China’s top leaders said the country must guard against financial risks and boost consumption amid signs that the recovery in the world’s second-biggest economy is faltering.
“China needs to cement its domestic economic growth momentum and guard against potential risks in financial sectors,” the Politburo Standing Committee said in a statement late yesterday published by the official Xinhua News Agency. Macro-economic policies should be stabilized and micro controls in some sectors should be loosened, it said after what Xinhua said was a “special session” on the economy.
Data this week showed China’s manufacturing is expanding at a slower pace, adding to evidence a recovery is losing steam after an unexpected slowdown in growth in the first quarter. Goldman Sachs Group Inc. and JPMorgan Chase & Co. last week cut forecasts for 2013 expansion while Nomura Holdings Inc. said this week that growth needs to moderate to avoid a systemic financial crisis.
The Politburo Standing Committee’s comments “provide support to the State Council’s decisions and don’t imply policy changes,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong. “While the leadership is saying China needs to boost growth momentum, it’s also warning about financial risks -- it isn’t going to pursue the old way of stimulus to push up growth at the expense of long-term structural reform.”
Stocks in China fell, with the benchmark Shanghai Composite Index down 0.4 percent at 1:54 p.m. local time. The gauge slipped 0.9 percent yesterday, the third drop in four days, and is heading for a third straight monthly decline.
The Politburo Standing Committee pledged to accelerate the establishment of a standard local government financing mechanism after “explosive” growth in local debt raised concerns about the financial health of the economy, according to Xinhua’s report which didn’t give more details.
Greater efforts are needed to bring out the potential of domestic consumption, according to the statement. While focusing on improving the quality and efficiency of economic development, the country should maintain a proactive fiscal policy and prudent monetary policy while making them more targeted, it said.
On housing, the Standing Committee said a “good job” should be done on development of the real-estate industry and building affordable housing. The government will remove or delegate power to approve investment projects in some areas while strictly limiting the “indiscriminate expansion” of energy-inefficient and polluting industries, it said.
Xu Gao, chief economist at China Everbright Securities Co. in Beijing, said this was the first time the Politburo Standing Committee held an economy-focused meeting in April since 2004 when it decided to step up efforts to control overheating investment. The meeting delivered a “strong message of stabilizing growth,” he said in a note. Normally such meetings are held in February, July and at the end of the year, Xu said.
The Standing Committee’s comments echo those made by the State Council, China’s cabinet, after a government report last week showed gross domestic product in the first quarter rose 7.7 percent from a year earlier, down from a 7.9 percent pace in the previous three months and trailing the median estimate of 8 percent in a Bloomberg News survey.
“As growth slows, pressure on the government is building to loosen policy further,” Zhang Zhiwei, Nomura’s chief China economist in Hong Kong, said in a note today. The Standing Committee’s comments show “the senior leadership has reached a consensus to tolerate slower growth” and indicate that policy stimulus is unlikely, he said.
Nomura estimates economic growth will slow to 7.2 percent in the fourth quarter year-on-year, and will be 7.5 percent for the full year. Goldman Sachs and JPMorgan estimate a 7.8 percent pace for 2013, the same rate as 2012 which was the weakest in 13 years.
In an April 24 report, Nomura said its China Stress Index, which monitors the risk of a hard landing, recorded its highest reading since it started in November 2011, driven by credit and property market booms. The bank defines a hard landing as an abrupt slowdown in real gross domestic product growth to an average of 5 percent or less year-on-year over four consecutive quarters, and estimates a one-in-three likelihood of such an event starting before the end of 2014.
Fitch Ratings Ltd. cut China’s long-term local-currency debt rating this month, citing risks to the country’s financial stability. Moody’s Investors Service also lowered its outlook for the country’s ranking to stable from positive, saying the nation has made less progress than anticipated in reducing risks from local-government debt and credit expansion.
China’s local governments may have more than 20 trillion yuan of debt, former Finance Minister Xiang Huaicheng said this month, almost double the figure given in a 2011 report by the National Audit Office. Aggregate financing, a broad measure of credit that includes non-bank lending and bond sales, was a record 2.54 trillion yuan in March, central bank data show.
China’s policy makers are also grappling with renewed inflows of capital from looser monetary policies in developed economies and expectations of yuan gains. The nation’s financial and capital account surplus surged to $101.8 billion in the first quarter from $56.1 billion a year earlier, data from the State Administration of Foreign Exchange showed yesterday.
--Nerys Avery. With assistance from Zhou Xin and Liu Li in Beijing. Editors: Nicholas Wadhams, Nerys Avery
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