China to focus on structural reforms in 2016

China’s policy makers are expected to focus on structural reforms next year, as an industrial glut and lack of high-quality supply rattles the economy, Xinhua news agency said.

China should continue to keep economic growth at a proper range and advance structural reforms in 2016, it quoted a statement released after a meeting of the Political Bureau of the Communist Party of China (CPC) Central Committee presided as saying.

“While improving domestic demand, the country should raise the quality and efficiency on the supply side,” the statement said.

While spurring investment and consumption, the leaders will prioritize reforms to digest excessive capacity and create new growth engines, Xinhua said, adding the reforms would generate growth in the long term by making enterprises more efficient.

A focus of those reforms will be eliminating “zombie companies” and increasing the productivity and competitive edge of Chinese firms, Xinhua quoted Liu He, deputy chief of the country’s top economic planner, the National Development and Reform Commission, as saying.

“Diminishing orders and a severe oversupply has created some “zombie companies” that can survive only on bailouts, particularly in industries like steel and cement, which saw hectic expansion in the past decade,” it said.

Those companies, along with other heavily indebted firms and a high inventory of unsold houses, are a road block for reforms targeting the economy’s supply side, said Liu Yuanchun, an economist at Renmin University of China.

China’s factory activity hit a 39-month low in November, official data show. The profits of major industrial firms fell 4.6 percent year on year in October, worsening from the 0.1-percent decline posted in September.

The statement said the government will encourage mergers, reorganization and, in some cases, companies filing for bankruptcy to clear up the market. While redundant, backward supply capacity will be allowed to exit the market, a slew of reforms will help companies adapt and upgrade.

Chinese leaders have pinned hope on mass entrepreneurship and innovation. The CPC meeting on Monday vowed to promote that by relieving financial strain for companies. Measures promised include reductions to transaction costs, taxes and social insurance fees.

“The persisting high cost of financing is hurting business sentiment,” Xinhua quoted Li Daokui, an economist at Tsinghua University, as quoting. He suggested reforms of the financial system to allow companies to expand the issuance of long-term debts and rely less on bank credit.

Key reforms include that of the country’s colossal state-owned enterprises (SOEs). Broad-stroke guidelines on SOE reform have been rolled out this year, restructuring plans for several conglomerates have been announced, and private investment has been encouraged to enter previously monopolized sectors.

China’s economy expanded 6.9 percent year on year in the third quarter of 2015, the lowest quarterly growth in six years, but still in line with the government’s target of around 7 percent.

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