Chinese Reform Goes Local

BEIJING – Since the eruption of the global financial crisis in 2008, China has used massive economic stimulus to sustain GDP growth. But unresolved structural problems have meant that the stimulus packages generated significant fiscal and financial risk, while doing little to improve China’s capital stock.

Indeed, while China’s overall capital stock is by no means small, capital-structure and maturity mismatches have led to the accumulation of massive volumes of non-performing assets, undermining China’s economic stability and financial efficiency. In order to create the stability needed to reach the next stage of economic development, China must shift its focus from sustaining high GDP growth toward revitalizing its capital stock.

China’s new leadership seems to recognize this. Premier Li Keqiang has declared that the government will not introduce any additional economic stimulus; instead, the authorities will pursue profound and comprehensive economic reform, even if that means slower GDP growth.

Moreover, Li has called upon the banking sector to reinvigorate idle capital and allocate incremental capital more effectively. And the State Council recently published Guidelines for the Structural Adjustment, Transformation, and Upgrading of the Financially Supported Economy, which outlines ten key measures for revitalizing the capital stock.