Curbing debt while targeting growth will test China

Significance

Modest progress is underway in rebalancing towards more consumption and less reliance on exports and investment. GDP growth is on target, helped by buoyant housing and automobile sales. Many of these have been financed by debt though, adding to concerns that prioritising GDP growth has left the economy too reliant on credit. The debt burden is a concern, particularly corporate debt.

Impacts

• The renminbi is at a six-year low and higher US rates could weaken it further, spooking markets.
• Foreign reserves are at a five-year low; while import cover is still strong, eroding macro fundamentals are a concern.
• Strong high-tech and equipment manufacturing growth must be built upon to develop a larger and more sophisticated private sector.
• The focus on growth targets set in 2010 risks debt resolution costs rising as they are deferred.