Analysts are still trying to decipher what Chinese Premier, Li Keqiang meant on Sunday when he told a Beijing press conference that the Chinese economy will struggle to make its reduced growth target of 7% in 2015.
He told the annual press conference the Premier conducts at the end of the annual meeting of the country’s parliament, that China will move to correct any slow down.
But how slow will the economy have to be before the government steps it – it all seems designed to show the government is concerned, but to give it enough wriggle room to postpone any decisive action, or to suddenly surprise with a big stimulus package.
But analysts wonder if he was being unusually candid, or whether he was stating an obvious truth – that the Chinese economy is doing it tough and that won’t change for some time.
Chinese investors loved the words, whatever they meant – pushing the Shanghai market up to a five year high yesterday with a rise of 1.8%, on top of last week’s very solid 4.1% surge.
The Premier made the point that the government has a lot of room to move on policy, and boost the economy having avoided using strong, short-term stimulus in recent years (since late 2008).
He assured the media conference (most of whom were domestic media) that policymakers would prop up the economy if growth was at risk of breaching a “lower limit” or hurt employment and income gains.
"In recent years, we have not taken any strong, short-term stimulus policies, so we can say our room for policy maneuver is relatively big, the tools in our toolbox comparatively many," Li said.
"If the slowdown in growth affects employment and incomes, and approaches the lower-limit of a reasonable range, we will stabilize policies and the market’s long-term expectations for China," he said.
“And at the same time, (we will) increase the intensity of targeted (policy) control,” he said (whatever that means).
Turning to his government’s plans to deliver economic growth of around 7% this year, Li said, "It looks like economic growth has been adjusted lower, but in reality achieving this target will not be easy”.
So while China is clearly worried that the economy’s slowdown is gathering pace and will prove hard to control, it is not a warning that the government has its hands on the lever marked ’stimulus spending’.
There have been two rate cuts and two reductions in the reserve ratio for banks which have released more money for lending. Like all monetary policy moves, they take time to have an impact, so we should be looking for an upturn in lending (especially to business) from April-May onwards.
Indicators to watch will be the level of industrial production, especially electricity and steel.
Watch also changes in the inflation rate for consumers (it should start rising) and the intense deflation in much of manufacturing and service sectors, plus areas of retailing such as whitegoods.
And the pace of decline in property prices and property investment – both will have to start levelling off and then slow even further for the government to be convinced the monetary policy moves are having an impact.
Then there’s the level of imports – look for news on higher volumes of oil, coal (even though coal consumption in major cities will be reduced this year wherever it can be), iron ore, copper and bauxite and other metals. No sign of any improvement in imports will be confirmation the intense price deflation continues to hold back industry.
The impact of lower prices for a host of commodities (and the resulting downward pressure on inflation and deflation) has still to work its way through the economy. That remains a big negative and one reason why the government is worried.
And finally, keep an eye out for a big one off stimulus package – the government has already boosted deficit spending, allowed local and provincial governments to expand their lending to refinance existing debts (some $US3 trillion) at lower interest rates, thereby generating interest rate savings to be invested by those governments.
Because all this will take time, it wouldn’t surprise to see the central bank whip out another rate cut in the next few weeks and a further reduction in the reserve ratio, to reinforce whatever momentum is developing in the economy.
