Mixed economic signals sharpen world focus on the ‘two sessions’

Premier Li Keqiang must address concerns about the nation’s slowing growth when he delivers the government’s economic work report

PUBLISHED : Thursday, 03 March, 2016, 1:13am
UPDATED : Thursday, 03 March, 2016, 1:13am

Mixed economic signals from Beijing amid slowing growth have sharpened world focus on the “two sessions” – the annual meetings of the country’s legislature, the National People’s Congress starting on Saturday and of its elite political advisers, the Chinese People’s Political Consultative Conference, starting tomorrow. They define the concerns Premier Li Keqiang (李克強) must address when he delivers the government’s economic work report, including this year’s growth target and the pace of reform.

Last weekend China assured a meeting of G20 finance ministers and central bankers in Shanghai it would not drastically devalue its currency. Two days later, the central bank cut the banks’ reserve requirement ratio, unleashing more than 600 billion yuan (HK$713 billion) for lending out, amid fears such an aggressive easing could weaken the yuan. This came on top of a 2.5 trillion yuan lending spree in January, followed by orders to financial institutions to lend more to industrial sectors. At the same time, “panic buying” is reported in the property hotspot of Shanghai to beat price rises as easing policies lift sentiment.

The relaxation of the reserve requirement also came despite the G20 meeting hosted by China warning against over-reliance on central banks to drive growth. This illustrates the central government’s dilemma in reconciling political and market expectations of policy measures to stabilise flagging growth. The pressure has been raised a notch by the latest official Purchasing Managers’ Index (PMI), which shows manufacturing activity in the mainland shrank at its fastest rate in four years. In a turn of the screw yesterday, Moody’s ratings agency downgraded its outlook on Chinese government debt to “negative” from “stable”, citing uncertainty over reforms, government debt and falling reserves.

The central bank move reflects Beijing’s determination to show it will do what it takes to sustain economic growth. US Treasury chief Jacob Lew has welcomed use of a wide range of tools to boost growth and Li said in their talks that China had room for proactive fiscal policy while pressing on with reforms. Markets expect more easing. Queues of buyers imply expectation the government will again use property as a major pillar of economic growth, prompting warnings of the danger to stability of property “bubbles.” On the one hand relatively easy monetary policy is needed to boost the economy, but growth that relies too heavily on the property market is not sustainable.