Xi Joins Li in Indicating China Tolerance for Slower Growth Rate

China’s President Xi Jinping indicated a tolerance for slower expansion to avoid environmental degradation, adding to signs that the government will limit temporary boosts for the economy as officials map out plans for market-based changes to drive long-term expansion.

The country won’t sacrifice the environment to ensure short-term growth, Xi said during a study session of the Communist Party’s top leadership on May 24. His comments follow a statement issued on the same day that the State Council, or cabinet, which is chaired by Premier Li Keqiang, approved a series of measures aimed at revamping the economy.

China’s new leaders may be reluctant to implement stimulus to reverse an unexpected slowdown in first-quarter growth after a 4 trillion yuan ($586 billion at the time) package to support the economy during the global financial crisis led to inflation, a housing bubble and industrial overcapacity. Since taking office in March, Li has pledged to cut government interference in the economy, give market forces more power and boost the role of private companies.

“The government is showing a much bigger tolerance for lower growth because they understand that China’s potential growth rate is slowing and that concerns about the environment are rising,” said Lu Ting, chief China economist at Bank of America Corp. in Hong Kong. “One of the reasons we cut our growth forecast is because protests over environmental issues are leading to the cancellation or delay of a lot of investment projects.”

Bank of America lowered its 2013 estimate for economic expansion to 7.6 percent from 8 percent on May 14, its second reduction this year.

‘Painful’ Changes

As part of efforts to curb pollution, the Ministry of Environmental Protection said this month it suspended approval for coal-fired power projects in the regions of Inner Mongolia, Henan and Guizhou. It also ordered 15 companies, including state-owned Hebei Iron & Steel Group, to pay fees for sulfur-dioxide emissions, according to a statement on its website.

In his first press conference as premier on March 17, Li described reform as the “biggest dividend for China” and said that cutting the government’s power was a “self-imposed revolution.” The changes would “be very painful and even feel like cutting one’s wrist,” he said.

In its May 24 statement, the State Council approved a series of measures put forward by the National Development and Reform Commission. They include changing the household registration, or hukou, system, boosting social welfare, taxing products that are resource-intensive and heavily polluting and expanding levies on natural resources.

Public Discontent

Xi’s pledge to protect the environment follows growing public discontent that industrial expansion is creating pollution and threatening food safety. Pollution has replaced land disputes as the main cause of social unrest, Chen Jiping, a former leading member of the Communist Party’s Committee of Political and Legislative Affairs, said in March.

Demonstrations against industrial plants have taken place in Shanghai and Kunming, the capital of southern Yunnan province, this month. State-owned China National Petroleum Corp., the country’s biggest oil producer, pledged to take measures to ensure a chemical factory it wants to build near Chengdu, the capital of Sichuan province, won’t harm the environment amid growing opposition to its proposal.

“Environmental issues are much higher on the agenda with the current leadership,” said Ma Jun, a Beijing-based environmentalist and founder of the Institute of Public and Environmental Affairs. Xi’s comments “are very positive and more serious this time, although the implementation will be very difficult.”

Market Mechanisms

In March, Li said the country needed economic expansion of around 7.5 percent a year until 2020 to meet the government’s social and development targets. That’s down from an average pace of 10.5 percent a year over the past decade, with growth driven by surging investment and exports.

Li signaled this month that policy makers are reluctant to use stimulus to counter the slowdown.

“To achieve this year’s targets, the room to rely on stimulus policies or government direct investment is not big -- we must rely on market mechanisms,” Li said in a speech broadcast to officials around the country, according to a transcript published May 14. Relying on government-led investment for growth “is not only difficult to sustain but also creates new problems and risks,” he said.

Economists at banks including UBS AG, Royal Bank of Scotland Group Plc and Bank of America Corp. lowered estimates for China’s 2013 expansion after the pace of gains in gross domestic product unexpectedly moderated to 7.7 percent in the first quarter from a year earlier.

The median estimate of 51 analysts in a Bloomberg News survey this month was for economic growth of 7.8 percent this year. That’s down from an 8 percent median projection of 52 economists in an April poll and would match the pace of expansion in 2012 that was the weakest in 13 years.

--Fan Wenxin, Nerys Avery in Beijing. With assistance from Feiwen Rong in Beijing. Editors: Nerys Avery, Peter Hirschberg

To contact Bloomberg News staff for this story: Nerys Avery in Beijing at navery2@bloomberg.net

To contact the editor responsible for this story: Stanley James at sjames8@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.