BEIJING (THE JAPAN NEWS/ASIA NEWS NETWORK) - The trusted confidant follows Chinese President Xi Jinping like a shadow on regional tours and attends meetings with foreign dignitaries.

He has a piercing gaze, and it is hard to imagine that he is an expert in economics.

A native of Beijing, he speaks standard, unaccented Mandarin. His low voice and deliberate speaking style project confidence.

The man in question is Mr Liu He, director of the Office of the Central Leading Group on Financial and Economic Affairs, which serves as the Xi administration's command centre for macroeconomic policy.

These impressions of Mr Liu come from a source involved in Japanese-Chinese relations who knows him.

The Xi regime will celebrate its second term at the 19th Party Congress scheduled to start from Oct 18.

There are whispers within the party that Mr Liu will be promoted to the party's Political Bureau, the top echelon of party leadership, and is rumoured to be a top candidate for a major post like vice-premier for economic affairs.

"He is very important to me" - Mr Xi is reported to have introduced Mr Liu this way when the two met Mr Thomas Donilon, presidential adviser to former US president Barack Obama, in May 2013.

Mr Liu is a reform-minded economic bureaucrat who studied at Harvard University. He is also known as a leading founder of the Chinese Economists 50 Forum, a policy brain trust he started with prominent economists in the latter half of the 1990s.

Through such activities, he seems to have forged strong connections with former premier Zhu Rongji; Mr Xi's ally and Political Bureau Standing Committee member Wang Qishan; and other powerful political leaders, eventually attracting Mr Xi's attention.

THE NEW NORMAL

Mr Liu first came to prominence in May last year after the People's Daily, a party newspaper, published an interview-style article. In the article, an unknown individual who claimed to be a "person in authority" (authoritative source) bluntly expressed dissatisfaction with delays in supply-side reforms.

Few now deny the source to be Mr Liu, backed by Mr Xi's authority.

The authoritative source stated in the article that "China's economy will become L-shaped (continued slow growth following a deceleration). This will not end in a year or two".

The source expressed clear opposition to the traditional method of supporting growth through expanded infrastructure investments, saying that "the market will be suspicious if we follow the path of past approaches to stimulating demand".

Mr Xi is striving for a "new normal" in which stable consumption-based growth replaces rapid investment-based growth. The prevailing view is that the article was published to boost supply-side reforms as a means of achieving this goal.

Behind this, it is thought that Mr Xi wants to avoid falling into a "middle-income trap" where the economy stagnates at the level of a middle-income country and cannot become an advanced nation.

Since last year, policy seems to be progressing in line with Mr Liu's scenarios.

In fact, there are conspicuous changes in fields such as new industrial development. Last year, the number of newly registered companies increased by 24.5 per cent from the previous year to 5.528 million. Innovative services, or so-called fintech, which combines finance and technology like smartphones, have shown remarkable growth. The elimination of excess production equipment is also said to have yielded results.

STATE-OWNED ENTERPRISES

However, reform of state-owned enterprises, a key component of supply-side reform, has yet to be achieved. As of the end of last year, China's outstanding corporate debt amounted to 123.5 trillion yuan (S$25.3 trillion), the equivalent of 166 per cent of its gross domestic product. The debt is a combination of bank lending, corporate bonds, shadow banking and other financial transactions.

This number is considerably larger than that of Japan, which is around 95 per cent. Moreover, there is analysis showing that state-owned enterprises account for the majority of the debt.

In its annual report on the Chinese economy released on Aug 15, the International Monetary Fund also warned of an expansion of excessive borrowing, not only by corporations, but also by the government and households.

The debt has ballooned due to an unhealthy financial system that supports state-owned enterprises in a wide range of fields, such as infrastructure, energy and manufacturing.

Expecting government guarantees, financial institutions inevitably slack off in monitoring the management of state-owned enterprises. This results in massive debt that exceeds repayment capabilities. If the number of companies with excessive debts increases, productivity may decline, leading to sluggish growth.

The Xi administration is trying to reduce debt by promoting mergers of large state-owned enterprises, while also implementing measures like debt equity swaps. However, it cannot be said that progress has been made in strengthening lending standards for financial institutions or in steadily reducing corporate debt.

At the end of July, the government announced a policy of privatising all state-owned enterprises within the year. It stated that old-style state-owned enterprises without stock, referred to as "enterprises owned by all the people", will be converted to stock corporations, among other measures.

However, the privatisation of state-owned enterprises has so far been limited to small- and medium-sized corporations, and progress has not been seen in large companies. The children of party executives are involved with large companies and are intricately caught up in factional interests.

Apparently, Mr Xi does not want to take drastic measures against the vested interests of state-owned enterprises, the basis of one-party dictatorship, as such measures could disrupt the system.

The prospects for reform of state-owned enterprises are inherently pessimistic due to systemic contradictions.

The party's frequent intervention in corporate management is of particular concern.

Amid the flurry of mergers and acquistions activity between major Chinese corporations and overseas companies, restraints imposed on top executives and investigations into M&A deals have recently become stricter. This authoritarian approach of punishing one as a warning to others seems to contradict market economy principles.

With such an approach, China will not gain the understanding of the international community, regardless of its protestations against Japan, the United States and the European Union for not recognising it as a market economy.

SUPPLY-SIDE REFORM

Mr Liu, who will take on a post of greater importance in the administration's second term, must be observed to see how far he can push reforms before reaching the limits of the system.

Reforms such as the reduction of excess capacity in steel production or the reorganisation of state-owned enterprises aim to force a shift from an economic structure that is excessively dependent on demand stimulus driven by economic measures, such as infrastructure investment, to an economy that is centred on consumption and domestic demand.

Other issues include eliminating financial risks such as real estate inventory problems and local government debt, and dealing with new industrial development.