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China Signals Tolerance of Slower Growth After Meeting

Bloomberg, Dec 17, 2012

China said it will seek a higher “quality and efficiency” of growth next year, signaling new leaders may accept a reduced pace of expansion in exchange for a more sustainable model.

There was no mention of seeking “relatively fast” growth, a policy in place since 2006, in a report yesterday by the state-run Xinhua News Agency after the annual central economic work conference in Beijing. Leaders vowed to target “sustained and healthy development” as they maintain a “prudent” monetary policy and “proactive” fiscal stance, Xinhua said.

Chinese leaders assuming power in a once-a-decade handover to be completed in March must decide the pace of market-driven change to boost consumer demand and rein in the role of exports and investment. Communist Party chief Xi Jinping, who made the case for restructuring during a visit to the southern Guangdong province this month, faces an economy likely to have grown this year at the weakest rate since 1999.

“Now the focus is firmly on reform for next year and the future,” said Shen Jianguang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd. “The key to watch is how fast the new leadership will proceed with the real tough structural change and reform. Many of these are easier said than done.”

Even so, “next year is considered a vital year for the new leadership,” so the government will not allow a so-called hard landing in growth, Shen said.

Improve Quality

The need to improve the quality of expansion was also cited by the party’s ruling Politburo in a Dec. 4 statement reported by Xinhua.

China will “fully deepen reforms” in the economy and “firmly promote opening-up” next year, Xinhua said. The nation will maintain property-market controls and increase urbanization, Xinhua reported, citing the closed-door meeting.

The government usually reveals specific economic targets at the legislature’s annual meeting in March. Nine of 16 economists surveyed by Bloomberg News last month forecast China will keep its 7.5 percent goal for growth in gross domestic product next year. The figure was the lowest target since 2004 when it was announced in March 2012.

The median estimate in a Bloomberg News survey is for 7.7 percent expansion this year.

Rate Controls

Wu Xiaoling, a former People’s Bank of China deputy governor who’s now deputy director of the financial and economic committee of parliament, said today that circumstances will be right in 2013 to loosen controls further on interest rates. China should consider adding several basis points to the Shanghai interbank offered rate, or Shibor, to replace the current central bank benchmark interest rate, Wu said.

Lending-rate discounts can be extended though not by a big margin, while China shouldn’t remove the deposit-rate ceiling too quickly to avoid spurring excessive bank competition, Wu said at a conference in Sanya, China.

PBOC Governor Zhou Xiaochuan spoke at the conference in comments that were embargoed for release later.

The country will “properly expand” aggregate financing to maintain a “moderate increase” in lending next year and reiterated it will keep the yuan’s exchange rate “basically stable,” Xinhua said yesterday.

The ruling Politburo said this month that China will keep economic policies stable, making adjustments as needed to deal with difficulties. At the same time, the economy will “face various challenges that should not be underestimated” next year, Xinhua reported Dec. 4.

Deng Tribute

China shouldn’t delay economic restructuring, Xi said during an inspection tour of Guangdong, where he paid tribute to Deng Xiaoping, a former leader who drove opening of the economy.

“We should master greater political courage and wisdom to push forward the next reforms,” Xinhua said yesterday in its report. It cited a phrase used by Deng about “crossing the river by feeling for the stones.”

Stocks jumped the most since October 2009 on Dec. 14 on speculation state-backed institutions were buying shares and after a pick-up in a manufacturing survey fueled confidence that the economy is rebounding after growth slid to a three-year low of 7.4 percent in the third quarter. The Shanghai Composite Index rose 0.5 percent as of the 11:30 a.m. local-time break.

“The meeting sent a stronger signal of speeding up reforms,” said Sun Junwei, a Beijing-based economist at HSBC Holdings Plc. At the same time, slack in the job market and producer-price deflation indicate that officials need to stay focused on growth goals, Sun said.

Policy Labels

The government’s labels for its policies are sometimes altered after the fact. For example, China started raising interest rates in 2010 before dropping its “moderately loose” stance of monetary policy in place since 2008.

The language of a prudent monetary policy has framed interest-rate moves in both directions. China raised borrowing costs and the reserve-requirement ratio for lenders from October 2010 to July 2011 as inflation picked up. Since then, with economic growth slowing, the central bank lowered rates twice and the reserve ratio three times, pausing since July.

Caterpillar Inc., the world’s biggest construction and mining equipment maker, expects growth to increase next year as China’s government focuses on urbanization, Chairman and Chief Executive Officer Doug Oberhelman said in an interview on Dec. 6.