Beijing - Chinese Premier Li Keqiang warned yesterday that the economy faced “severe challenges” this year – comments that came as weak data fanned speculation the central bank would relax monetary policy to support stuttering growth.
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 pushed through reforms aimed at providing longer-term and more sustainable growth.
Data released shortly after his comments suggested that that tolerance may face an early test. Growth in investment, retail sales and factory output 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 remained 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 targeted a rise in gross domestic product (GDP) this year 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 would allow further debt defaults after Shanghai Chaori Solar Energy Science and Technology 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 would 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 stability.
Growth in Chinese corporate debt has been unprecedented. An analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 percent to 4.74 trillion yuan (R8.38 trillion) from December 2008 to September last year.
“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 were among the top priorities this year, reinforcing market expectations that long-awaited changes to liberalise bank deposit rates and efforts to 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. This includes allowing market forces to play a bigger part in the economy.
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 Société Générale, said after yesterday’s data. “First-quarter GDP growth is probably already below 7.5 percent. The government will probably do some easing.” – Reuters