Reform drive faces slowdown test
Expectations of first-quarter growth coming in below the year's target rate may weaken the premier's resolve to make tough decisions
Premier Li Keqiang is facing an unprecedented test in maintaining the health of an economy that likely grew at a five-year low last quarter, while deepening the pledged financial and fiscal reforms that could add more pain to near-term growth.
A slowdown might delay some crucial reforms at the centre of Beijing's plan to boost productivity and transform an export and investment-driven growth model, for fear of hurting the economy further, analysts say.
Sluggish industrial demand and faltering exports may have cooled first-quarter economic growth to 7.3 per cent from a year earlier, according to an average estimate of economists. Official figures are due out on Wednesday. That would be the weakest growth since the global financial crisis and below the official target of about 7.5 per cent for this year. In the fourth quarter of last year, GDP grew 7.7 per cent.
Li last week ruled out "strong" stimulus to spur growth. He reiterated that the official target would be flexible and emphasised promoting healthy development through structural reforms.
However, some observers felt Li's attitude was ambiguous as he also promised contingency policies to spur growth as needed. In past weeks Li has repeatedly noted downside risks in the economy, fueling speculation about more pro-growth policies to come.
"Investors are now becoming increasingly concerned that China is reverting back to its old ways, and hence derailing its ambitious plan for reforms," UBS Securities economist Wang Tao said. "More painful or growth-negative reforms such as the hardening of local government budget constraints, [state-owned enterprises] restructuring, launching a nationwide property tax and land reforms will progress more slowly."
The economy has continued to lose steam, reflected in weak activity data from fixed-asset investment growth to industrial output in the first two months. Retail sales also showed few signs of a fast pick-up, hit by austerity campaigns launched by President Xi Jinping to combat graft.
Adding to the woes was an unexpected year-on-year slump in imports and exports last month, after authorities cracked down on hot money inflows through inflated trade invoices amid yuan appreciation expectations.
Economists are split on the economic outlook. It also remains unclear to what extent the government would resist a policy stimulus amid the slowdown. Spurring growth with massive stimulus could exacerbate shadow banking risks and hurt structural reform designed to increase business efficiency. "Major uncertainties are still hanging over the economic outlook, making predictions on the trends difficult," said Zhu Baoliang, a senior economist at the government-backed State Information Centre.
He said the trend of foreign capital flows and how far property prices might fall were still unclear.
The People's Bank of China has guided the yuan lower in the past months, curbing fast hot-money inflows. But analysts say the mainland's trade surplus in March might rekindle appreciation pressure on the yuan.
Bank of America Merrill Lynch economist Lu Ting acknowledged that there were many distortions in the property market, with "some parts of China overcrowded and some other parts remaining empty".
"[But] we don't think there is overinvestment, and we don't expect a big crash," he said.
Economic growth is likely to stabilise after the State Council rolls out its "mini-stimulus" package, including tax cuts and plans to set up special funds to back infrastructure investments. Similar measures launched last year managed to reverse a slide in growth, with full-year GDP expanding 7.7 per cent.
As inflation remains benign, market participants are shifting their focus to new loans as they seek to gauge monetary policy.
Barclays Capital said it looked for new loans to come in at 1.1 trillion yuan (HK$1.38 trillion) in March, which would mark a strong pick-up from 644.5 billion yuan in February.
The bank forecast industrial production growth to improve modestly and fixed-asset investment to accelerate to 18.3 per cent year on year in the first quarter from 17.9 per cent in the first two months.
But observers remain unconvinced that a market-oriented approach was gaining a firm footing among the country's leaders.
Some also believe Li's say in policymaking was trimmed after Xi established top-level panels to oversee various reforms last year. So far, Beijing has streamlined investment approvals, widened the yuan's trading band, and in the latest step to ease capital controls, it has joined Hong Kong authorities in approving a so-called through train for the cross trading of shares in Hong Kong and Shanghai.
However, more complex reforms that would hurt vested interest groups could be delayed, such as overhauling the land system, writing property tax into law, or significantly trimming the dominance of state enterprises.
Qiushi magazine, the Communist Party's mouthpiece, warned last week that the plan to introduce private capital into state firms to develop mixed ownerships might eventually erode state assets.
"If we aren't clear-minded and fail to exert caution in our policies, such a danger may become a reality one day," the commentary said.