Beijing offers growth assurance in its economic balancing act

BEIJING Wed Jul 31, 2013 8:56am EDT

Labourers working at a construction site are pictured behind a Chinese flag in Beijing April 24, 2013. REUTERS/Kim Kyung-Hoon

Labourers working at a construction site are pictured behind a Chinese flag in Beijing April 24, 2013.

Credit: Reuters/Kim Kyung-Hoon

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BEIJING (Reuters) - China's authorities, mindful of the risk of a sharp economic slowdown that could derail their reform efforts, sent their clearest signal yet that they will safeguard growth and tweak policy when necessary.

The message from a meeting of China's top decision-making body, the Politburo, sought on Tuesday to dispel market concerns about China's near-term economic outlook by stressing stability of growth.

The main economic planning agency followed on Wednesday with assurances that this year's growth goal was safe and that the authorities would supply markets with relatively ample funding.

"We believe the message here is that stability is highlighted after the unnecessary chaos in the interbank market in June, while the party still sends a signal that the new leadership is reform-minded despite some recent confusion," Bank of America Merrill Lynch analysts said in a note.

The nation's new leadership has pledged to wean China off its addiction to export and credit-fuelled heady growth in favor of one driven more by consumption, making clear it would accept some slowdown as a consequence of such a transition.

Yet a combination of slackening growth, fast expanding credit and frothy property markets has kept investors on edge; their immediate concern that growth could fall well below this year's official 7.5 percent target, already a 23-year low.

As a result China's leadership must walk a fine line between addressing near-term weakness in growth that may complicate economic re-engineering and fears that delaying a financial and manufacturing sector overhaul could result in Japan-style stagnation.

In particular, the politburo's mention of "stable and healthy development" of the real estate sector caught markets' attention, interpreted as a sign that Beijing would not risk any radical action to cool that market, concerned about the impact on overall economic growth.

Such a view was reinforced on Wednesday by comments from a senior central bank official, who dismissed any link between the property boom and easy credit.

The remarks helped buoy Hong Kong listed property shares.

TOUGH BALANCE

Economists said Beijing faces a tough balancing act, but it has some budget wiggle room, which the politburo suggested it was willing to use.

"Fiscal policy will play a bigger role in supporting the economy as we need to maintain prudent monetary policy," said Zhu Baoliang, chief economist at the State Information Centre, a top government think-tank in Beijing.

"There will be more tax cuts and the fiscal deficit may exceed 2 percent of GDP (target)," he said, adding that this should allow growth to stabilize in the second half of the year.

While most expectations point to an expansion of fiscal spending and targeted investment that supports reform, some in markets are speculating the central bank may be persuaded to relax bank reserve limits if the economy's slow down prompts capital outflows.

As recently as last month officials seemed more concerned about establishing their reform credentials. They stressed readiness to accept some economic pain as part of an effort to shift China's economy onto a new, more balanced growth trajectory.

A cash crunch that hit China's money market last month was taken as a sign that Beijing meant business in its drive to rein in speculative excesses.

Yet a stock market rout that followed and a slew of weak economic data and even weaker indicators such as purchasing managers' surveys prompted the authorities to offer a more balanced message.

Economists said the latest pronouncements also made a point that boosting growth and reforms were not mutually exclusive.

"The central authorities will continue to coordinate the multiple tasks of stabilizing growth, restructuring the economy and promoting reforms," the official Xinhua news agency said, citing a statement released after the politburo meeting.

Both the party leadership and the planning agency highlighted plans to boost China's urban population by 400 million over the next decade, with the planning agency's chief, Xu Shaoshi, saying the government would unveil its urbanization plan in the second half of the year.

Economists said giving the timeframe for what is considered a key part of the planned economic overhaul not only served to burnish Beijing's reform credentials but also opened up the way for more government investment.

While using massive infrastructure investment to boost growth is no longer an option, more targeted spending seen as supporting long-term economic rebalancing was a strong possibility.

"In the second half, we expect the policy support to focus on more investment in public services, such as urban facilities, hospitals, waste disposal, sewage treatment, as well as light rail and subways in cities," said Zhu Jianfang, chief economist at CITIC Securities in Beijing.

"Such spending will help restructure the economy and also support growth."

(Additional reporting by Xiaoyi Shao; Writing by Tomasz Janowski; Editing by Neil Fullick)

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Comments (4)
pbgd wrote:
Under a totalitatarian regime provincial governors live in costant fear and try to manipulate the numbers. Even Premier Li himself admitted he doesn’t trust these reports. Hence such forward statements are partly wishful thinking.

Jul 31, 2013 7:26am EDT  --  Report as abuse
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Jul 31, 2013 7:55am EDT  --  Report as abuse
dareconomics wrote:
The Chinese economy is cooling off. Less money is being earned and placed into the Chinese financial system creating a shortfall as evidenced by the rise in overnight repo rates. Currently, the PBOC is making liquidity available in order to enforce a 5% ceiling on the overnight rate.

In the coming months, the PBOC will attempt to avoid a liquidity crisis by applying various one-off measures as needed. Eventually, one of these measures will fail and all semblance of a controlled market will evaporate into panic. The 2nd worst thing that can happen to financial markets is for investors to believe that the central banks have everything under control, but the worst thing is that the central bankers believe in the myth of their own power.

Full post with charts, images and links:

http://dareconomics.wordpress.com/2013/07/31/around-the-globe-07-31-2013/ ‎

Jul 31, 2013 2:17pm EDT  --  Report as abuse
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