage”, he told reporters at a news conference.
“We would rather sacrifice in some other areas. But we will ably handle the relationship between stable growth and risk prevention,” he added.
Yu Pingkang, chief economist at Changjiang Pension Insurance, said that the message from Yang showed that top policymakers are prepared to push necessary reforms, including cutting SOEs’ indebtedness even though it will mean slower growth.
“Reducing economic leverage could be a long and painful process. The best way to do it is to raise SOEs’ production and operating efficiency through market-oriented reforms,” he said.
Yu said he will not rule out the possibility of a slight credit loosening by the policymakers if major risks emerge during the economic deleveraging process.
Wang Zhijun, an official at the top economic policymaking office, said at the news conference that China will continue its proactive fiscal policy and prudent monetary policy to maintain appropriate credit growth and stable liquidity.
The country’s better-than-expected economic performance, shown by the strong 6.9 percent GDP growth and recovering corporate profits in the first half of the year, has offered the government greater policy leverage to push reforms.
Industrial profit grew by 22 percent in the first half of this year, much faster than the 6.2 percent of the first half of 2016, according to the National Bureau of Statistics.
Moody’s Investors Service revised the Chinese banking system’s outlook on July 27 to stable from negative－the first change since 2015－because of the improved corporate profit, solid economic growth, steady commodity prices and slower increase in corporate debt.