Reform the economy or risk financial crisis – that’s the message from the highest level

Thanks to opaque policy and decision-making, investors, economists and foreign officials are accustomed to having to interpret nuanced messages about China’s economy. The latest, an article in People’s Daily citing an “authoritative source”, may prove more significant than most. It is being seen as a signal that top Beijing officials want to change course from reliance on debt to fuel growth because they believe it could lead to systemic financial risks, although many observers would be more convinced if someone important put their name to it.

According to the article, the world’s second-largest economy is set to enter a so-called L-shaped recovery trajectory for a few years and it is unrealistic to expect any rebound. The interview covered a third of the front page of the Communist Party mouthpiece and all of page two, and was later circulated by Xinhua. The paper’s international edition confirmed online that the remarks could be seen as coming from the top leadership and were intended for consumption by the general market and government officials. As a result, economists are tempted to treat it more seriously than more talk about reform with little action.

Similar interviews with an unnamed official, on slowing growth and economic reform, have appeared twice previously in the past year amid stock-market volatility. This time, the “authoritative” figure said that boosting growth by increasing leverage was like “growing a tree in the air” and that a high leverage ratio could lead to a financial crisis. It followed a rebound in the first quarter driven by heavy targeted government stimulus and record bank lending, at the expense of restructuring goals like cutting corporate debt, phasing out excess industrial capacity and relying more on consumption and services for sustainable growth. State-owned enterprises, far from restructuring, increased investment by more than 23 per cent.

This may have pleased vested interests and political elements opposed to market reform. But the “authoritative source” poured cold water on the perception of a “good start” to 2016, saying that deep-rooted problems had not eased. The article implied criticism of policies pursued by the State Council under Premier Li Keqiang (李克強 ), including propping up stocks and boosting the leverage ratio. The declared target audience of the market and officials may be seen to step up pressure on the State Council to rein in an unsustainable approach and grasp the nettle of restructuring. Otherwise, the sustainable recovery the world is sweating on to boost global growth may remain elusive.