Bolder structural reforms needed in China: economists

Updated: 2016-09-27 20:02

By Jiang Xueqing(

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Bolder structural reforms are necessary for China to free productivity and tap growth potential, Asian Development Bank economists said today.

Jurgen Conrad, head of the economics unit at the Asian Development Bank PRC Resident Mission, said structural reforms have made good progress since the Third Plenum, but maybe more slowly than the government expected three years ago.

"Deepwater reforms are difficult, and many problems require comprehensive solutions. I think that is slowing reforms down a little bit. It's not too late for the government to change the picture fundamentally, for instance, in the area of SOE reforms," he said.

Economists at ADB suggested that over the next two years, structural reforms should focus on finding comprehensive solutions for so-called zombie companies, carrying out fiscal reforms that are focused on reforming the relationship between local and central governments, improving state-owned enterprise performance, and having more vigorous financial sector reforms.

Earlier this year, China started exploring the way for commercial lenders to swap non-performing loans of companies for stakes in those firms. Conrad said debt-for-equity swaps belong in the toolbox of enterprise restructuring but they cannot work in isolation.

"If you reduce the debt level of a specific company through debt-equity swaps, that just allows the company to borrow more. In five years, it will have as much debt as it had before the swap but in addition, a lot of shares of this company are now at the balance sheet of financial institutions. Then you are clearly worse off than you were before the debt-equity swap," he explained further.

"So clearly other measures need to be taken in addition to ensuring that this enterprise works more successfully than in the past, because the key problem of the enterprise was not that it could not borrow. The problem goes to something else that needs to be identified and addressed," he said.

Thanks to a stronger-than-expected first half performance and further stimulus measures, ADB updated its forecast on China's growth in 2016 to 6.6 percent, up slightly from its previous projection of 6.5 percent. Its estimate on the country's growth next year also increased 10 basis points to 6.4 percent.

In the first half of 2016, growth continued to be driven mainly by services and consumption, in line with government objectives. On the consumption side, services contributed 60 percent to GDP growth. On the demand side, consumption contributed 73.4 percent to GDP growth.

"One key way to boost consumption is the fact that Chinese households have one of the highest precautionary savings in the world," Niny Khor, economist at ADB PRC Resident Mission, said. "One of the reasons is social safety protection is not quite complete… If we look at OECD (the Organization for Economic Cooperation and Development) countries, the average government spends 20 percent of GDP on social safety protection programs. In China, it's less than one third of that."