China says plans to speed up investment, stabilize demand

BEIJING Thu Mar 20, 2014 6:39am EDT

A picture taken through tripod shows China's Premier Li Keqiang during a news conference, after the closing ceremony of the Chinese National People's Congress (NPC) at the Great Hall of the People, in Beijing, March 13, 2014 file photo. REUTERS/Kim Kyung-Hoon

A picture taken through tripod shows China's Premier Li Keqiang during a news conference, after the closing ceremony of the Chinese National People's Congress (NPC) at the Great Hall of the People, in Beijing, March 13, 2014 file photo.

Credit: Reuters/Kim Kyung-Hoon

BEIJING (Reuters) - Premier Li Keqiang said China will speed up investment and construction plans to ensure domestic demand expands at a stable rate - an indication authorities are considering practical measures to support slackening economic growth.

Li said at a weekly cabinet meeting that China needs to roll out approved plans for growing domestic demand to keep growth in the economy in a "reasonable range".

No further details were given in an official statement following the meeting, and it was not clear if Li had given authorities a green light to accelerate new investment, or to start work on projects that have already been approved.

But his remarks, which came after China quietly revealed last week that it had signed off on 142 billion yuan ($23 billion) worth of railway projects this year, stoked talk among analysts that Beijing is ready to stimulate the economy.

China rattled financial markets earlier this month with data showing growth in investment, retail sales and factory output plumbing multi-year lows in January and February.

Investors, multinational companies and its major trading partners fear a sharper-than-expected slowdown in China will soon drag on activity across the world.

Ramping up state investment to shore up the economy has been par for the course in China in recent years.

In 2008/09, in the face of the global financial crisis, Beijing approved a whopping 4 trillion yuan ($645 billion) of state spending funded partly by bank loans.

That spending helped China recover quickly from the crisis, but the mountain of debt incurred fed other credit problems that the government now hopes to fix, in part by abandoning its former export- and investment-driven growth model.

Stimulus measures announced in several economic soft patches since then have been more modest and more focused, such as last year's spending on social housing, infrastructure and energy-saving industries, and tax breaks for smaller firms.

The five railway projects tipped last week were approved in January and February and will get half of their funding from bank loans, according to the country's economic planner, the National Development and Reform Commission.

Some analysts cautioned investors against taking the latest projects as an indication that China is ramping up spending again, as the construction sector usually picks up in March as the weather turns warm.

They said if China does increase investment in coming months, it would be a setback for broader economic reforms, but arguably an unavoidable one as Beijing is intent on growing the economy by around 7.5 percent this year to boost incomes and employment.

"Of course it will compromise reforms, but the starting point is that the government has to seek a compromise between growth and reforms," said Tao Wang, an economist at UBS. "It was always meant to be a balance."

At a plenum meeting of the Communist Party last November, China announced ambitious reforms that signaled the shift of the world's second-biggest economy from investment- and export-fuelled growth towards a slower, more balanced and sustained expansion.

Some changes, such as government downsizing or closures of debt-laden factories, are likely to take a back seat to avoid fuelling job losses and undermining social stability, analysts have said.

GROWTH VERSUS REFORMS

China has been showing some determination to reform and few experts believe Beijing will launch another super-sized stimulus to prop up the economy.

On Thursday, the government relaxed rules to allow more foreigners to invest in its stock markets, the latest step to free its financial markets after widening the yuan's trading band at the weekend, taking it closer to turning the yuan into a convertible, global currency.

China also has lifted a ban on equity financing for listed property developers for the first time in four years, a step that could herald less government intervention in the sector and ease funding concerns as credit grows tight and the economy slows.

The approvals come amid growing fears of defaults in the property sector after the collapse of Zhejiang Xingrun Real Estate.

But a more volatile yuan has added to global jitters about China after it fell to a one-year low on Thursday. <CNY/>

Some analysts believe China's central bank is engineering the recent slide in the yuan to cushion the weakening economy by making exports more competitive, and others speculate that the government may step up efforts to bolster growth in coming months.

Analysts from government-controlled think-tanks told Reuters last week that Beijing may loosen monetary policy by reducing the level of deposits commercial banks must keep at the central bank if the economic growth slips below its 7.5 percent target.

Beijing could re-energize the economy by increasing government spending, which may involve familiar themes of greater investment in railway construction, public housing and environmental projects such as water conservation.

"With the support of these investments in infrastructure, we believe the economy will stop its slowing trend by the second quarter," economists at Everbright Securities said, adding that the projects will likely be funded by the state budget. ($1 = 6.1965 Chinese yuan)

(Editing by Eric Meijer & Kim Coghill)

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