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China's Leaders Shift From Short-Term Stimulus to Five-Year Plan

China’s leaders gathering in Beijing this week to formulate the 13th five-year plan confront an era of sub-7 percent economic growth for the first time since Deng Xiaoping opened the nation to the outside world in the late 1970s.

Old drivers such as manufacturing and residential construction are spluttering, and new areas like consumption, services and innovation aren’t picking up the slack quickly enough. While President Xi Jinping’s blueprint for 2016-2020 will seek to map out the structural change needed to propel the next leg in China’s march toward high-income status, a more immediate fix has been delivered with the sixth interest-rate cut in a year.

"Defensive economic stimulus is needed to ensure that structural reforms maintain their momentum," said Stephen Jen, co-founder of London-based hedge fund SLJ Macro Partners LLP. "If growth slows too much, the pace of structural reforms in China will also need to be curtailed. The government wants to conduct reforms before the macro conditions get worse."

Late Friday, China announced it would cut benchmark interest rates, stepping up the battle against deflationary pressures and easing the financing burden on indebted local governments and companies. It also lowered the amount of deposits banks most hold as reserves, adding liquidity that has been drained by intensifying capital outflows since August’s yuan devaluation.

Growth Target

China is striving for a growth target of about 7 percent this year while pushing ahead with reforms that include interest-rate liberalization, winning reserve status for its...