China vows policy continuity, efforts to address debt and overcapacity

China on Friday pledged to maintain continuous and stable economic policy while pushing forward reforms to achieve "reasonable growth" in 2014 as an annual tone-setting economic conference concluded.

A statement issued after the four-day Central Economic Work Conference said the country will continue to implement proactive fiscal and prudent monetary policies.

Acknowledging downside risks facing the economy, the statement also pledged to push forward interest rate liberalization and exchange rate reforms, and keep a reasonable growth of money supply and social financing.

"This suggests monetary policy may not tighten significantly in 2014," said Nomura economist Zhang Zhiwei in a research note.

The statement did not give a specific growth target for 2014, which is usually made public in March. Analysts largely expect the goal to be 7 percent or 7.5 percent.

China's economy has experienced a notable slowdown since last year, but has gradually gained strength in the latter half of 2013. Growth came in at 7.8 percent in the third quarter, up from 7.5 percent in the second and 7.7 percent in the first.

A string of economic data suggested the economy is well on track to achieve this year's growth target of 7.5 percent.

Friday's announcement outlined six major economic tasks for 2014, ensuring food security, reducing overcapacity, containing debt risks, improving regional development and social welfare, as well as promoting further opening up.

CONTAINING DEBT RISKS

China will make containing risks of local government debt an important task for 2014, as rising debt is becoming a major threat to the country's healthy development.

"China should coordinate short-term measures and a long-term mechanism to defuse the local government debt risks," said the statement.

It promises to discipline debt-raising procedures for local governments and hold them accountable for their debt, while vowing efforts to correct the GDP-obsession mindset of many officials.

The announcement came just days after the Organization Department of the Communist Party of China (CPC) Central Committee decided on a new system to evaluate officials, abandoning much of the focus on GDP.

"Local government debt will be an important indicator in assessing the performance of officials," the department said.

Local government debt surged during the investment and construction binge that was part and parcel of a stimulus in 2008 to buffer against the global financial crisis.

A huge number of debt-financed projects have not generated any cash flow since. Local government debt, which the National Audit Office (NAO) estimates at around 10 trillion yuan (1.64 trillion U.S. dollars), has become a major threat to financial stability.

To get a more clear understanding of the situation, the NAO announced a nationwide audit of government debt in July, but the results have yet to be published.

The most recent official data on local government debt was a NAO survey released in June that put the debt of 36 local governments at 3.85 trillion yuan at the end of 2012, up 12.9 percent from 2010.

REDUCING OVERCAPACITY

"Unswerving efforts will be made to tackle overcapacity, and the central government's decisions and arrangements on the issue should be implemented without compromise," the statement said.

The statement noted that the way to resolve overcapacity is through innovation, as the country continues to see adjustment of industrial structure as one of its core tasks for economic development in 2014.

China should combine the goals of letting the market play a decisive role in allocating resources and letting the government play a better role, and eliminate incompetent players through the means of competition, the statement said.

The government should impose stricter standards for environmental and safety-concerned issues and strengthen enforcement of laws and regulations, it said, adding that behaviors leading to environmental and ecological damage should be punished severely.

Some industrial sectors have been hit by weak demand and falling prices while suffering from outdated production ability, pushing their profitability down to dangerously low levels and jeopardizing long-term development.

Measures have been taken to tackle the problem as the leadership repeatedly warned against the consequences of worsening overcapacity.

In July, President Xi Jinping urged that tackling overcapacity should be a priority, with more efforts to boost industrial restructuring.

Some 1,400 companies in 19 sectors, including steel, cement, electrolytic aluminum, plate glass and shipbuilding, were ordered by authorities to get rid of outdated production capacity by September and eliminate excess capacity by the end of the year.