Forget the small downgrade in China’s official GDP target to around 6.5%, and the maintaining of the inflation target at 3% and even plans to continue cutting surplus capacity in steel, coal and construction. Forget also a trimming of the growth in the defence budget, and talk about being four square behind globalisation.
The central message from the set piece opening speech (which went two hours) annual “work report” by Premier Li Keqiang to China’s National Congress was all about risk and the controlling of it in the economy and financial system.
There are financial risks (such as over lending and rising debt and the problems they pose for the financial system and the economy), there is the risk of a property bubble popping this year, there are the risks of a trade war with the Donald Trump led US (something China has little control over), and then there are the attendant risks to the Communist Party and President Li as the 17th Party Conference approaches in the northern autumn.
Interestingly the word ‘risk’ did not appear in the English versions of China’s two main government websites, Xinhua and China Daily. But the translations used by groups such as the Financial Times, Reuters and Bloomberg all carry numerous examples of its use by Premier Li.
“At present, overall systemic risks are under control,” Mr Li said. “But we must be fully alert to the build-up of risks, including risks related to non-performing assets, bond defaults, shadow banking and Internet finance.” He also said that his government was also concerned about “high leverage in non-financial Chinese firms”… "We will ensure order in the financial sector and build a firewall against financial risks," Li added. For him to use the phrase “systemic risks” is a sign of how high up on the list of things risk in all its meaning are for the government and the communist party as they approach the 17th party Congress later this year where President XI wants to a second five year term..
Over the past year, the government headed by President Xi has cleaned out the top regulatory jobs across the economy. New heads of the securities and banking regulators as well as the National Development and Reform Commission, have been named. The Financial Times says they are “reform-minded technocrats who have sounded the alarm about the risks stemming from speculative bubbles in China’s property, equity and insurance sectors."
A year ago there was a dispute between officials after the Parliament met about the rapid growth of Chinese debt – local, provincial, national and private. The policy last year was to support the lending to boost the economy and end the slowdown. Now debt is back in the forefront of everyone’s mind, or rather the risks of too much debt are “Financial supervisors should fix weak links and act hard against illegal activities,” President Xi said ahead of the NPC meeting
Premier Li yesterday He also reiterated the need to rein in China’s runaway housing prices, especially in large, economically prosperous cities, noting that “houses are built to be lived in, not [for] speculation”. Government spending will be controlled – the fiscal deficit target is unchanged at 3% of GDP; (3.8% in 2016). Defence spending will grow by around 7%, down on last year’s 8% plus. Investment is projected to rise 9% instead of the 10.5% target from last year last year (and 8.1% actual). Retail sales are projected to slow slightly. Efforts to cut surplus capacity in the power, coal mining and steelmaking sectors will continue (which could be good for exporters like Australia).
China’s central bank said in a working paper published last month that the debt deleveraging process should be managed prudently to help avoid a liquidity crisis and asset bubbles and Premier Li said yesterday “We will apply a full range of monetary policy instruments, maintain basic stability in liquidity, see that market interest rates remain at an appropriate level, and improve the transmission mechanism of monetary policy.” Mr Li also repeated the now common mantra said the government will continue to implement a proactive fiscal policy and maintain a prudent monetary policy adding that government would press on with supply-side reforms and take steps to control risks and ensure safety in the financial sector. He said the government is also looking to shutter more ‘zombie’ (state) enterprises, or firms with inefficient surplus capacity and saddled with debt. Sounds all jargony (and it is), but what he is saying, no rocking the boat and producing a monetary or fiscal policy generated crunch.
China’s debt-to-GDP ratio rose to 277% at the end of last year from 254%in 2015. Chinese banks lent out a record 12.65 trillion yuan ($US1.83 trillion) of loans in 2016, and recent data shows that new yuan loans hit 2.03 trillion yuan in January, the second-highest ever (which means a big slowdown is coming if the government is serious about risk and debts). And if banks go on lending at high levels into the second half of the year, you know the argument over growth and risk hasn’t be resolved, and that the risks to stability are rising.
