China Prepares Way for New Low in Growth

Apr 11, 2014

China’s premier offered the strongest and most public signal yet that the country is bracing for a new low in growth, as trade officials reported a surprise drop in exports that added to unease among China’s global trading partners.

 

Premier Li Keqiang told global leaders and delegates at the Boao Forum for Asia that growth could be a bit higher or lower than the target of 7.5%.

As he spoke, customs officials reported that contrary to expectations for a rise, Chinese exports fell 6.6% in March. They also reported weaker-than-expected imports of materials used in processing—generally, components for products assembled in China, such as the iPhone and other electronics, then often shipped out for export. In all, imports fell 11.3%.

Meanwhile, China’s central bank pumped money into the banking system for the first time in nine weeks, a move that appeared intended in part to give individuals and companies cash for tax season, but also a step that follows soft results in trade and manufacturing.

Beijing faces an increasingly difficult trade-off between stimulating the economy or sticking to its leaders’ reform agenda. Moving too fast to rein in the credit growth fueling China’s economic expansion could trigger financial panic. But without stronger financial oversight, the International Monetary Fund said, China risks sending the world’s second-biggest economy into a tailspin that would wreak havoc on global growth.

Thursday wasn’t the first time China’s leaders have suggested the growth target wasn’t necessarily set in stone. Last month, Finance Minister Lou Jiwei said at a news briefing that growth between 7.2% and 7.3% would count as meeting the goal. In the fall, a government-controlled labor group reported that Mr. Li had said growth of only 7.2% would still meet China’s employment goals.

Still, other officials have stuck by the target in public. The remarks by Mr. Li—China’s top economic official—at such a public arena mark the most high-profile instance of Beijing giving itself room to fall short. China hasn’t missed the target since 1998 and traditionally it has blown past the stated goal—which was 8% until recent years—sometimes with double-digit growth rates. But the margin has narrowed in recent years as growth has slowed.

It was also significant coming a week before China releases its first-quarter gross domestic product.

Economists from the IMF say they are concerned China isn’t moving fast enough to rein in excessive borrowing. If Chinese authorities don’t control the country’s financial risks, "spillovers to the rest of the world, including through commodity prices, could be significant," the fund said.

China’s commodity imports rose in March amid lower prices for energy and minerals, but if Beijing resists the temptation to launch another infrastructure-led stimulus, raw-material exporters will feel the brunt of the pain from lower Chinese demand.

Qinwei Wang of Capital Economics, a London-based research firm, said mining economies like Australia, Brazil, Chile and South Africa will be the worst affected.

"The main risk is China," said Rodrigo Vergara, Chile’s central bank governor Thursday on the sidelines of a gathering of finance officials in Washington. China is Chile’s top export destination.

The slip in the trade data is difficult to interpret, however, because exports were exaggerated in early 2013 as companies disguised investment funds as trade payments to skirt China’s limits on moving money across its borders, economists say. Indeed, the data showed a sharp drop in shipments to Hong Kong, at the center of much of the overinvoicing, as the practice is known.

Trade between the U.S. and China was also disappointing, with just 1.4% year-over-year growth in the first quarter. Analysts have been predicting for months that an economic recovery in developed countries would support a rebound of China’s troubled export sector, but so far that has been slow in coming.

There are multiple signs the government will have trouble reaching 7.5% growth this year. In the first two months of the year, industrial output grew at its slowest pace since 2009, while retail-sales growth also dropped to a two-year low.

"Internal and external demand remain weak," said Ma Xiaoping, a Beijing-based economist at HSBC. "The recovery of China’s major trade partners—the U.S., Europe, Japan—was not as good as expected." She added that China’s first-quarter growth will test the limit of what the government will tolerate.

Mr. Li told the Boao Forum for Asia, an annual meeting of political and business leaders in a southern Chinese resort town, that Beijing wouldn’t jump in with aggressive measures to boost the economy at the first sign of weakness. "We will not resort to short-term strong stimulus policies just because of temporary fluctuations," he said.

Beijing has sent conflicting signals about its willingness to shore up growth. At the beginning of this month, the government said it would bring forward some spending, including plans for five new railway lines in remote areas and slum renovation. The government didn’t give exact figures on the amount of new spending being contemplated.

The first growth goal post of the year will come with GDP data next week. The economy is expected to have grown 7.3% in the first quarter, according to the median forecast of 15 economists surveyed by The Wall Street Journal. That would be impressive for many countries, but in China it represents a notable slowdown from the 7.7% logged in the final quarter of 2013.

In addition to sluggish global demand for its exports, China also faces a slowing property market, concerns about debt and spending and diminishing returns from an economy that is now the second-largest in the world. Domestic consumption—seen by economists as an important future growth engine—hasn’t yet picked up the slack.

"The downward pressure on economic growth remains," Mr. Li said on Thursday. "We can’t underestimate these difficulties."

Not all of the signs for exports were negative.

Tao Meixia, general manager of Shanghai Silk Textile Co. which exports silk scarves to Europe, the U.S., Australia, Japan and other countries, said she saw a boost from the recent weakness in China’s currency, the yuan, against the dollar. "It helped us to get more orders, because we’re now more competitive on price," she said.

"I have confidence that the trade business this year will be better than last year," she added.

At Boao, the Chinese premier seemed eager to distinguish between targeted policies like last week’s measures and a high-powered stimulus like the one China rolled out in early 2009 to counter the global financial crisis. That 4 trillion yuan thunderbolt—$644 billion at current exchange rates—helped shore up economic growth as the rest of the world struggled. But the easy money also sowed the seeds of future problems by propping up weak state-owned companies and directing capital to inefficient sectors.

Policy makers are now trying to move away from past policies that economists say are increasingly ineffective and dangerous. In November they announced a far-reaching set of plans intended to shift the economy away from its reliance on heavy industry and big-ticket investment products toward consumer needs. The proposals included giving farmers more rights to their land, making it easier for rural residents to move into cities, liberalizing the tightly controlled financial system, and spending profits from state-owned enterprises on a stronger social safety net.

Source: The Wall Street Journal