China willing to sacrifice growth to manage systemic risks: senior official

BEIJING (Reuters) - A senior Chinese economic official on Thursday indicated that policymakers would be willing to sacrifice some short-term economic growth in order to deal with systemic risks.

China's national flag is seen in front of cranes on a construction site at a commercial district in Beijing, China, January 26, 2016. REUTERS/Kim Kyung-Hoon

Beijing is trying to contain rising debt and defuse property bubbles amid fears such risks could derail the world’s second-largest economy if not handled well, but policymakers will be treading warily ahead of a key party meeting later this year.

“(China can’t let smaller risks) eventually lead to large systemic risks that would cause serious harm to China’s economy,” Yang Weimin, vice minister of Office of the Central Leading Group on Financial and Economic Affairs, told reporters.

“We would rather sacrifice in some other areas, but also deal with the relationship between stable growth and risk prevention”, Yang said.

But Yang also said China could achieve both goals of maintaining steady growth while containing debt levels.

China’s total private and public debt has exceeded 250 percent of GDP, up from 150 percent before the global financial crisis, according to the Organisation for Economic Co-operation and Development (OECD).

Chinese regulators have already launched a crackdown on riskier types of financing, but the drive has pushed up short-term borrowing costs.

The government’s efforts to lower debt levels in the economy will be a long-term process and the key is to push state-owned firms to deleverage, Yang said.

“We cannot allow the leverage ratio to continue to rise in order to safeguard economic growth,” he said.

China’s economy grew a faster-than-expected 6.9 percent in the second quarter, matching the first quarter’s pace, supported by solid exports, industrial production and consumption.

But analysts expect growth to slow in the second half as the property sector cools and borrowing costs for firms climb.

Chinese leaders have pledged to keep the economy steady as they prepare for a five-yearly transition later this year.

Government officials have said steady growth in the first half could help hit the full-year target of around 6.5 percent and achieve even better results.

Yang also said that China’s economic outlook is bright and the country will not fall into the middle-income trap.

China will fine-tune monetary policy to offset the impact of changes in market interest rates, said Wang Zhijun, another party official.

Higher market interest rates have started to trickle down to the real economy.

The weighted average lending rate of China’s non-financial firms rose by 26 basis points in the first quarter to 5.53 percent, according to data from the central bank.

Data for the second quarter is due in early August.

Reporting by Kevin Yao; Writing by Elias Glenn; Editing by Jacqueline Wong