Premier Li pledges more reform, tries to reassure on growth

Chinese Premier Li Keqiang reacts during a press conference after the closing session of the annual National People’s Congress held in Beijing’s Great Hall of the People

Chinese Premier Li Keqiang yesterday promised more market-opening reforms and said Beijing can keep slowing growth on track, seeking to reassure jittery global markets about the outlook for the world’s No. 2 economy.
Speaking at a news conference, Li promised to shrink bloated steel and coal industries, make the financial system more market-oriented and reduce the government’s role in business. He expressed confidence that despite such wrenching change, the world’s second-largest economy can achieve its official growth target of 6.5 to 7 percent and avoid mass job losses.
“So long as we stay on the course of reform and opening up, China’s economy will not suffer a ‘hard landing’,” Li said at the event capping the annual meeting of China’s ceremonial legislature.
In the wide-ranging televised event lasting nearly two hours, the premier also said U.S.-Chinese cooperation will grow regardless of who wins this year’s U.S. presidential election. Asked about tensions over conflicting claims to portions of the South China Sea by Beijing and other governments, Li said China wants “harmonious coexistence” with its neighbors.
Chinese leaders have spent the past three weeks making unusually high-profile declarations about economic stability following stock and currency turmoil that dented their reputation for adeptly managing growth. At a February meeting of global finance officials in Shanghai, both U.S. Treasury Secretary Jacob Lew and Christine Lagarde, managing director of the International Monetary Fund, said the reflexively secretive communist government needed to do a better job of explaining policy changes.
The repeated Chinese reassurances have started to quell anxiety, but Beijing has some way to go to calm global markets, private sector analysts said.
As for promises of stability, “we perceive it as fake,” said Stephen Innes, a currency trader for OANDA in Singapore. “I think the Chinese economy is struggling and will continue to struggle over the next year.”
At the news conference, Li acknowledged China’s slowing growth and regulatory shortcomings, possibly hoping reassure investors and consumers with a show of candor.
China’s ruling Communist Party is navigating a years’ long shift from a worn-out growth model based on exports and investment to a more sustainable approach driven by domestic consumption.
An unexpectedly sharp downturn over the past two years raised the threat of politically dangerous job losses. Beijing has countered with repeated interest rate cuts and injections of money through higher spending on public works construction — setbacks for its campaign to reduce reliance on investment.
Analysts say the growth target, down from last year’s “about 7 percent,” will be hard to meet without more stimulus. The IMF and other forecasters say it will likely fall to 6.3 percent or lower from last year’s 6.9 percent.
The economy suffers from “government overreach,” Li said, referring to complaints over the dominance of state companies in areas from energy to finance to telecoms. He said Beijing is failing to do “an adequate job of ensuring a level playing field” for entrepreneurs who generate most of China’s new wealth and jobs.
Li promised to make it easier to set up new businesses. He said the state-dominated financial system would become more market-oriented to support growth.
The latest jitters over China began with a share sell-off in June that wiped out some USD5 trillion. The government spent heavily to buy shares to stop the slide.
The surprise introduction in August of a new mechanism for setting the yuan’s state-controlled exchange rate fueled fears Beijing would weaken the currency to boost exports. The yuan slid against the dollar and capital flowed out of China, limiting Beijing’s ability to support the economy with interest rate cuts without causing more turmoil.
Official efforts to calm markets have had mixed success.
Central bank governor Zhou Xiaochuan’s pledge to avoid “competitive devaluation” calmed depreciation expectations enough to cut interest rates, economist Prakash Sakpal of ING said in a report.
Traders are losing interest in the yuan thanks to abrupt central bank policy changes aimed at preventing them from betting against the Chinese currency.
“Every day, they seem to be switching back and forth,” said Innes of OANDA. “That is still causing a lot of grief for investors out there.”
In Japan, Asia’s second-largest economy, the comments by Chinese leaders do little to defuse concern about the spillover of the slowdown, said Harumi Taguchi of IHS Economics.
“The slowdown has become much more evident and it will continue this year,” she said.
The legislature ended with no announcements of major new initiatives, though none were expected. The ruling party gave itself until 2018 to show first results from the campaign to make state companies more efficient and competitive. No significant new changes are likely until after 2017, when a new Cabinet is scheduled to take office.
Excess production capacity in industries including steel and coal has led to price-cutting wars, pushing companies toward bankruptcy and prompting complaints from reform advocates that propping up companies is a waste of public money. Exports of excess steel anger China’s trading partners.
The government plans to cut 1.8 million steel and coal jobs, but Li promised authorities would help those workers find new jobs. The government previously announced it would create a 100 billion yuan ($15 billion) fund to pay for that.
“We will ensure there are no massive job losses,” Li said.
That reluctance to “tolerate the pain associated with significant change” might weigh on growth, Julian Evans-Pritchard of Capital Economics said in a report.
“The leadership’s continued tentative approach to structural reform raises doubts about growth prospects over the medium term,” said Evans Pritchard.
The premier acknowledged concerns about rising debts and potential bad loans at banks but said debt levels are manageable given the large reserves held by financial institutions and China’s high savings rate.
“We are still in a good position to defuse debt risks,” he said. Joe McDonald, Beijing, AP