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Li’s Balancing Act

In recent years, short-term investment opportunities in China have diminished, raising fears of a hard landing. To buy time for structural adjustment and reform – critical to generating the next wave of investment opportunities – Premier Li Keqiang’s government must strike a balance between economic growth and financial risk.

SHANGHAI – Three years of persistent economic slowdown have rattled Chinese economists and policymakers. Financial analysts are in a tizzy over whether GDP growth will fall below 7%, parsing official statements for clues as to whether and when the government will act.

The government’s financial viziers seem none too alarmed. Beneath this cool exterior, however, China’s leaders are very worried indeed. As Liu Shijin, Vice Minister of the Development Research Center of the State Council, recently explained, the dilemma facing the authorities is that another massive stimulus plan to boost growth would mean more outstanding credit – a problematic approach, given the enormous debt and financial risks that local governments have accumulated. But an excessively sluggish economy poses its own risks.

To be sure, China’s government was in a similar situation ten years ago. But the economy today is not performing as it was a decade ago. China needs new solutions.

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