BEIJING (Reuters) - China has cut its growth target this year as the world’s second-largest economy pushes through painful reforms to address a rapid build-up in debt, and erects a “firewall” against financial risks.

Chinese national flags are flying near a steel factory in Wu'an, Hebei province, China, February 23, 2017. Picture taken February 23, 2017. REUTERS/Thomas Peter

China aims to expand its economy by around 6.5 percent, Premier Li Keqiang said in his work report at the opening of the annual meeting of parliament on Sunday.

The target, which Reuters had reported exclusively from sources in January, was realistic and would help steer and steady expectations, said Li.

China set a target of 6.5 to 7 percent last year and ultimately achieved 6.7 percent growth, supported by record bank loans, a speculative housing boom and billions in government investment.

But as the government moves to cool the housing market, slow new credit and tighten its purse strings, China will have to depend more on domestic consumption and private investment for growth. As in 2016, China did not set a target for exports, underlining the uncertain global outlook.

“The developments both in and outside of China require that we are ready to face more complicated and graver situations,” Li said, adding that world growth remained sluggish, while deglobalisation and protectionism were gathering pace.

Growth of around 6.5 percent is sufficient to safeguard employment, said Huang Shouhong, director of the State Council Research Office, who helped craft the premier’s work report.

China added 13.14 million new urban jobs in 2016, with the number of college graduates finding employment or starting businesses reaching another record, according to Li’s report.

“As for whether there is a bottom line on growth, as long as there are no problems in employment, growth slightly higher or lower is acceptable,” Huang said.

Michael Tien, a Hong Kong delegate to China’s parliament and founder of clothing chain G2000, said he was surprised by the 6.5 percent figure.

“I think it’s very high,” he told Reuters. “In the past few years, whatever number they come up with, they will always meet it, and they will always exceed it a little bit. So with this economy, 6.5 (percent) is mind-boggling.”

DELICATE BALANCE

Economists say it is a delicate balancing act to support growth and maintain liquidity while pursuing reforms and taming unruly financial forces.

The 2017 target for broad money supply growth was cut slightly to around 12 percent from about 13 percent for 2016. The government’s budget deficit target was kept unchanged at 3 percent of GDP.

Li said China would continue to implement a proactive fiscal policy, adding that government aimed to cut companies’ tax burden by about 350 billion yuan ($51 billion) this year.

China will also maintain a prudent and neutral monetary policy, he said.

Beijing has flagged in recent months a gradual shift away from a loose monetary stance to discourage speculative investments. Since February, the central bank has raised by tiny increments the interest rates on some lending facilities.

Jia Kang, former director at the finance ministry’s Institute of Fiscal Science, told Reuters he did not expect the PBOC to hike policy rates, at least in the near term.

“It seems unlikely, since stability comes first in the short term,” Jia said.

At present, systemic risks are under control, but China must be fully alert and build a “firewall” against financial risks, Li said.

Chinese banks extended a record 12.65 trillion yuan of loans in 2016, and recent data shows that new yuan loans hit 2.03 trillion yuan in January, the second-highest ever.

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“We will apply a full range of monetary policy instruments, maintain basic stability in liquidity, see that market interest rates remain at an appropriate level, and improve the transmission mechanism of monetary policy,” Li said.

China will also press on with asset securitisation and debt-to-equity swaps this year.

CAPACITY CUTS, LAYOFFS

China will push forward with reform of state-owned firms and assets this year, Li said.

Ownership reforms at more than 100 central government-run enterprises will be completed by year-end as part of efforts to use private capital to revive its lumbering state sector, state media reported last month.

China is also looking to shutter more ‘zombie’ enterprises, a term loosely used to describe inefficient firms with surplus capacity.

The National Development and Reform Commission (NDRC) said in a work report released on Sunday that it would shut or stop construction of coal-fired power plants with capacity of more than 50 million kilowatts.

China will also cut steel capacity and coal output this year, the economic planner said.

Fixed-asset investment is expected to rise about 9 percent in 2017, down from last year’s target of 10.5 percent.

“As overcapacity is cut, we must provide assistance to laid-off workers,” Li said.

China aims to create more than 11 million new urban jobs this year, even as employment pressure grows.

“This year’s target for urban job creation is 1 million more than last year, underlining the greater importance we are attaching to employment,” Li said.