At his news conference held yesterday, Chinese Premier Li Keqiang provided interesting insight into the new Chinese leadership’s economic policies.
His comments take on special importance given that equity markets around the globe have suffered significant falls over the past few days owing to the twin factors of the Ukraine crisis and the downbeat economic data coming out of China.
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Lower GDP growth is okay
A key takeaway from the conference is Li’s statement, “We are not pursuing GDP growth alone.” Of course, this should be read in context of his other remark that said, “The acceptable lowest limit of GDP growth needs to ensure enough employment and that people’s incomes are increasing.”
This is a remarkable departure from the policies followed by earlier Chinese regimes, which placed an undue and overwhelming emphasis on GDP growth above all else.
A shift of focus
“We will make breakthroughs in reform on important issues this year. This year we will continue to push forward the simplifying of administration and the decentralising of government power, allowing market forces to take effect,” Li said.
Clearly, the new Chinese leadership is seeking to balance the priorities of reform, economic growth, and social objectives such as employment and low inflation.
That market forces will play their role henceforth became apparent when the government chose to let the recent corporate bond default happen. The government indicated that it will not backstop financial risk – something new for the Chinese financial markets, which tended to assume that the government will do whatever it takes to shield them from events such as this.
It is also clear that, up to a certain point, the Chinese government will not meddle with market forces just to achieve a GDP target.
Analysts whittle down Chinese GDP forecasts
Societe Generale analyst Wei Yao, however, feels that Li’s stance may be tested sooner rather than later given the spate of disappointing data emerging out of China, indicating downhill momentum that may not have been anticipated by the government.
“China’s January-February activity data all came in vastly below our below-consensus forecasts, confirming the fast deterioration of China’s economic growth entering 2014. Q1 GDP growth falling below 7.5% is now pretty much certain and something barely above 7% looks quite likely,” she says. “We have always viewed the new leaders as less pro-growth, but such a sharp slowdown is probably still more than what they can stomach.”
Disappointing YTD data
Notably, data released on Chinese growth in industrial production, retail sales and urban fixed assets earlier this week underperformed estimates by Soc Gen, which were, in fact, already forecast lower than consensus estimates, as shown in the table below.
The actual figures declared by the government show that growth in industrial production, retail sales and urban fixed asset investment have fallen to multi-year lows during the first two months of 2014, points out Wei.
Given that growth in credit has been slowing, there exist significant pressures on growth in spending on infrastructure and investment.
Overall, these data lead Wei to estimate that Q1 GDP growth might slow to just 7% – way short of the 7.5% target indicated by Premier Li earlier this month.
“New leaders are now facing a critical test: whether they can stabilise the economy, without significantly compromising the progress of lowering debt risks,” observes Wei. “We think that they will try to send clear easing signals but continue to refrain from any big stimulus program.”