If China gives up monetary stimulus, how will it sustain economic development? “Reform will stimulate the economy,” said Li Keqiang, prime minster of China, at the Davos 2014 summer Forum.

Li noted that China has a wealth of capital so it is impossible to stimulate the economy by issuing more currency. It is true that loose monetary policy can bring short-term economic growth, but it will be followed by a series of new problems such as damped consumption and overstupply of inventory. There is a conjecture that China will adopt a looser monetary policy as its economic growth slows down. Contrary to expectations, monetary stimulus will make Chinese economic problems more complicated rather than solve them.

The credit data revealed by Li also indicates the complexity of China’s economy. Chinese incremental credit hit its lowest level in July and August of this year since September 2009. This shows that the marginal effect of monetary stimulus has begun to diminish. As a result, loose monetary stimulus cannot stimulate the real economy, but will aggravate inflation.

Reform is an effective means to drive the economy. Li pointed out that central government and local governments should clearly know what they can do and what they can’t so as to prevent the abuse of public power. Measures have been taken to optimize the Chinese economic system. 600 administrative examination and approval procedures have been shortened and streamlined. It is easier for private capital to enter the market. Reform should be adopted to draw a clear line between economy and public power.

Chinese economic growth depends on the depth of reform. Li said that China's economy will not hit a hard-landing. The economy has huge potential in its public services and infrastructure. China’s economy can still achieve sustained development in the future.

The article is edited and translated from《达沃斯论坛透露的中国经济谜底》, source: www.jinghua.cn, author: Xu Liyuan