* Li hints Beijing will tolerate economic slowdown
* Suggests government would allow further debt defaults
* Data points to marked slowdown in economy in Jan, Feb
* Analysts expect policy changes to support economy
* Some forecast central bank will cut bank reserves
By Benjamin Kang Lim and Kevin Yao
BEIJING, March 13 Chinese Premier Li Keqiang
warned on Thursday that the economy faces "severe challenges" in
2014 - comments that came as weak data fanned speculation the
central bank would relax monetary policy to support stuttering
Li, speaking at a news conference on the final day of
China's yearly parliament, hinted Beijing would tolerate slower
economic expansion this year while it pushes through reforms
aimed at providing longer-term and more sustainable growth.
Data released shortly after his comments suggested that
tolerance may face an early test.
Growth in investment, retail sales and factory output all
slumped to multi-year lows, suggesting a marked slowdown in the
first two months of the year, according to data released by the
National Bureau of Statistics.
"A storm is coming," said Gao Yuan, an analyst at Haitong
Securities in Shanghai, while Hao Zhou, the China economist for
ANZ said "policy easing should be imminent."
But Sheng Laiyun, a spokesman for the statistical bureau,
said China's economic fundamentals remain sound despite
experiencing some short-term pains from structural adjustments.
"The economy is likely to maintain steady and healthy growth
in the future," he was quoted by state radio as saying.
At the carefully orchestrated briefing where questions had
to be vetted in advance, Li spent most time discussing the
economy. But he also touched upon other topics, including
friction in relations with Washington, corruption, pollution,
and the disappearance of a Malaysia Airlines aircraft.
While acknowledging the economy faced difficulties, Li
suggested Beijing would not let growth slip too far. The
government has targetted a rise of GDP in 2014 of 7.5 percent
after actual growth last year of 7.7 percent.
"We believe we have the ability, and all the means, to
ensure that economic growth will stay within a reasonable range
this year," he said.
He also signalled the government will allow further debt
defaults after Shanghai Chaori Solar Energy Science and
Technology Co Ltd failed last Friday to pay an
interest payment on its five-year bonds.
The first default on a domestic bond was hailed by experts
as a landmark that will impose more market discipline, a break
from the past when bonds enjoyed an implicit guarantee because
the government would bail out troubled firms to ensure
Growth in Chinese corporate debt has been unprecedented. A
Thomson Reuters analysis of 945 listed medium and large
non-financial firms showed total debt soared by more than 260
percent to 4.74 trillion yuan ($777.3 billion) between December
2008 and September 2013.
"We are reluctant to see defaults of financial products, but
some cases are hard to avoid," Li said. "We must enhance
oversight and solve problems in a timely way to ensure no
systemic and regional risks."
Li said financial and fiscal reforms are among top
priorities this year, reinforcing market expectations that
long-awaited changes to liberalise bank deposit rates and
efforts rein in local government debt could be in the pipeline.
Chinese leaders unveiled plans last year for sweeping
reforms aimed at transforming the economy's reliance on
investment and exports, which have fuelled double-digit growth
for three decades, to one that leans more on services and
consumption. It included allowing market forces to play a bigger
part in the economy.
PRIORITY ON JOBS
The signs of a slowdown in the economy this year have raised
worries among some investors that China will miss the 7.5
percent growth target.
"The momentum is really quite weak," Wei Yao, China
economist for Societe Generale said after Thursday's data. "Q1
GDP growth is probably already below 7.5 percent. The government
will probably do some easing."
Yao said she expected the central bank to reduce bank
reserve requirements by 50 basis points. Major banks currently
have to put aside a fifth of their cash as reserves and such a
measure would represent the central bank's strongest policy
easing since 2012.
Sources involved in internal policy discussions told Reuters
earlier this week that the central bank was prepared to cut bank
reserves if economic growth slowed further. But they said policy
action may only happen in the second quarter.
Li skillfully dodged a question on how far Beijing would let
economic growth slip before it steps in with policy measures to
support activity. Still, he hinted at tolerance for below-target
growth, as long as enough new jobs are created.
"The GDP growth target is around 7.5 percent. 'Around' means
there is some flexibility and we have some tolerance," he said,
adding that the lower limit on growth must ensure job creation.
Finance Minister Lou Jiwei said last week that China can
slightly miss the 7.5 percent growth target as long as enough
jobs are created.
However, Xu Shaoshi, the head of the pro-growth National
Development and Reform Commission, said on Wednesday that the
7.5 percent target would be the lower limit for the government.
Beijing wants to create 10 million new jobs in 2014 and Li
has said that the economy must grow 7.2 percent annually to do
that. Some 13 million new jobs were created last year when the
economy grew 7.7 percent.
Premier Li said the government will take a differentiated
approach to cool the property market, rather than using
one-size-fits-all policies used by his predecessors that have
largely failed to calm real estate inflation.
"We need to apply differentiated property measures in
different cities based on different types of demand and local
conditions," Li said.
But on government corruption, Li had an unequivocal answer.
"We will show zero tolerance for corrupt behaviour and
corrupt officials. No matter who it is, or how senior their
position, everyone is equal before the law," Li said, without
mentioning any names.
Speculation has gathered around China's former domestic
security chief Zhou Yongkang, who sources say is at the centre
of a corruption investigation reaching into the highest echelons
of government, though Beijing has yet to formally confirm this.