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Despite the central government's pinning on deleveraging and trimming overcapacity as its major tasks, economists are still concerned, saying the goals are hard to achieve under the current plan.

"We believe that high leverage will remain a problem for (the mainland) in the mid-term although the authorities have vowed to work on it," Zhu Haibin, chief China economist at JPMorgan, said in Beijing earlier this month.

"Given that credit growth is not likely to decelerate to a level below nominal GDP growth, we will only see the leverage ratio adding up (on the mainland) in the next two to three years. As a result, risks will pick up as well," he said.

According to Premier Li Keqiang's annual work report unveiled on March 5, the growth targets for both M2 and total social financing in 2016 are pinned at around 13 percent - much higher than this year's 6.5 to 7 percent GDP growth target.

Zhu estimated that the mainland's outstanding total social financing at between 140 trillion and 150 trillion yuan ($21.5 billion to $23 billion) for 2015, which means 18 to 19 trillion yuan in incremental loans this year. "With local government debt swap, we expect real credit growth this year to be as high as 16 percent," he said.

Michael Every, head of Asia Pacific financial markets research at Rabobank, pointed out that it's "impossible" to restructure through mergers and acquisitions (M&As) alone, with no job loss. "You will not see a painless shift into services," he emphasized. "Workers fired from heavy industries don't have the skill set for service sectors. Every other industrialized country can tell you how painful and expensive it would be. If the government keeps everybody in unnecessary jobs which is the plan, productivity and profitability will be undermined."

During the central economic work conference held last December, the authorities earmarked M&A as the primary method to eliminate overcapacity in order to keep unemployment under control.

In his annual work report, Li also promised a 100-billion-yuan fund this year from the central government's budget to help laid-off workers.

But, a group of economists led by Helen Qiao, China and Asia economist at Bank of America Merrill Lynch, said in a report on March 18 that the structural deleveraging in the real sense has yet to begin.

"In contrast to the common belief that deleveraging should start with cutting credit, we believe it requires reform-driven productivity growth, which would ultimately lift China up to a new production frontier," Qiao said.

She said the root of the mainland's over leverage problem lies in the collapse of productivity growth over the past four years. While credit growth slowed down from previous periods, nominal output growth slowed down much more sharply.

"We believe China will be able to grow out of the high leverage with the help from structural reforms and countercyclical policy adjustments. The assumption by mainland policymakers is that innovation and the expansion of new private sectors will dwarf the drag from zombie firms ... This means the implementation of service-sector deregulation and financial reform is critical to the success of deleveraging."

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(HK Edition 03/30/2016 page6)