Chinese officials promise economic stimulus and structural reforms

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/08

China’s officials this month have assured they can calm turbulent markets, hit their growth targets and move forward with reform. Eight top officials posted a declaration on the central bank’s website to express their commitment to increasing financial support to industrial branches impacted by structural reforms. The declaration further promised support to Chinese investment abroad. Insolvent “zombie” firms will be wound down. Earlier this month, to speed up structural change the government promised tax relief to high-tech service firms. At a meeting of the reform policy steering group this week, president Xi Jinping stressed that it was essential to continue with reforms at all levels. In February, the head of China’s securities regulatory commission was sacked. 

The latest economic policy declarations emphasise the role of debt-finance to promote structural reforms and growth. This will worsen China’s debt problems. The biggest headache for officials still seems to be figuring out how to achieve the current 6.5–7 % growth target. There seems to be no room to consider that employment goals might be achieved with slightly lower growth and less indebtedness. Some official comments optimistically assert that the recent uncertainty is only temporary and reforms can be postponed to more appropriate times. Yesterday (Feb. 25), the markets expressed their view on uncertainty with share indexes in China dropping by more than 6 %.

Further discussion on the course of economic policy is expected next month when the People’s Congress (China’s parliament) convenes to approve this year’s budget and the revised goals for the 2016–2020 five-year plan.

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