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Xinhua Insight: China trades growth for reform

English.news.cn   2014-04-11 17:20:46

SHANGHAI, April 11 (Xinhua) -- Growth in the first quarter is set to dip below the target for the whole year, but recent policy has signaled tolerance of a moderate slowdown.

Street consensus puts growth at 7.2 to 7.3 percent for Q1, below the 7.5 percent target set during the March parliamentary session. Data for the first two months point to slowdowns in manufacturing, retail and investment in infrastructure, even after seasonal factors are taken into account.

Zhang Zhiwei, China economist with Nomura Securities said economic momentum may have stayed weak in March. He expects Q1 growth of 7.3 percent and a further drop to below 7 percent in the next two quarters if no policy easing measures are put in place.

"While economic growth in the first quarter is likely to fall below the official target, the government has also made economic restructuring its top priority this year. The biggest challenge for authorities is how to balance the two," said Peng Wensheng, chief economist at China International Capital Corporation (CICC) in a recent research note.

NO ADRENALIN SHOT

At the Boao Forum for Asia on Thursday, Premier Li Keqiang said the government will not use stimuli to address short-term fluctuations but is focused on sound growth in the long term.

With monetary easing off the agenda, Li said growth slightly below target is OK, as long as it creates enough jobs. At a press conference in March, he predicted some 10 million new jobs this year. For that to happen, the economy must grow above 7.2 percent.

In a meeting with provincial leaders late last month, Li also said the administration "should roll out effective policies in a targeted way" to keep growth in what he called "a reasonable range" .

That translates into providing a backstop for growth by relieving the tax burden on small businesses, support for affordable housing, and railway construction in the western region.

"The government aims to stabilize short-term growth while avoiding future financial troubles," said Lu Ting, China economist at Bank of America Merrill Lynch.

"The traditional solution was to put a lot of money into the system, but they [the government] have less room to maneuver than in the past," said Kenneth Jarrett, president of the American Chamber of Commerce in Shanghai. "This year the government is also concerned about the accumulation of debt."

According to the CICC, cutting interest rates to increase liquidity is unlikely. A more likely scenario is targeted easing, freeing up of some reserves and leaving room for increased spending. While liquidity will remain tight, a more proactive fiscal policy will support the economy.China Development Bank, for example, will set up a new entity to sell bonds to other financial institutions to fund shanty town development and other infrastructure projects.

"China should deleverage local governments while leveraging up the central government to deliver a soft landing and defuse the debt timebomb. One approach is to raise banks' profiles in infrastructure and social housing investment," Lu said.

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Editor: An
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