Pursuing financial, economic reform while preserving growth a tricky balancing act

By Xiao Xin Source:Global Times Published: 2017/7/18 22:23:39

In recent days, it seems that there has been a negative correlation between China's economic indicators and the performance of stocks listed on the Chinese mainland. That divergence signals tricky challenges for policymakers who must pursue deeper reforms while ensuring steady economic growth.

Mainland stocks edged up slightly on Tuesday, which nevertheless did little to restore investor confidence after Monday's plunge, in which about 500 stocks tumbled by the 10 percent daily limit. The stock slump concurred with the announcement of a raft of economic indicators that pointed to a second-quarter economic revival in China.

The world's second-largest economy exceeded market expectations to record a 6.9 percent expansion in the second quarter, buoyed by robust manufacturing activity, resilient consumption, strong foreign demand and impressive property sales.

Understandably, policymakers have recently emphasized deleveraging and reining in market speculation as part of broad-based efforts to defend against systemic financial risks. The policy stance tightening may affect the stock market in the short term.

But the fact that stronger-than-expected GDP expansion didn't soothe investors' nerves may reflect deeper China growth woes.

While high levels of debt can easily spur credit-fueled growth, deleveraging efforts aimed at avoiding asset price bubbles and reducing systemic risks represent a tougher nut to crack.

Insufficient deleveraging might not make any difference, which means that the debt "balloon" might be further inflated. Too hard a blow, however, could send securities markets reeling and cause an economic hard landing.

That said, it's vital for policymakers to become more sophisticated when it comes to economic rebalancing. With the capital markets playing an increasingly important role in financing economic activity - especially  entrepreneurial ventures - the stability of China's capital markets should be an important priority.

This makes particular sense when one factors in the difficulty of steadying the capital markets without putting innovation efforts on hold. The 2015 stock market slump showed just how hard it is to balance efforts to reform the country's securities market with the drive for overall economic reform.

It's advisable for market regulators to remain aware of financial risk prevention despite resilient, broad economic growth.

Observers are hoping that the new financial stability and development commission announced at the two-day National Financial Work Conference that ended on Saturday can play a part in addressing rebalancing concerns.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn

Posted in: EYE ON THE ECONOMY

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