By Ren Zeping, Institute of Macroeconomic Research, Development Research Center of the State Council (DRC)

Research report No 82, 2014 (Total No 4581)

Abstract:

Around 1999, the Chinese government, facing a complex and serious economic situation, implemented successful macroeconomic control and market-oriented reform. It opened a new chapter of economic and social development.

The current situation is quite similar to 1999. It seems that the economic downturn is caused by insufficient overseas market demand and a periodic adjustment, but the fundamental issue lies in the deep structural and institutional problems. For example, market clearing should be done periodically but is impeded because of institutional obstacles. Capacity reduction and deleveraging are implemented slowly. The economy will see long-existing downturn pressure with increasing overcapacity and debt risk. Since the restart of bank-government and bank-enterprise relations, the government's implicit guarantee has become widespread. In addition, a large amount of resources have been allocated to low-efficiency departments, which increases financial risks and makes it more difficult for the transforming of growth stage and the upgrading of driving force for growth.

With the experience of 1999, the country can issue more long-term treasury bonds for domestic construction to stabilize growth, promote market clearing of State-owned departments by combining market and administrative methods, cut commercial bank's non-performing assets to allow the financial system to function well, and work hard to reform the macro-structure and micro-foundation for the market economy.