Reforms will enhance growth potential

Fourth, China is implementing the most aggressive structural reforms in decades, while this determination is not seen in most other emerging economies due to political stalemate. The reforms outlined after the Third Plenum of the 18th Central Committee of the Communist Party of China in November last year were unprecedented, and the recent establishment of China's Leading Group for Comprehensively Deepening Reforms, is another sign that the leadership is fully committed to forcefully implementing these reforms. China's new reform program, especially deregulation, will enhance the country's growth potential and reduce macro risks.

Fifth, China's financial risks are being addressed by reforms. Many investors fear that China's wealth management product defaults and local government financing vehicle loans will lead to a blow up of the financial system. This is very unlikely. Given the recent resolution of the China Credit Trust event, it is now clear to us that the authorities are embarking on a path toward "managed defaults" to gradually improve risk pricing in the trust loan sector, while tightening rules on shadow banking activities.

As for the local government financing vehicles, their liability to asset ratio has actually declined in the past two and half years by 4.9 percentage points, according to a recent National Audit Report. The local government bond market will be developed to gradually replace local government financing vehicle loans as a more important source of financing for local government capital expenditure.

Clearly all these changes are in the direction of reducing financial risks, rather than increasing risks.

The author is the Chief Economist for Greater China of Deutsche Bank.

(China Daily 02/19/2014 page8)