“Only a sharpened axe can cut through firewood,“ was Li Keqiang’s advice last week, using a Chinese proverb to describe the challenges ahead.
China’s premier has just finished a busy two weeks beginning with his presentation of the government ‘work report’ at the opening of the National People’s Congress (or NPC) and concluding with a question-and-answer session with reporters.
But at the final press conference the grumbling was that Li was more interested in blunting the dialogue than sharpening it, after reporters were restricted to questions on a pre-approved list. In particular, no mention was allowed of Zhou Yongkang, the biggest name alleged to be embroiled in Xi Jinping’s anti-corruption drive (as reported in WiC227). Here, the media was soon contrasting Li’s tightly scripted session with the more relaxed style of his predecessor, Wen Jiabao, who surprised attendees at his final press conference at the NPC by making ominous remarks about the future of Bo Xilai, then Party chief in Chongqing. (Soon after Bo was removed from his post and eventually jailed.)
Then again, this year most journalists were more attuned to whether Li would offer clarity on the direction of the economy.
What did we learn?
The premier pre-empted some of the wider pessimism by noting that China met its growth targets last year, ignoring talk about hard landings for the economy. It would do so again this year, he promised, despite the difficult conditions. But he also left himself some wriggle room by avoiding commitment to a hard-and-fast growth number. Instead, Li said that coming in a little below bulls-eye would be acceptable. “The GDP growth target is around 7.5%. ‘Around’ means there is some flexibility and we have some tolerance,” he noted, adding that his priority is to create 10 million new jobs.
That being said, Li refused to sugarcoat the challenges ahead. Policymakers had to “ensure steady growth, ensure employment, avert inflation and defuse risks” whilst fighting to resolve major concerns like pollution too. “So we need to strike a proper balance amidst all these goals and objectives,” he warned. “This is not going to be easy.”
In one of his most significant statements Li warned that “isolated cases of default were inevitable”. This was a sea change. Previously top policymakers have stayed quiet on the subject of default and arranged bailouts for troubled borrowers. The result was moral hazard and a misallocation of credit, as investors assumed that bonds or trusts products are risk-free. That changed with the default of Chaori Solar’s bonds (see WiC229), the first such credit event in China’s corporate bond market. This happened while the NPC was in session and Li’s remarks made plain it would not be an isolated incident.
More generally, reform of China’s financial architecture remains at the heart of Li’s programme – dubbed Likonomics by some (see WiC204) and usually associated with a more market-led approach. There was confirmation of a new deposit insurance scheme to launch this year, which is seen as a further step towards freeing up interest rates on deposits. Plus the day after the NPC closed, the trading range for the renminbi exchange rate was widened, meaning more room for the market to determine its value.
Licences are also to be issued to five new private sector banks (see page 11), in a bid to boost competition in the financial sector and increase lending to small and medium-sized entrepreneurial firms.
But a spate of darker economic news upstaged some of the reform talk, leading to speculation that Li is going to struggle to get close to his target of 7.5% growth for the year.
Last week, HSBC economists Qu Hongbin and Sun Junwei agreed that the economic picture is disappointing but said there’s no need to panic yet. For a start, March’s numbers will offer us a better insight because economic activity will be getting back to more normal patterns after the Chinese New Year holidays. And Beijing also has the policy flexibility to counter a steeper slowdown, they said. Inflation is benign and there is scope for targeted investment in initiatives like building subways and alleviating air pollution, to give the economy a boost.
That view was vindicated yesterday as the State Council vowed to acclerate the construction of projects that will stabilise growth.
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