Premier Wen Jiabao’s call to focus more on growth was endorsed by China’s State Council this week with the exception of his push to expand credit, in what economists said shows tension over how to reverse the slowdown.
Wen, 69, in comments posted on the government’s website May 20, said the nation should put “stabilizing growth in a more important position” and increase lending to support construction, spurring speculation the government will step up stimulus. A statement May 23 by the State Council, or Cabinet, backed the shift by listing ways to boost expansion including infrastructure projects without urging an escalation in credit.
The ruling Communist Party is dealing with a deeper-than-forecast slowdown in the world’s second-largest economy as it prepares for a once-in-a-decade power handover that begins later this year. Leaders may be reluctant to enact stimulus on the scale of the $586 billion program during the global financial crisis that triggered a lending binge, fueled inflation and burdened local governments with debt.
“It might be very hard for the leadership to reach a consensus to protect growth unless employment shows major problems,” said Xu Gao, Beijing-based chief macroeconomic analyst at Everbright Securities Co., a unit of one of the nation’s largest state-owned investment companies.
He said the State Council statement is “disappointing” for failing to send a clear signal about loosening bank credit and “appears to be a result of compromise.”
The State Council, composed of about 90 officials including ministry heads, said the government will stick with a “prudent monetary policy, maintain a reasonable size of social financing and further improve the credit structure.”
Helen Qiao, Morgan Stanley’s Hong Kong-based chief Greater China economist, said in a May 24 note that the Cabinet statement “showed less urgency in monetary easing” than Wen’s remarks suggested. That suggests top officials are “still waiting for further confirmation of growth weakness before implementing aggressive policy easing,” she said.
The yuan weakened against the U.S. dollar for a third straight week, dropping 0.2 percent to 6.3439. That’s the lowest close for a week since December.
The government on May 12 cut banks’ reserve requirements for the third time in six months. China’s biggest banks may fall short of loan targets for the first time in at least seven years as an economic slowdown crimps demand for credit, three bank officials with knowledge of the matter said this week. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., the two largest lenders, last quarter posted the slowest earnings growth in more than two years.
New bank loans last month dropped 33 percent from March to 681.8 billion yuan, missing the 780 billion yuan median forecast of economists surveyed by Bloomberg News. A third of April’s new credit was so-called discounted bills, or short-term loans often used by banks to pad the total figure.
Liu Yuhui, a researcher at the government-backed Chinese Academy of Social Sciences, said that “while there have been red-hot state media reports every day on boosting infrastructure investment, banks have moved little.” Next-generation leaders, including Vice Premier Li Keqiang, have been mum on adding stimulus to the economy, he said.
China plans to speed up approval of infrastructure projects, the China Securities Journal reported on May 22, citing an unidentified person. This year’s investment plans must be submitted before the end of June and the government may allocate construction funds earlier than planned, the newspaper said.
Everbright Securities’ Xu said he still expects the government to adopt measures including tax cuts or increase fiscal spending. The steps may have a “limited impact on overall demand unless bank lending is relaxed,” Xu said.
The four biggest banks advanced 34 billion yuan in loans this month as of May 20, Liu said, without saying where he got the data. They may rush to boost credit in the final days, mainly through short-term loans, he said.
The slowdown in growth may not necessarily be bad in the long term because it provides a chance to improve the way resources are distributed and make investment decisions based more on market demand, said Liu, director of a financial research office at CASS. Boosting credit without adequate demand may “cause huge risks” for banks, he said.
Remarks published May 22 from Li, Wen’s likely successor, also showed a possible split in views, said Ken Peng, Beijing-based economist at BNP Paribas.
Li, 56, said during a visit to eastern Jiangsu province that he will focus more on supporting public housing and overhauling the medical and social welfare system to create jobs and spur consumption. He also urged innovation and upgrading of technology.
Wen’s concern about growth is “very obvious” while Li’s remarks focused on changing the makeup of the economy and increasing efficiency, said Peng, last year’s top forecaster of the Chinese economy, according to Bloomberg Rankings.
“One of them eyes this year, while the other is thinking about the next decade,” Peng said.