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China Moves to Dispel Doubts on Economy

Via The Wall Street Journal : China’s leaders fired a top regulator and set out specifics on how they intend to restructure the economy

China’s leaders moved to dispel perceptions of disarray in the management of the world’s second-largest economy, firing a top regulator and setting out specifics on how they intend to restructure the economy without having growth fall off a cliff.

The departure of Xiao Gang as head of the China Securities Regulatory Commission, first reported by The Wall Street Journal on Friday, was announced by the official Xinhua News Agency on Saturday morning. In a brief, Xinhua said the decision was made by the State Council, China’s cabinet.

The move came amid what appeared to be a public campaign by Beijing in recent weeks to counter global pessimism about China’s growth prospects and economic stewardship.

Mr. Xiao had been in the hot seat for months. He was the official primarily faulted for a bungled mid-2015 stock-market rescue that for the first time made President Xi Jinping look vulnerable.

At a meeting last summer attended by Mr. Xi and other senior officials, Mr. Xiao’s face went pale when Mr. Xi expressed dissatisfaction with how Chinese regulators handled the market-rescue effort, according to people familiar with the situation.

Then in January, an invention Mr. Xiao had championed—a circuit breaker to prevent a stock-market free fall—went spectacularly awry, worsening a selloff to trigger the worst-ever start to a year for Chinese stocks. The circuit breaker was shelved after only four days in use.

Such missteps, paired with clumsy attempts to reverse or explain them, have exposed China’s leaders to speculation that they have lost their once-steady economic touch.

Mr. Xiao’s successor at the stock regulator is Liu Shiyu, current chairman of the Agricultural Bank of China and a former central-bank deputy governor, Xinhua said.

Mr. Xiao is expected to be reassigned as a deputy secretary-general of the State Council, officials with direct knowledge of the matter said. In that position, he would be asked to assist Premier Li Keqiang on economic issues, the officials said, but it is a less powerful position than the securities-regulatory chief.


Also Friday, Beijing’s top economic mandarins gathered at a historic Beijing guesthouse to present a unified message on the government’s resolve to create a consumer-driven economy and leave behind China’s old formula of relying on cheap exports abroad and infrastructure investment at home.

They indicated reforms need to happen soon.

“If we miss the window of opportunity” to push through the structural reforms, “we would suffer severe consequences,” said Yang Weimin, a deputy director of the Office of the Central Leading Group for Financial and Economic Affairs. That office, headed by President Xi’s top economic adviser, Liu He, is highly influential in shaping China’s economic policies.

Mr. Yang said the next two years are crucial in reducing debt and closing “zombie” businesses and factories churning out unneeded goods, reforms outlined in the government’s five-year plan that runs through 2020.

The economic conference of the China 50 Forum, a think tank founded by Mr. Liu, took place ahead of a meeting of Group of 20 finance officials in Shanghai next week, and those attending also included China’s central-bank governor and finance minister.

China’s chairmanship of the G-20 this year had earlier been seen as a venue for it to promote new models for running the world economy. But after the economy’s stumble recent stumble, major trade partners are looking for signs that Beijing has plans to rectify its economic problems.

Mr. Yang said the government was in the process of tallying up things like the number of zombie businesses, the kind of overcapacity they account for and the number of workers they employ.

He took aim at vested interests opposed to the overhauls and said the government wouldn’t provide subsidies and banks wouldn’t lend to firms mired in overcapacity and debt.

“Those responsible for overseeing state assets shouldn’t drag their feet just because shutting down those firms would decrease the amount of assets they oversee, and local governments shouldn’t protect zombie firms,” he said.

Central bank Gov. Zhou Xiaochuan said the moves must be paired with stimulating demand through monetary and fiscal policies. His deputy at the People’s Bank of China, Yi Gang, said the government would be mindful of the effects on employment from drastic restructuring, indicating Beijing is unlikely to carry out any massive factory closures to avoid unrest.

But Mr. Yi also stressed that China would avoid flooding the market with too much credit.

The central bank, which has tried to steer lending to the corners of the economy where it is most needed, on Friday said it had raised the amount of deposits some banks hold in reserve because of their failure to lend to farmers and small businesses as required.

In a move to ease a housing glut afflicting large parts of China, the finance ministry said that it was reducing deed taxes for home buyers. The reduced tax rates won’t apply to the few big cities, such as Beijing, Shanghai and Shenzhen, where demand remains strong.

The twists and turns in Beijing’s economic messaging have left global investors wondering whether Beijing is putting reforms on the back burner to rekindle growth with old-style stimulus. A record surge in bank lending in January fanned such speculation.

Chinese officials involved in decision making agree that Beijing is treading a fine line between restructuring the economy and preventing instability. Many Chinese officials say privately that it will take determination of the kind showed by former Premier Zhu Rongji when he pushed through painful reforms. Mr. Zhu led a charge two decades ago to shake up China’s bloated state sector—an effort that resulted in the closure of some 60,000 companies and layoffs of about 40 million workers.

Uncertainty about China’s slowdown, compounded by Beijing’s mixed signals, led some global hedge-fund managers, including Kyle Bass’s Hayman Capital Management in the U.S., to pile up bets against China’s currency, setting up a showdown between Wall Street and Chinese policy makers.

Western officials, including the International Monetary Fund Managing Director Christine Lagarde and U.S. Treasury Secretary Jacob Lew, have urged Beijing to better communicate its policy intentions. Mr. Zhou, the central-bank governor, recently broke a monthslong public silence to give an interview to China’s Caixin magazine, saying China will press ahead on reforms in a “pragmatic” manner.

There have also been calls inside China for action rather than words.

“Policy makers should stop the empty talk and really start looking into what the problems are and trying to solve them,” said Xin Bin, an economist at the Development Research Center, a think tank affiliated with China’s cabinet, on the sidelines of Friday’s forum.

Some of the criticism of Beijing’s handling of the economy has cited policy bottlenecks as a result of Mr. Xi’s micromanaging leadership style.

Amid the efforts by the Communist Party to regain mastery of the economic narrative, President Xi on Friday went on a whirlwind tour of China’s three flagship state news organizations, his first visit to state media since taking power three years ago.

In between conducting a live video chat with villagers receiving poverty-alleviation assistance and trying out the evening-news anchor chair at China Central Television, he instructed journalists to focus on positive reporting.

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