China’s Li vows to ensure growth amid reforms that cut flesh

Bloomberg

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Li Keqiang, China's premier, delivers a speech during the opening of the third session of the 12th National People's Congress at the Great Hall of the People in Beijing, China, on March 5, 2015. Li Keqiang, China's premier, delivers a speech during the opening of the third session of the 12th National People's Congress at the Great Hall of the People in Beijing, China, on March 5, 2015.

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Premier Li Keqiang pledged to protect job creation in China as the leadership presses ahead with a “painful” push to cut corruption and waste by reducing the role of the state.
Policy makers will take action if China’s growth, which the government targeted at about 7 percent this year, drifts toward the lower limit of its range and cuts into employment or wages, Li told reporters. While stripping the government of some of its role in the world’s second-largest economy may face resistance from vested interests, it is crucial, he said.
“This is not nail-clipping -- it’s wrist slashing,” Li said Sunday at his annual nationally televised briefing, held in Beijing’s Great Hall of the People, referring to the restructuring initiative. “It’s like taking a knife to one’s own flesh.”
Li’s remarks highlight the challenges China’s leaders face as they seek to wean the economy off its reliance on exports and investment, a model that’s fueled pollution, corruption and ballooning debt. At the same time, missteps risk further dragging down growth that was the slowest in more than two decades last year.
‘Thin needle’
“It’s a very thin needle that they are trying to thread,” said Andrew Polk, the Conference Board’s Beijing-based economist. “The downward pressure on the economy is very strong. All the main drivers of economic growth are decelerating.”
The economy expanded 7.4 percent last year. Bloomberg’s gross domestic product tracker, which draws on measures such as electricity production, shows the pace weakened to 6.28 percent in February.
Li’s comments Sunday echoed ones he made at his annual briefing in 2013, when he said China would open the economy to more market forces. At the time, he said doing so would be “very painful and even feel like cutting one’s wrist.”
As in years past, he vowed tougher measures to combat pollution, saying controls so far had fallen short of people’s expectations. Asked whether two companies -- China Petroleum & Chemical Corp. and China National Petroleum Corp. -- had stymied anti-pollution controls, he said no one should “use his power to meddle with law enforcement in this regard.”
Property market
Yet much has also changed since 2013, when property prices advanced and gross domestic product would expand at 7.7 percent for the second straight year. The value of property sales fell 15.8 percent in the first two months of 2015, while China saw a “relatively big” decline in newly created jobs during that time, according to the human resources ministry. The yuan has depreciated 0.9 percent against the dollar this year.
Expansion of 7 percent would be the nation’s slowest pace since 1990. Li said it won’t be easy to reach even that target. The challenge of making structural adjustment while maintaining growth is similar to weiqi -- a Chinese game that in Japan is known as “go” -- where players must plan for the big picture and also get individual moves right, Li said.
“The good news is that in the past couple of years we did not resort to massive stimulus measures for economic growth,” Li said. “That has made it possible for us to have fairly ample room to exercise macro-economic regulation, and we still have a host of policy instruments at our disposal.”
Monetary policy
Among the steps that officials have already taken in recent months are two reductions in benchmark lending and deposit rates rates, and a paring back of banks’ required reserve ratios. Economists anticipate further steps to stoke liquidity this year.
Efforts to streamline the government helped boost economic vitality and put China in a stronger position to cope with downward pressure on growth, Li said. He said China can forestall any systemic or regional financial risks.
Li’s two-hour briefing touched on issues including overseas investment, online shopping, and even his reading habits. He told reporters corrupt officials would be held accountable for incompetence or inaction. A national anti-corruption campaign has “yielded good results,” Li said.
The International Monetary Fund forecasts 6.8 percent expansion for China’s economy this year, while the World Bank estimates growth will be 7.1 percent. At that pace, China is still set to remain the fastest growing Group of 20 nation.
“They have to accept that the potential growth in China at least in the next five years has slowed significantly,” said Liu Li-Gang, an economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “Without policy support, growth could slow to even lower than 7 percent.”

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