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Chinese Premier Li Keqiang, also a member of the Standing Committee of the Political Bureau of the Communist Party of China Central Committee, chairs a symposium on the economic situation. Photo: Xinhua/Wang Ye

China on high alert for mounting economic headwinds as Li Keqiang meets with local government heads

  • Li Keqiang urged local governments to take more action to support small businesses and make them a major economic priority
  • The move comes hot on the heels of warnings by several government advisers that the country’s economic recovery is not stable yet

A meeting between Chinese Premier Li Keqiang and 10 local government heads on Monday shows Beijing is on high alert for mounting headwinds for the world’s second-biggest economy, after the central government promised a new round of supportive measures for smaller companies to protect jobs and growth.

The moves come hot on the heels of warnings by several government advisers that the country’s economic recovery is not yet stable.

China’s gross domestic product growth rate in the fourth quarter is widely expected to fall below the key threshold of 4 per cent.

“Unstable and uncertain factors, at home and overseas, are increasing and China’s economy is facing new downward pressure,” Li Keqiang said on Monday in Shanghai, according to the state news agency Xinhua.

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The meeting included the heads of economic powerhouses like Shanghai, Guangdong, Jiangsu and Zhejiang, but also governors from less economically-vibrant regions, such as Guizhou and Jilin.

Li urged local governments to take more action to support small businesses and make them a major economic priority, such as offering more tax cuts and helping them with payments in arrears.

He also called on them to build a better business environment for smaller companies, with a relaxation of administrative restrictions, avoiding “overly aggressive, one-size-fits-all measures”.

The comments came only four days after Li raised similar concerns in a symposium in Beijing with economists and entrepreneurs.

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In both meetings, Li re-emphasised the government’s focus on “ensuring security in employment, people’s livelihoods and market entities”, a catchphrase not seen for a while but often used when supporting the economy with policies amid the worst of the pandemic’s impact.

Li also called for more transfer payments at the grass roots level and for stronger financial support below the county level of government.

The gatherings also come ahead of the central economic work conference, a meeting of China’s top leadership which is expected to take place next month to set priorities for 2022.

Liu Yuanchun, vice-president of Renmin University and an adviser to the central government, has also warned of structural economic pressures in the second half. His team expects the rate of China’s economic growth to slow to 3.9 per cent in the October-December period, from 4.9 per cent in the previous three months.
The impact of rising costs on small and medium-sized enterprises has reached a maximum, [they] will be hard to bear for much longer
Liu Yuanchu

“The impact of rising costs on small and medium-sized enterprises has reached a maximum, [they] will be hard to bear for much longer,” Liu warned on Sunday.

China’s smaller companies account for about 80 per cent of the country’s urban jobs and about 60 per cent of gross domestic product. They are widely seen as a major pillar supporting increased incomes and rising domestic private consumption under Beijing’s inward-looking “dual circulation” strategy.

However, the sector has taken a hit from rising raw material prices amid supply chain issues caused by repeated Covid-19 outbreaks. They have also been hit by a series of regulatory crackdowns and by a nationwide power crunch.

The latest measures from Beijing come after experts warned that previous policies would not be enough to support small and medium-sized enterprises (SMEs) through the post-pandemic recovery.

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“The rise in costs due to higher import prices alone was expected to reach 1.4 trillion yuan this year … whereas the total amount of tax cuts and help given to SMEs amounts only to about 700 billion this year,” Liu said at the virtual forum.

Other economists said the problems facing smaller companies in China needed tackling at a deeper level.

“Everyone knows that this matter [of promoting fair competition and market access for SMEs] needs to be solved … but the issue is how to maintain fair competition in terms of institutional mechanisms,” said Ding Shuang, chief economist for Greater China at Standard Chartered.

The State Council, the country’s cabinet, on Monday also issued a plan to strengthen relief efforts to support SMEs.

China’s economy will be good only if SMEs are good, we should earnestly help SMEs to get through their difficulties
Xu Xiaolan

The document encourages local authorities to allocate relief funds for SMEs to ease their cost burdens when it comes to rent and utility bills, with subsidies to offset the rising cost of raw materials, logistics and wages. It also said wider financing guarantees will be offered to smaller companies.

“If a large number of SMEs collapse, it would not only hit jobs but put essential services for residents in short supply,” said Zhao Xijun, a professor of finance at Renmin University.

The central government also issued two separate action plans this week to enhance policy and financial support for SMEs to strengthen their competitiveness and help technologically advanced SMEs address specific problems.

“China’s economy will be good only if SMEs are good, we should earnestly help SMEs to get through their difficulties and accelerate raising their competitiveness,” Xu Xiaolan, vice-minister of industry and information technology, said on Tuesday.

China has the ‘tools’ to cope with economic challenges, says Li Keqiang

Standard Chartered’s Ding said that adding to relief funds would be a test for many money-strapped local authorities, as they would have to rely on their own wallets rather than issuing special-purpose bonds.

And Ding does not expect any aggressive action by Beijing to relax central monetary and fiscal policy to support smaller companies.

Meanwhile, Li also said at Monday’s meeting that the country should make efforts to ensure a better supply of energy and electricity, push reform and opening-up, advance industrialisation and urbanisation, and continue regular Covid-19 control measures, according to the Xinhua report.

He added that China should take the implementation of the Regional Comprehensive Economic Partnership as an opportunity to expand international cooperation and better attract foreign investment.
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