OREANDA-NEWS. The annual meeting of China's National People's Congress (NPC) has resulted in no major surprises or changes to macroeconomic targets and policy priorities. Key questions on the pace and content of structural reforms - and how potential asset quality problems in the financial system are to be addressed - remain substantially unanswered. Fitch Ratings believes that the Chinese authorities face a sharpening dilemma between recognising the costs of the imbalances that have built up in the economy and allowing vulnerabilities to intensify further.

The first week of the NPC seemed to indicate a broader focus on stimulus over reform. Notably, the authorities have conceded that the economy will continue to add to leverage in 2016 - with a total social financing (TSF) growth target of 13% versus an implied nominal GDP growth target in the single digits. The focus on stimulus in conjunction with China's broader economic challenges could have an effect on the sovereign, with increased government borrowing targeted this year. Fitch expects the authorities will ultimately have to fiscalise more of the cost of China's imbalances.

At the same time, the commitment by authorities on the nature and pace of supply-side reforms at the NPC has remained broadly vague. Reducing excess supply in certain sectors is a theme which was reinforced at the NPC, for example, but the CNY100bn (USD16bn) in resources pledged are small within the context of China's USD11trn economy. More broadly, the slogan of "supply side reform" remains a fairly general term that could mean various different kinds of policies. Furthermore, China continues to lack a comprehensive framework on how to address the potentially significant asset-quality problems in the financial system.

Fitch maintains that we do not expect a hard-landing growth scenario for China in the near term, as the agency believes authorities still have the administrative and financial resources to avert a disruptive outcome. That said, we believe that the economy could face a bleaker medium-term outlook without structural adjustment and macroeconomic rebalancing, which would be likely to require major structural reforms.

Fitch forecasts real GDP growth to slow to 6.2% this year from 6.9% in 2015. We caution against reading too much into the data around Chinese New Year, but the growth pattern indicated thus far has not been constructive for rebalancing away from investment towards consumption.

Fixed-asset investment - particularly in real estate - has re-accelerated while retail sales have weakened over the first two months of the year. There has been a marked surge in property sales and property investment in the top tier cities as broad-based activity indicators continue to slow. These developments underscore the urgency of the reform challenge.

Capital outflows have begun to slow, in line with Fitch's expectations. The decline in reserves in February was around USD29bn, which was significantly lower than the almost USD100bn in the previous month. The Governor of the People's Bank of China confirmed over the weekend that the authorities do not intend to resort to a significant yuan depreciation to prop up growth - a measure which would threaten to reverse even the limited progress on rebalancing so far achieved.