Photo: CCTV screen grab
Photo: CCTV screen grab

Chinese president Xi Jinping said in a televised New Year’s address on Sunday that the country will not waver in its push to reform.

“We will take the opportunity of celebrating the 40th anniversary of the reform and opening-up in 2018 to further carry out reform, as reform and opening-up is the path we must take to make progress in contemporary China and to realize the Chinese dream,” Xi was quoted by Xinhua news agency as saying.

The Chinese people would “cut paths through mountains, and build bridges across rivers” to move forward on reform, he said, citing a Chinese addage.

His words underscore the message coming out of the 19th Party Congress, as well as an annual economic policy meeting held recently.

At the annual economic conference held on December 20, policy makers stressed “high quality growth” (higher tech and less pollution) and cautious deleveraging. “Prudent monetary policy should be kept neutral, the floodgates of monetary policy should be controlled and credit and social financing should see reasonable growth. Meanwhile, the proactive orientation of fiscal policy will be maintained, while the structure of fiscal spending should be optimized,” according to a December 21 Party statement.

China’s leadership knows that “economic growth has slowed, a credit binge has fueled risks, markets have become more liberalized yet volatile, while transition to a more sustainable and high-quality economy is imperative,” as Xinhua reported last week.

In practice, this means what the People’s Bank of China (PBOC) calls a “two-pillar framework,” that is, stable monetary policy combined with the use of targeted regulatory tools to control credit growth, notably requiring banks to control “asset bubbles.” Additional property market curbs are also envisioned.

In addition, the Chinese authorities are encouraging companies to raise equity as an alternative to debt, and the inclusion of China A-shares in the MSCI Index next year should encourage mainland IPOs.

As consumption growth drives an increasing share of GDP growth, lending to China’s financially-robust household sector should increase while the highly geared industrial sector takes advantage of strong profit growth to gradually reduce leverage. The result likely will be a modest (perhaps 0.5 percentage point) fall in overall GDP growth in exchange for gradual de-risking of China’s economy.

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