Photographer: Billy H.C. Kwok/Bloomberg

China Says It Can Balance Leverage Cuts and Maintain Growth

China can maintain stable economic growth while cutting excessive leverage to prevent financial risks, a top economic official said.

The nation can’t let leverage rise for the purpose of boosting economic expansion, Yang Weimin, vice minister of the Office of the Central Leading Group on Financial and Economic Affairs, said at a briefing on Thursday. Liquidity in the second half of 2017 will stay basically ample, according to Wang Zhijun, another official in the same office.

A twice-a-decade National Financial Work Conference this month signaled an effort to reduce leverage in the financial sector could broaden. Policy makers laid out priorities for the second half of this year, including actively addressing the risks around local government debt, cracking down on wrongdoing in the financial sector and stabilizing the property market, said Yang.

Yang sits on the Communist Party’s elite financial and economic panel, led by President Xi Jinping, that shapes policies for the world’s second-largest economy. The director of the panel’s office is Liu He, one of Xi’s top advisers.

High leverage is a source of risk and the key to fixing the problem is to reduce leverage at state-owned enterprises, said Yang. China would rather "compromise on certain aspects" in order to achieve a proper balance between maintaining growth and fending off risks, he said.

In general, China’s economic outlook is bright and the nation won’t fall into the so-called "middle-income trap", according to Yang.

Rhinos and Swans

Wang mentioned the potential risks of "gray rhinos" in China’s economy -- highly probable, high-impact threats that people should see coming, but often don’t. These include risks such as shadow banking, property bubbles, high leverage in state-owned enterprises, local government debts, and illegal fund raising, he said, adding that the nation should set out its priorities and tackle them.

Policy makers should also be vigilant against unexpected "black swan" events especially as the economic recovery is not solid enough, Wang said. Policy makers will fine-tune credit growth while keeping a prudent monetary policy to guide interest rates, he said.

— With assistance by Xiaoqing Pi, and Miao Han

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