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China Vice Premier says economy faces headwinds, urges broad reforms

China's Politburo Standing Committee member Liu Yunshan (R) talks to newly-elected Vice-Premier Zhang Gaoli during the sixth plenary meeting
China's Politburo Standing Committee member Liu Yunshan (R) talks to newly-elected Vice-Premier Zhang Gaoli during the sixth plenary meeting

BEIJING (Reuters) - China's economy faces more headwinds as it struggles with surplus production capacity and risks to the financial system, a member of the country's top decision-making body said on Sunday, calling for sweeping reforms, including lessening state control.

Vice Premier Zhang Gaoli, a member of the highest-ranking Politburo Standing Committee, warned that failure to extend reforms would consign the economy to years of low-quality growth.

"There are increasing downward economic pressures and the problem of excess capacity is worsening," Zhang said. "Objectively speaking, there are potential risks in the financial area."

China's $8.4-trillion economy fought its worst slowdown in 13 years last year when weak exports and interest rate hikes from the year before dragged annual growth to 7.8 percent -- impressive by world standards but the grimmest for China since 1999.

The downturn, which surprised many with its length and depth, led analysts to warn that China's days of heady, double-digit economic growth are over and that broad reforms across sectors are needed.

History has shown that the only way to surmount growth obstacles is to undertake sweeping changes, Zhang said.

"This is a very important job for us," he told a business forum, saying areas that needed change include government institutions, the household registration system and environment protection standards.

"If not, even if our absolute economic size gets bigger, our economy, our growth standards, will still be at the mid- to low-end."

Areas often cited by analysts as requiring pressing change include freeing China's interest rates market, allowing more private investment in the economy, encouraging consumption and "greener" growth, and enforcing the rule of law.

Zhang sought to assure foreign firms that China, which is often criticized for impeding competition by subsidizing its state firms, is open for business.

"Some of our friends from abroad are very concerned about China's investment environment," he said. "I can tell you fair competition is our common goal."

The new Chinese government, led by President Xi Jinping and Premier Li Keqiang and which formally took office this month, has vowed to start reforms. But resistance to change by interest groups means any reform would likely be gradual, analysts say.

"Where control is required, the government must exert control and control it straight and well. Where control is not needed, then the government should not control and intervene," Zhang said. ($1 = 6.2122 Chinese yuan)

(Reporting by Shao Xiaoyi and Koh Gui Qing; Editing by Sanjeev Miglani)

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