Li Says China Rebound Not Yet on Solid Foundation

Chinese Premier Li Keqiang said the foundations of a growth rebound aren’t solid while cautioning that stimulus won’t help resolve deep-rooted issues in the world’s second-largest economy.

“The foundation of an economic recovery is not solid yet with many uncertain factors,” Li said in a speech yesterday at the World Economic Forum in Dalian, China. The nation is taking steps to stabilize growth and can achieve the main economic targets this year, Li said.

Policy makers have signaled they will defend a 7.5 percent expansion goal for 2013 and seek to ensure a pace of 7 percent in the coming years. Li pledged reforms that will ripple throughout the financial system as Communist Party leaders prepare for a November meeting to lay out a blueprint for sustaining long-term growth.

“An important part of economic-system reform is financial reform,” Li said in a question-and-answer session after the speech. “It is because it is such a complicated systematic project, it indicates China’s reform has entered a deep-water zone, or the most difficult phase.”

Li reiterated that China will push forward interest-rate and exchange-rate reforms and the internationalization of the yuan while promoting the currency’s convertibility under the capital account.

Risk Cost

Government data on Sept. 10 showed industrial production and aggregate financing, the nation’s broadest measure of new credit, rose more than estimated in August, in a sign leaders are committed to meeting economic goals even at the cost of adding financial risks. The government has used measures from tax cuts to extra spending on railways to respond to a growth slowdown.

Kasper Rorsted, chief executive officer of Henkel AG, the German maker of products from Right Guard deodorant to Loctite adhesives, said in an interview today in Dalian that “we have been and continue to be very bullish on China,” the company’s third largest market.

“China is very focused on the long term, a long-term, high, sustainable growth rate,” Rorsted told Susan Li on Bloomberg Television’s “First Up.”

Li said China is taking “targeted measures” to address the issue of local government debt that “people are all concerned about.” The State Council, or cabinet, headed by Li, awaits results from a nationwide audit of government borrowing ordered in July.

Debt ‘Controllable’

“We can say confidently that it is safe and controllable in general,” Li said.

Vice Finance Minister Zhu Guangyao said last week at a Group of 20 nations summit that while China needs to strengthen supervision of shadow banking, officials are aware that smaller businesses need access to finance.

A government-engineered cash squeeze in June sent money-market interest rates to record highs and helped curb shadow banking, reducing longer-term dangers while adding to forces slowing economic growth. Now it appears that the crunch in liquidity and credit is over, Wang Tao, chief China economist at UBS AG in Hong Kong, said Sept. 10.

Adam Posen, president of the Peterson Institute for International Economics in Washington, said in Dalian that “we’re starting to get concerned” about the levels of shadow banking.

Savings Returns

“It’s still nothing like the size of the imbalances financially we used to speak about in the mid-2000s in the West,” Posen, a former Bank of England policy maker, said on “First Up.” “Nonetheless, it is a sign that they’re not providing enough returns on savings for your average Chinese investor.”

Analysts at UBS, Deutsche Bank AG and Citigroup Inc. boosted growth forecasts following this week’s economic data, which increased chances that Li will meet the goal for 7.5 percent annual expansion.

That pace would be the slowest in 23 years and follow a decade averaging more than 10 percent a year. Growth slowed for a second straight quarter to 7.5 percent in the April-June period.

The sustainability of China’s rebound is in question and growth may slow after November, said Gao Shanwen, chief economist at Essence Securities Co. in Beijing. August figures showed no significant change in government-dominated investment in infrastructure construction, Gao said on a conference call with clients yesterday.

Li said China has entered a phase of a “medium-high” rate of growth, down from a high rate, yet the pace is “still a high rate among major economies” around the world.

“It’s not easy for such a gigantic economy to realize long-term and continuous growth,” Li said. “We must make sure the fruits of reform and development can be shared by the broadest range of people.”

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