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China Signals Tolerance of Slower Growth After Meeting

By Bloomberg News
December 17, 2012 2:43 AM EST
People are seen resting in front of a floral flower display which reads "patriotism" in Chinese characters in Beijing.
Photographer: Tomohiro Ohsumi/Bloomberg
People are seen resting in front of a floral flower display which reads "patriotism" in Chinese characters in Beijing.

China said it will seek a higher “quality and efficiency” of growth next year, signaling new leaders may accept a reduced pace of expansion in exchange for a more sustainable model.

There was no mention of seeking “relatively fast” growth, a policy in place since 2006, in a report yesterday by the state-run Xinhua News Agency after the annual central economic work conference in Beijing. Leaders vowed to target “sustained and healthy development” as they maintain a “prudent” monetary policy and “proactive” fiscal stance, Xinhua said.

Chinese leaders assuming power in a once-a-decade handover to be completed in March must decide the pace of market-driven change to boost consumer demand and rein in the role of exports and investment. Communist Party chief Xi Jinping, who made the case for restructuring during a visit to the southern Guangdong province this month, faces an economy likely to have grown this year at the weakest rate since 1999.

“Now the focus is firmly on reform for next year and the future,” said Shen Jianguang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd. “The key to watch is how fast the new leadership will proceed with the real tough structural change and reform. Many of these are easier said than done.”

Even so, “next year is considered a vital year for the new leadership,” so the government will not allow a so-called hard landing in growth, Shen said.

Improve Quality

The need to improve the quality of expansion was also cited by the party’s ruling Politburo in a Dec. 4 statement reported by Xinhua.

China will “fully deepen reforms” in the economy and “firmly promote opening-up” next year, Xinhua said. The nation will maintain property-market controls and increase urbanization, Xinhua reported, citing the closed-door meeting.

The government usually reveals specific economic targets at the legislature’s annual meeting in March. Nine of 16 economists surveyed by Bloomberg News last month forecast China will keep its 7.5 percent goal for growth in gross domestic product next year. The figure was the lowest target since 2004 when it was announced in March 2012.

The median estimate in a Bloomberg News survey is for 7.7 percent expansion this year.

Rate Controls

People’s Bank of China Governor Zhou Xiaochuan spoke today of limits on reform, saying China will keep controls on short-term capital flows even if it implements deeper convertibility of the yuan. China won’t welcome capital flows such as those by some hedge funds that enter or exit the country in one or two weeks, Zhou said at a conference in Sanya, China.

Wu Xiaoling, a former PBOC deputy governor who’s now deputy director of the financial and economic committee of parliament, said at the same event that circumstances will be right in 2013 to further loosen controls on interest rates. China should consider adding several basis points to the Shanghai interbank offered rate, or Shibor, to replace the current central bank benchmark interest rate, Wu said.

The country will “properly expand” aggregate financing to maintain a “moderate increase” in lending next year and reiterated it will keep the yuan’s exchange rate “basically stable,” Xinhua said yesterday.

The ruling Politburo said this month that China will keep economic policies stable, making adjustments as needed to deal with difficulties. At the same time, the economy will “face various challenges that should not be underestimated” next year, Xinhua reported Dec. 4.

Deng Tribute

China shouldn’t delay economic restructuring, Xi said during an inspection tour of Guangdong, where he paid tribute to Deng Xiaoping, a former leader who drove opening of the economy.

“We should master greater political courage and wisdom to push forward the next reforms,” Xinhua said yesterday in its report. It cited a phrase used by Deng about “crossing the river by feeling for the stones.”

The benchmark Shanghai Composite Index rose 0.5 percent today, extending the biggest rally in three years as the government’s plans to increase urbanization spurred gains in commodity producers.

“The meeting sent a stronger signal of speeding up reforms,” said Sun Junwei, a Beijing-based economist at HSBC Holdings Plc. At the same time, slack in the job market and producer-price deflation indicate that officials need to stay focused on growth goals, Sun said.

Policy Labels

The government’s labels for its policies are sometimes altered after the fact. For example, China started raising interest rates in 2010 before dropping its “moderately loose” stance of monetary policy in place since 2008.

The language of a prudent monetary policy has framed interest-rate moves in both directions. China raised borrowing costs and the reserve-requirement ratio for lenders from October 2010 to July 2011 as inflation picked up. Since then, with economic growth slowing, the central bank lowered rates twice and the reserve ratio three times, pausing since July.

Caterpillar Inc., the world’s biggest construction and mining equipment maker, expects growth to increase next year as China’s government focuses on urbanization, Chairman and Chief Executive Officer Doug Oberhelman said in an interview on Dec. 6.

--Zheng Lifei. With assistance from Regina Tan and Zhou Xin in Beijing and Bonnie Cao in Shanghai. Editors: Scott Lanman, James Mayger

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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