Tag Archives: Li Keqiang

Li Lays Out China’s Economic Goals For The Year

CHINA HAS SET its growth target for this year at ‘around 6.5%’, prime minister Li Keqiang told the annual session of parliament. That is down from 2016’s goal of 6.5%-7% and the outcome of 6.7%.

The glide path to slower but more sustainable growth continues. However, it will be a more cautious approach this year ahead of an important party plenum later this year at which the scope of President Xi Jinping’s second term and eventually succession will be set.

China also faces a more uncertain external environment economy than any time since the 2008 global financial crisis, while the stimulus that staved off deflation last year has left the debt crisis still to be dealt with. While China is perfectly able to deal with that on a macro level, signs of local stress are increasingly apparent.  The finance ministry has again just warned of the ‘the hidden-debt risks of local governments’, especially in the rust belt in the Northeast.

Li’s signalled that the leadership considered 6.5% growth a floor, though if there is any suggestion of social or political instability (and especially instability within the political elites), that floor will, no doubt, be lowered.

Last year, 726,000 workers were shifted out of rust-belt industries; this year another 500,000 will follow, according to the labour minister. China created more than 13 million new jobs last year, according to the official figures, but a further half a million redundant iron and steel workers and coal miners is a lot to absorb, and especially in places where few new industries are flourishing.

Removing excess capacity from heavy industry has proved more difficult than planned as has killing off ‘zombie’ state-owned enterprises.

Rebalancing the economy has also progressed more slowly than Xi laid out when he assumed the leadership four years ago; one reason is that he has repeatedly turned to old-school stimulus whenever the economy looked to be slowing too rapidly.

The government will have work to do to reduce last year’s fiscal deficit of 3.8% of GDP to the wished-for 3.0% (which was also last year’s target).

Li set another ‘about’ target, of ‘about 12%’ for broadest measure of money supply (M2). While that is less than 2016’s target 13%, it is still above end-2016  money supply growth of 11.3%. More monetary policy tightening is likely, barring severe adverse external headwinds.

The military budget will again be restricted to a 7% increase (1.3% of GDP), even though US President Donald Trump has promised a 10% hike in the United States’ defence budget. The United States spends 3.3% of its GDP on defence.

Beijing’s holding fast after decades of double-digit growth will increase the already sizeable spending gap, $600-plus billion a year against $140 billion a year, though off-budget procurement could add a further $50 billion to China’s number and the modernisation of the PLA will continue.

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Jobs’ Challenge To Slowing Growth

THE ECONOMY CONTINUES along its glide path to slower growth. Last year’s GDP growth target of ‘about 7%’ has been replaced by 6.5%-7% for this year. Announcing this to the National People’s Congress (NPC), Prime Minister Li Keqiang warned that the rebalancing of the economy towards consumption-driven growth faced challenges and tough times ahead.

One of those will be keeping unemployment ‘within 4%’ – of a workforce of more than 800 million that has been adding 12 million jobs a year for the past five years and faces an unusually high number of 15 million new graduates joining the workforce this year.  A detailed reading of the 13th Five-Year Plan, the economic development blueprint to 2020 due to be approved by the NPC, will provide some insight into how that will be done.

The official unemployment rate was 4.05% in the second half of last year.

Like any economy deindustrialising, China has to bear a heavy burden of workers left without jobs or the skills to get new ones. At least 3 million jobs, or 30% of the workforce, could go from heavy industry as a result of cutting surplus production capacity. The bulk of those redundancies will fall on the coal and steel industry. Human resources minister Yin Weimin says that 1.8 million jobs in those industries, an estimated 10-15% of the workforce, are at risk.

With that comes the possibility of social unrest and thus a threat to Party rule based on the premise of delivering ever higher living standards. The number of strikes and protests by workers, at more than 2,700 last year, was more than double 2014’s number, according to the China Labour Bulletin, a Hong Kong-based civic group.

The response has been carrot and stick — a crackdown on labour activists and non-governmental organization to snuff out any political nexus forming and financial measures such as the 100 billion yuan ($15.3 billion)  to be given to local authorities ‘solve the problem of worker placement’ under the umbrella an industrial enterprise restructuring fund.

The stick, though its use is well practiced, is not without hazard. Overzealous suppression of labour unrest could cause the Party itself to become a target of worker anger, and especially in provinces such as Guangdong, where local officials have traditionally held a relatively tolerant attitude towards labour relations but where several labour activists were arrested in January and put on trial as ‘foreign subversives’.

The only officially sanctioned trade union, the All-China Federation of Trade Unions (ACFTU), has recently reformed itself to stress its role as an instrument of Party and government and to straighten its top-down control over its local unions. This could have the unintended consequence of turning disgruntled workers more towards unofficial channels.

So far, though, labour disputes are overwhelmingly economic, not political, and a Party leadership that puts a premium on maintaining stability will want to keep it that way.

There are risks in the carrot, too. Local governments already have a debt time bomb ticking quietly under them. For all the help they will get from Beijing, they will face immense fiscal pressure as growth slows to pay for dealing with shuttered mines and mills and factories and workers demanding unpaid wages (a chronic problem, particularly in the construction industry), redundancy pay and social security.

The pressures will be particularly acute in those areas where heavy industry is concentrated, notably the rust-belt of the northeast, in the export factories in the Pearl River delta, and where the reforms of state-owned enterprises bite hardest, particularly the proposed rationalization of ‘zombie’ companies hitherto kept afloat by local governments seeking to avoid job losses.

If more and more workers see the Party failing to look after their interests, the overarching risk is that their acceptance of the social compact that underpins the Party’ monopoly on political power will erode, which is what the Party is most set on avoiding.

This Bystander recalls a far more drastic set of state-sector reforms and sharply decelerating growth in the late 1990s.  If there is a ray of hope for the top leadership, it is that the Party got through that when it had fewer carrots and less sophisticated capabilities with its sticks.

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China’s Crashing Stocks And Creaking Politics

THERE WAS A time when even financial markets in China were believed to be responsive to firm instruction and Party discipline. Yet China has become much more market driven in many spheres than it once was, even, incongruously, as President Xi Jinping has sought to exert greater control over every aspect of the body politic.

The trouble with markets, as has been seen in the Shanghai and Shenzhen exchanges in recent weeks, is that they have a mind of their own. Stock markets, in particular, can express it in stark and cantankerous ways.

July’s attempt to prop up stock prices that had started to blow off a lot of excessive froth — by cajoling 21 securities firms to hold stocks — was brushed aside like a mistress’s hair from a jacket; so, too, was the more recent directive to the country’s massive pension funds to act as the buyer of last resort.

This was not markets just thumbing their nose at any old government intervention. This was a direct challenge to the proposition that the Party leadership could be trusted to stop the stock markets fall. By extension, it could also be trusted to keep the real economy from slowing too quickly even while making the transition from the old model of infrastructure investment- and export-led growth to one driven by domestic consumption.

That transformation is a Herculean task of macroeconomic management demanding extensive structural reforms, although a task that both Japan and South Korea have earlier undertaken, if not on the scale required in China. It is one, though, that challenges many vested interests that profited richly from the old ways and stood to lose much from the reforms needed.

One thing that this recent stock market crash has inadvertently advertised is how deep and widespread are the pockets of opposition to reform — a contrast the the narrative of inevitability and Xi’s expanding control portrayed in state media.

The arguments of what countermeasures to take against falling stocks, the currency, and slowing growth have become a proxy battle for the bigger one over reform. Xi has championed reform as necessary to ensure the Party can continue to deliver economic wellbeing for China’s population and thus retain its mandate to rule.

He, correctly in the view of this Bystander and many other outside observers, believes that the old growth model is unsustainable if China is to continue to develop as a wealthy economy. If there turns out to be any substance to the gossip the Prime Minister Li Keqiang is to be a scapegoat for the slowing economy and stock market fall — then that would indicate deep divisions over the path to rebalancing on a scale that would rattle global markets.

The precipitousness of that path, which we have frequently referred to here as a glide path to slower growth, is what is now so concerning. We have always regarded its trajectory as being the object of the leadership’s management, but equally have cautioned that it would not, inevitably, be as smooth as the leadership would like.

There are many potential bumps: property bubble, equities bubble, shadow banking crisis, and local government debt bomb. All remain manageable, but the stock market’s fall raises the risk of a credit crunch.

What is now at stake is trust in the government’s capacity to manage the markets and the economy more broadly.

Ever since Deng Xiaoping started to open up the economy at the end of the 1970s, the government has been able to marshal the capital needed to direct the economy and absorb the external shocks to distorted markets. The assumption that that will continue to be the case is now being tested.

The banking system as a closed conduit of state-disposed capital is under stress. The Catch 22 is that it has to be if the financial system is to be opened — as, in turn, it has to be if rebalancing is to be successful.

All of which brings this Bystander back to a fundamental question: can China do something that no other developing economy has ever achieved, liberalise its financial system without doing the same with its politics.

Last October we said:

The trick for Xi remains to align the political realities he faces with the underlying structural slowing of economic growth, but without getting too close to the feared hard landing of the economy that would undermine his political position. As we have noted before, every mini-stimulus ratchets up a notch the difficulty of introducing the policies needed for rebalancing because they don’t address the underlying causes of unsustainable booms and the vested interests that benefit from them. And that needs a political solution before it can get an economic one.

That remains the case.

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China Tilts Kazakhstan Away From Russia

china-kazakhstan-li-keqiang-karim-massimov at the Great Hall of the People in Beijing, China, March 27, 2015.

Prime Minister Li Keqiang (R) greets Kazakh Prime Minister Karim Massimov at the Great Hall of the People, Beijing, March 27, 2015. (Photo credit: Xinhua/Zhang Duo)

CHINA HAS NOW signed $40 billion-worth of deals with Kazakhstan in the course of barely four months. The latest tranche ($23.6 billion) was agreed during last week’s visit by Kazakhstan Prime Minister Karim Massimov, reciprocating his counterpart Li Keqiang’s trip to Astana in December. On that occasion, $18 billion in joint ventures was inked.

The two men also met at the World Economic Forum in Davos in Switzerland in January. Despite being a member of the Russia-led Eurasian Economic Union, Kazakhstan is intent on deepening its strategic relations with China, if nothing else as a counterbalance to Russia, the region’s longstanding power, and to the West, which has become more of a presence in Central Asia since the collapse of the Soviet Union.

For its part, Beijing will welcome the security of a trade-tied neighbour on its at times troubled far western marches as much as it does Kazakhstan’s exports of oil, natural gas and uranium. The Central Asian country also offers a prospective market for China’s growing defense industry while being a key leg of the new Silk Road westward overland trade corridor Beijing wants to develop, and which was so prominently touted at the annual Boao conference just concluded.

Kazakhstan is already the largest recipient of Chinese foreign direct investment among the post-Soviet Central Asia republics. Loans-for-oil-deals between the two countries date back to 2009. Beijing will use the investment funds it makes available via the Silk Road Fund, the Shanghai Cooperation Organization, and its proposed Asian Infrastructure Investment Bank to cement that position.

Kazakhstan has its own ‘Bright Road’ project to boost economic development through infrastructure projects. The spillover from Russia’s sanctions-slowed economy has made that need more urgent. The European Bank for Reconstruction and Development downgraded its forecast for Kazakhstan’s GDP growth this year to 1.5% from the 5.1% it forecast as recently as last September. 2014’s estimated GDP growth was 4.3% down from 6% in 2013.

One-fifth of Kazakhstan’s $84 billion–year of exports now goes to China, twice the share that goes to Russia. The relative positions reverse on the import account: Russia being the source of 36% of Kazakhstan’s $44 billion a year of imports; China of 18%. That gap looks set to narrow. A regular goods rail service between Lianyungang and Almaty, Kazakhstan’s largest city, started last month with the first westbound load carrying Chinese cars, electronics and household goods.

Beijing has the trade and investment clout to exploit Russia’s moment of vulnerability and so expand its influence and market power across the region at Moscow — and the West’s — expense.

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China’s Economy Continues Its Intended Slowdown

THE SLOWING OF China’s economy alarms financial markets more than it does China’s policymakers. First-quarter GDP growth, at 7.4%, represented the second slowest three months of growth since the global financial crisis. But the economy is on a long-term deceleration as authorities seek to rebalance it from investment and export-led growth to domestic consumption. Growth, remember, hasn’t topped 8% since the first quarter of 2012.

Although the official growth target for the year is 7.5%, China’s leaders are lowering public expectations about the need for that to be hit exactly. Prime Minister Li Keqiang’s comments at the Boao Forum last week about “about 7.5%” growth being the target were just the latest in a series softening the number.

How much softer is permissible will depend on unemployment staying sufficiently low. That is an indicator being carefully monitored as it has political as well as economic ramifications. Policymakers are also watching closely for signs of worsening trouble in the banking and property sectors.

In the first quarter, fixed-asset investment was up 17.6% year-on-year, a tad down on the 17.9% growth in the first two months of the year. Retail sales grew 12.2% year on year in March, exceeding January-February’s 11.8%, though the first two months of the year, which contained New Year, will have been hit by the curbs on lavish displays of official consumption as part of the anti corruption drive. The statistics bureau is suggesting growth in overall consumption was likely down in the first quarter.

The leadership looks committed to slowing the economy to a long-term sustainable growth rate, and, if to a lesser extent, to the reforms necessary to get it there. It can always fall back on accelerating infrastructure investment later this year if growth softens too much too fast.

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China Sets A Fudgable 2014 Growth Target

CHINA HAS SET its official growth target for the year at 7.5%. There is no great surprise to Primer Minister Li Keqiang’s announcement of the number at the National People’s Congress, or in the target inflation figure of 3.5%. The growth target would mark a slight slowing from 2013’s 7.7%.

Finance minister Lou Jiwei (below), no stranger to public slips of the tongue, says GDP growth of 7.2% or 7.3% would achieve the target, confirming the risks are on the downside, and that suggestions that credit expansion incompatible with rebalancing will be necessary to support 7.5% growth may be misguided. But Lou also highlighted the critical importance of job creation, saying that that rather than the exact growth number is key.

That, in turn, suggests the link between unemployment and social instability is uppermost in the leadership’s mind. GDP growth will become an increasingly unreliable proxy for the Party’s objectives of maintaining public order in the face of growing popular concern about social and environmental issues and of sustaining the legitimacy of its monopoly political rule. The upside is that that could make the number more accurate as there would be less need to massage it to meet political goals.

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Ten Questions About November’s Third Party Plenum

What is a Party plenum?

It is a high-level meeting of the broad leadership of the Chinese Communist Party. In attendance are the Politburo’s Standing Committee, the inner sanctum of Chinese power, currently seven strong, plus the some 200 members of the Central Committee, which is the level of power one rung below the Politburo. Committee members will also be the occupants of the most important state and government positions.

How often are plenums held?

Typically for four days every year in October during a Politburo’s five-year cycle, though they tend to be front loaded, which effects the timing. The current Politburo took over in November 2012, when its first plenum elected the key Party leaders; Xi Jinping was named as Party general secretary  and chairman of the Central Military Commission then. He and Li Keqiang were appointed to the lesser state posts of president and prime minister at the second plenum in February this year.

What is significant of third plenums?

These are the big policy setting meetings for a Politburo’s term. Deng Xiaoping announced China’s opening to the world at a third plenum in 1978 and Zhu Rongji introduced the idea of a socialist market economy at a third plenum in 1993 — as state media have been reminding their audiences incessantly. That is setting up this one to be of the same scale of importance. Xi and Li are expected to advance a sweeping proposal for economic reform to rebalance the economy, starting with financial markets reform and boosting the private sector.

Anything to be read into a November rather than October date for this third plenum?

Nothing beyond the complexity of preparing a reform package on the scale being mooted, squaring away vested interests, and the need to consult more widely than usual on how to implement it as the reforms will touch on such widely disparate areas of the economy.

How detailed will be the action plan coming out of the plenum?

The plenum sets Party policy. The government then has to come up with the detailed policies and priorities that puts the broad strategy into practice.  That is somewhat similar to the five-year plans. It is also a somewhat deductive process. The plenum is unlikely to produce either a blueprint for reform or a timeline. It more sets the overall direction and indicates what broad reforms have had political sign-off.

What are the key signposts to that direction?

  • Get the private sector out from under the shadow of the big state-owned enterprises;
  • Accelerate financial reform, particularly interest-rate liberalization, regulation of shadow banking, and greater internationalization of the currency;
  • Open up hitherto largely protected sectors such as energy, finance and telecoms to more international investment in order to improve their innovation and international competitiveness.
  • Lessen market distorting subsidies for power and other resources;
  • Reform local government financing to make it less dependent on land sales, and the corruption-plagued market distorting investment they encourage;
  • Relax the hukou system of household registrations to support the policy of urbanization, which is seen as critical to rebalancing the economy towards domestic consumption.

These are all  interconnected. For example, reform of local government finance will mean developing a municipal-bond market which will require financial-markets and foreign-exchange reforms to be fully effective.

Any chance of political reforms.

No. The new leadership is making a point of positioning its reforms as a continuation of those of its predecessors. Even though political reform seems to many to be the inevitable consequence of the economic reform path China is taking, the Party is kicking dealing with that day as far down the road as it can. Xi has been talking of the Chinese dream as an echo of the American Dream  and creating a moderately prosperous society. All is being kept within an economic  frame of creating a better standard of living for Chinese. That is the premise the Party’s claim to a monopoly on political power rests.

Where are the points of resistance to economic reform?

Xi has interwoven his anti-corruption campaign and strictures against official extravagance with his message of the need for deep economic reforms. That has mostly gone down well with the broad public and put local and provincial officials and some in the big state owned enterprises who could be expected to be resistant to change on the defensive. That is not to say there doesn’t remain substantial pockets of resistance to change from those who would potentially lose out. The leadership is hammering a message of both the necessity and inevitably of reform. At the recent World Economic Forum meeting in Dalian Li said, “China is now at such a crucial stage that without structural transformation and upgrading, we will not be able to sustain economic growth.”

How quickly will reform happen?

Some big (and profitable) state owned industries and provinces and municipalities are powerful commercial players now in their own right. They have the potential to be roadblocks to reform. Xi recognizes the risks of reforming them from the top down so seems to be pushing changes from the bottom up and side in that will require them to adapt to a new economic environment, but to be able to prosper by doing so. The internationalization of the yuan is an example of that process at work. But it also an example of how Xi’s approach will take many years of incremental change to take effect. But that might prove more effective in the long-term than hammering through change using political clout.

Who are now the key figures in pushing reform?

Xi and Li, who as prime minister is in charge of the economy, are the political prime movers. There has been a consensus among the very highest levels of the leadership for some years that China’s economy will need to move in the direction being advocated. Xi and Li would not have been able to assume the leadership had that not been the case. Among the key technocrats backing them up are central bank governor Zhou Xiaochuan, long-time proponent of reform, and Liu He, the new deputy director of the National Development and Reform Commission. Liu was a central figure behind the publication of the report the World Bank issued last year calling for the reform of state-owned monopolies and warning of China’s risk of being caught in the ‘middle income’ trap which would leave it unable to make a Japan and South Korea-like transition to being a developed economy. Liu has drafted the economic reform speech Xi give at the Plenum.

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