• Sun
  • Dec 21, 2014
  • Updated: 3:36am

Premier Li Keqiang rules out strong stimulus despite weaker growth

Reserve requirement ratio for rural banks will be cut, while tax relief for firms also on cards

PUBLISHED : Wednesday, 16 April, 2014, 11:46pm
UPDATED : Thursday, 17 April, 2014, 7:35am

Premier Li Keqiang has resisted calls for a strong stimulus despite the mainland's economy expanding at its slowest pace since 2012.

The State Council, at a meeting chaired by Li to discuss the economic situation, did not release any stimulus package following the report of a weaker first-quarter economic performance. It did say it would cut the reserve requirement ratio (RRR) for some rural banks and expand the scope of tax relief to private firms that create jobs.

Still, the steps indicated Beijing was ready to fine-tune policies as needed in case of any sharper slide in growth.

The scope of the cut on the required share of funds parked by rural lenders at the central bank for reserves was not detailed in a statement posted on the government's website. It also did not specify how much businesses would benefit from more tax relief - with the policy now extended to 2016.

Nomura International's chief China economist Zhang Zhiwei said the amount of liquidity to be released through the RRR cut would not be significant for the economy.

"Nonetheless, this is another loosening signal from the government, which suggests it is probably more concerned about the economic outlook as the property sector slowed sharply in [the first quarter]," said Zhang. He said the RRR cut may be expanded to the whole banking sector in May or June.

China's gross domestic product grew 7.4 per cent in the first quarter from a year earlier, slightly above the 7.3 per cent consensus, but fell short of the annual official target of 7.5 per cent growth and the 7.7 per cent growth registered in the previous quarter.

Property investment growth slumped to 16.8 per cent year on year in the first quarter from 19.3 per cent in February, dragging fixed-asset investment growth down to 17.6 per cent in the quarter from 17.9 per cent growth in the first two months.

"The downside risks remain large, with growth engines such as investment still quite weak," Everbright Securities chief economist Xu Gao said.

On a brighter note, retail sales and industrial production growth picked up last month.

Growth in power consumption, a leading indicator for business activity, rose 7.2 per cent in March from 4.5 per cent in the first two months of the year.

HSBC economist Qu Hongbin said the economic pattern appeared to be repeating that of last year, when the economy faced downward pressures at the start before recovering in the second half thanks to mini-stimulus measures and then slid again.

Qu said Beijing must accelerate efforts to reform investment and financing mechanisms, lower financing costs, cut taxes and prevent the yuan from further appreciation.


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Instead of concentrating the country's reform effort on the monetary flow (like interest rate liberalization, yuan internationlization, and opening-up of the capital account),
the Chinese government should also pay more attention to the real flow,
like providing good on-the-job training to the existing workers,
better match the market needs with the universities' undergraduate programmes, and so on.
It's even better, though not at all easy, to copy and adapt the Germany apprenticeship schemes in the country.
According to the same scholar, among all the various industries, the manufacturing industry produces the greatest amount of beneficial externality.
For every US$1 manufacturing input, US$1.48 of benefit is created for other industries.
For all the various service industries, the figures are all less than US$1.
The lowest is the retail industry --- less than US$0.6.
In the US, while the manufacturing industry only occupies 12% of the country's GDP, it creates 50% of her exports, and 90% of her patent R&D result.
Should we say the manufacturing industry in China, and hence the country's exports, is less and less important over time?
The SE Asian countries have replaced China as the first choice for manufacturing FDI.
The Chinese manufacturing workers’ average productivity still has much room for improvement.
In other words, on average, their wage rate is too high relative to their productivity, causing the country’s relative decline in external competitiveness --- the same thing as the overvaluation of the yuan !
In April 2013, Adidas stopped her business with more than 300 Chinese factories, and left the country, causing 300,000 Chinese workers to become unemployed.
To regain her external competitiveness, and to retain those FDI, China once again needs to devalue, not revalue, the yuan, in the foreseeable future.
To me, it's really mind-boggling to observe that so many people keep on arguing the currency will or should resume its revaluation later in the year.
Without the government’s specified minimum wage rates in various Chinese cities, does the average Chinese worker, especially those undertrained ones from the rural villages, really justify earning such a high wage rate?
I wonder.
According to a Chinese scholar, in the developed countries, for every US$1 manufacturing wage rate input, the average output multiple is 3.18.
In China, the multiple is only 2.86.
In other developing countries, it’s 5.81 --- almost 2 times that of China !
This partly explains why in the first quarter this year, China’s FDI from Japan shed 47.18 percent, while that from the United States and European Union fell 1.91 percent and 24.52 percent, respectively.
The yuan’s continued revaluation may pressurize some of the country’s exporting firms to upgrade their technology and move up the value chain.
But this one-size-fits-all type of adjustment also partly causes the currency to be overvalued --- tax policy and subsidization can also be used to incentivize the firms to do the same thing.
China's own internal savings is more than enough to finance her investment needs --- the crucial and imminent problem is how to efficiently channel these savings to their most-valued uses.
In this respect, China's policy banks seem to have failed the job --- those innovative, more efficient and job-providing without-relationship SMEs simply can’t obtain the loans they want from the policy banks, or from the shadow banking market even at very high interest cost.
China must accelerate her effort to develop much more sophisticated financial markets ( the bond market in particular) before she promotes yuan internationalization and further opens up her capital account.
Freya Beamish, Hong Kong-based economist with Lombard Street Research, said at the end of last year that the yuan was probably overvalued by about 30%.
Now I think the currency is still overvalued by more than 20%, if we take into consideration the dropping of China's inflation rate, the persistent nominal yuan revaluation (up until recently), fast nominal wage rate increase (relative to labour productivity) in China, the up-till-now-accumulated large currency depreciation of other countries (relative to the dollar) in recent years, the recent drop in growth rate of China's FDI, and the relocation of some production bases to South-East Asia and elsewhere.
From the weak PPI and HSBC manufacturing data published recently, China should continue to devalue the yuan to help sustain her exports market and hence her overall GDP growth.
Appropriate adjustment of the external value of the currency belongs to a country's sovereignty and shouldn't be disturbed by any opposing foreign country.
Any resulting capital flight can be accommodated by an easing monetary policy to prevent the market interest rate from jumping too high --- this also helps solve the problematic hot money inflow into the country which helps fuel the country's precarious shadow banking system and property market.


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