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Chinese President Xi Jinping and Premier Li Keqiang arrive for the opening session of the National People's Congress at the Great Hall of the People in Beijing on March 5. (Photo by Kosaku Mimura)
Politics

China vows to confront structural issues with tighter control

Corporate debt to be reined in to contain financial risk

BEIJING -- The Chinese government on Monday unveiled its annual economy targets, suggesting a slowdown trend as it vowed to deepen reforms including in the financial sector to keep risks in check. Premier Li Keqiang's legislative address on Monday showed the leaderships' intention to cement its top-down approach to tackling the nation's urgent challenges.

Li told the National People's Congress in Beijing that while the country is in a "pivotal" period of transforming its growth model, there are still "many hills to climb." He said the government is committed to resume fighting "three critical battles" against poverty, pollution and financial-sector risk.

"What we need to do is to tackle both symptoms and root causes and take effective measures to defuse potential risks," said Li, referring to illegal fundraising and financial fraud.

To ease the mounting debt of state-owned enterprises, Beijing has proposed so-called mixed ownership reforms and debt-to-equity swaps. Martin Petch, vice president and senior credit officer in Moody's Investors Service's sovereign risk group, said in a note that while these measures "may help address corporate-specific financial pressure, we do not expect such policy tools to lead to significant and sustained deleveraging of SOEs."

Li pledged to write off loss-making "zombie enterprises" and tackle excess industrial output by further reducing steel production capacity this year by around 30 million tons and coal production capacity by 150 million tons. The move is part of the central government's commitment to address pollution to achieve a "continuous decline" in airborne fine particulate matter density in key urban areas. The smog around central Beijing appears to have improved in the run-up to the congress.

Economists at research company Capital Economics indicated doubt about the government's resolve on financial risk. "For all the recent talk of focusing less on the speed of growth, we suspect it will return to the forefront of policymakers' concerns if a slowdown threatens to weaken the labor market," they wrote in a report Monday. "For that reason, we're skeptical that the reiterations today that credit risks will be dealt with resolutely will hold up through the rest of the year. If growth slows, credit concerns are likely to be demoted [as a priority], at least temporarily."

Gross domestic product growth in China, the world's second-largest economy after the U.S., has decelerated in recent years after nearly a decade of double-digit expansion that was boosted by large packages of stimulus measures. The gradual slowdown, intended to avoid a hard landing, has appeared to steady over the past three years, allowing the government room to tackle more pressing socio-economic issues.

Growth in 2018 is projected to hit 6.5%, lower than the 6.9% achieved last year, Li told some 3,000 lawmakers.

The largely rubber-stamp legislature will deliberate over the next 16 days on 10 major agenda items, including the 2018 government budget, constitutional amendments and state appointments. Lawmakers, over two-thirds of whom are new, are expected to adopt all meeting documents handed down to them.

Under the 2018 government budget, expenditures will rise 7.6% to 20.983 trillion yuan ($3.63 trillion) on projected revenue of 18.317 trillion yuan.

Economists expect China to get tough on stamping out risks in its financial system by beefing up regulation.

"The central government is serious about improving financial supervision," said Xiao Minjie, a senior economist with SMBC Nikko Securities. He expects Beijing will tighten its grip on shadow banks, non-bank intermediaries which provide credit that is often repackaged for sale to investors as wealth management products.

Xiao observed that China has stopped putting so much emphasis on fighting real estate bubbles as housing prices have stabilized. Instead, keeping a tab on financial risks will be a priority, with stricter supervision from the top taking the place of letting the market dictate the flow of capital.

"The central government did discourage local governments from using shadow banking, but they kept looking for loopholes," Xiao said. "With serious regulations set to be implemented, local governments are unlikely to take risks anymore to break the rules."

Beijing's Great Hall of the People during the National People's Congress on March 5 (Photo by Kosaku Mimura)

Monday's meeting was also attended by top managers from the private sector and state-owned companies. Pony Ma Huateng, chairman of internet company Tencent Holdings, said he wished to leverage the government's innovation push to sharpen the country's competitive edge. "A digitized China that leads global internet development will be our goal," he told reporters.

Chen Hong, president of SAIC Motor, echoed Ma, saying that big data, cloud computing and artificial intelligence technology will be the pillars of future development in carmaking.

Premier Li in his nearly two hour-plus long speech also reiterated Beijing's "one country, two systems" policy toward Hong Kong and Macau and warned against any activities promoting the formal independence of Taiwan, the self-governing island which China claims as its own territory.

The congress will likely adopt a proposal on Mar. 11 to eliminate a constitutional two-term limit on the state presidency, allowing 64-year-old Xi Jinping to lead the country beyond 2022. State media have said the change will align the presidency with the other two key posts held by Xi, which lack term limits: his positions as general secretary of the Communist Party and chairman of the Central Military Commission. Provisions for a new state anti-corruption agency called the National Supervisory Commission will also be added to the constitution. According to Xinhua, the commission will oversee lower-level commissions nationwide and will not be subject to administrative interference from any level.

Chinese officials have argued that strong authority is vital to achieve Xi's long-term goal of building a prosperous society. The strengthening of centralized power, unseen since the time of Mao Zedong, has raised expectations regarding Xi's economic plans.

"We will rally even closer around Comrade Xi at the core and follow the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era," said Li at the closing, referring to the latest addition to the party's official ideology.

Nikkei staff writers Masayuki Yuda and Michelle Chan contributed to this article.

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