China finance minister signals may accept growth below 7 percent

SHANGHAI Fri Jul 12, 2013 4:48am EDT

Chinese Minister of Finance Lou Jiwei smiles before the G20 finance ministers and central bank governors family photo during 2013 Spring Meeting of the International Monetary Fund and World Bank in Washington, April 19, 2013. REUTERS/Yuri Gripas

Chinese Minister of Finance Lou Jiwei smiles before the G20 finance ministers and central bank governors family photo during 2013 Spring Meeting of the International Monetary Fund and World Bank in Washington, April 19, 2013.

Credit: Reuters/Yuri Gripas

SHANGHAI (Reuters) - China's finance minister signaled that Beijing may be willing to tolerate economic growth in the second half of the year significantly below 7 percent, marking the most sobering comment to date from a senior policymaker on the country's slowdown.

Speaking in Washington, Lou Jiwei said growth in the world's second-largest economy could be 7 percent this year, the official Xinhua news agency reported on Friday. That would mean growth coming in below the government's official target for the first time in living memory.

Corporate and investment bank TD Securities said the comments implied a sharp slowdown in economic growth in the rest of the year.

"It's not hard to do the math to work out that 6 percent (year on year) GDP growth is required by year end to achieve that," Annette Beacher, head of Asia Pacific research FX and rates strategy of TD Securities, said in a client note.

Lou said economic growth in the first half of the year would be "slightly lower than 7.7 percent". China is due to report GDP for the latest April-June quarter on Monday.

"There is no doubt that China can achieve the growth target, though the 7 percent goal should not be considered as the bottom line," Xinhua reported in paraphrasing Lou's remarks made on the sidelines of the U.S.-China Strategic and Economic Dialogue.

Markets showed muted reaction to Lou's remarks. The Australian dollar dipped briefly on the news about the country's biggest export market before recovering. Global markets have been soothed this week by comments from U.S. Federal Reserve Chairman Ben Bernanke that U.S. monetary policy will remain accommodative.

Still, Chinese growth in 2013 of 7 percent would be lower than many economists are currently predicting. Most forecasts are between 7 percent and 7.5 percent.

Chinese authorities, worried about over-investment and strong growth in informal lending, have indicated they are prepared to tolerate slower economic growth rates as they drive through structural reforms.

The country's official 2013 growth target of 7.5 percent was approved only four months ago at the annual National People's Congress (NPC), or parliament, so analysts said it was highly unlikely that Lou was pointing to a change in the target.

"A revision of the official growth target may require NPC approval, so we regard the quote with caution and wait for any clarification from the government," said Zhiwei Zhang, economist at Nomura in Hong Kong, in a note.

Instead, they suggested he was trying to steer expectations towards slower growth as the government tries to wean the economy off a reliance on exports and investment and more towards consumption-led economic activity.

"While next year's target remains unknown, we believe it will be lowered again to 7 percent. A year ago, a target that low would have sparked a global panic and ‘risk off' reaction," Beacher said.

Xinhua quoted Lou as saying that 7 percent growth this year should not be considered the bottom line and that while the pace of economic activity was slowing down there would not be a hard landing.

"Despite the slowdown of China's economic growth rate, the structural reform is paying off," Xinhua quoted Lou as saying.

NO FIXED FLOOR?

His remarks echo comments earlier this week by Premier Li Keqiang, who has been pushing reform over growth speed. Li said in a speech in southern China that more effort must be put into structural adjustments, reforms and economic transformation.

"If you take these (Lou's) comments and the comments from Li Keqiang two days ago, it feels as if at the moment, top leaders in China, they definitely want to push the envelope a bit in becoming ever tolerant of slower growth," said Louis Kuijs, economist at RBS in Hong Kong.

"It seems at the moment they don't have a fixed floor that is agreed on, they are looking for one, or maybe they don't need one specific number."

Last month, Vice President Li Yuanchao said China would be able to maintain a 7 percent economic growth rate in the future.

Economists polled by Reuters expect April-June GDP data to show the economy grew 7.5 percent from a year earlier, down from an annual pace of 7.7 percent in the first quarter. It marks a far cry from the double-digit growth common in the past three decades.

Financial markets had been fretting that second-quarter growth could be lower than 7.5 percent after weaker-than-expected trade figures this week.

Economists have consistently lowered their forecasts for China's economic growth this year. They could be lowered further next week after Monday's GDP figures and in light of weak trade data this week and the government comments of slower growth.

(Reporting by Pete Sweeney in SHANGHAI, Koh Gui Qing and Xiaoyi Shao in BEIJING and Umesh Desai in HONG KONG; Editing John Mair and Neil Fullick)