China’s Lou Turns Tables on U.S. Over Calls for Faster Change

China’s Finance Minister Lou Jiwei turned the tables on the U.S., pointing to a lack of structural change in its economy after Treasury Secretary Jacob. J Lew called for China to more quickly expand the role of markets.

Lou also played down the risks from shadow banking, saying that possible defaults in some wealth-management products don’t reflect “big problems” in the industry. Lew last week highlighted potential danger in China’s financial sector as one of several risks clouding the global economic outlook.

“They have always been saying that China should boost its consumption ratio and the U.S. should boost its investment ratio, but that structural change is not happening in the United States,” Lou told Bloomberg News yesterday in Sydney, where he was attending a meeting of Group of 20 finance ministers and central bankers. The U.S. recovery “is being helped by monetary policy and not much by structural adjustment,” he said.

Lou’s comments underscore the tensions between the world’s two biggest economies as the U.S. recovery gathers pace while China’s expansion is set to be the weakest in 24 years. Communist Party leaders have indicated they are prepared to tolerate lower growth as they implement economic and social reforms to boost consumption and allow markets to play a bigger role in pricing resources.

‘Move Faster’

“I have yet to see the signs that they are moving with the speed that we would want,” Lew said in Sydney on Feb. 21, referring to China’s promised changes. The U.S. will continue to press the nation’s leadership “to move faster, with more clarity and more immediacy,” he said.

Expansion in China will this year slow to 7.5 percent from 7.7 percent last year, according to an International Monetary Fund estimate last month, as President Xi Jinping reins in investment and credit growth and implements policies to rebalance the economy toward consumption. In contrast, the Washington-based lender forecasts U.S. gross domestic product will increase 2.8 percent, up from a 1.9 percent pace last year.

Premier Li Keqiang will announce the government’s GDP growth target for this year at the annual meeting of the National People’s Congress, China’s legislature, in Beijing next month. The goal was 7.5 percent last year.

Lou also hit back at concerns that the growth of shadow banking in China is increasing financial risks in the economy. Such activity is less risky than in western countries because it’s more closely linked with economic growth, he said.

Financial Stresses

“Shadow banking in our country is still related to the real economy,” whereas in western economies shadow banking products such as credit default swaps are “far from real economic activities on the ground,” he said.

Investors are focused on financial stresses in China after the near-default last month of a high-yield trust product. The bailout of Credit Equals Gold No. 1, distributed by the nation’s largest bank to its wealthy clients, averted what would have been the biggest default in a decade in the country’s $1.8 trillion market for trust products.

Shadow banking is an issue of worldwide concern, although it isn’t “intrinsically nefarious,” Lew said at a conference in Sydney on Feb. 21.

Shadow banking, a catchall phrase for lending outside the regular banking system, encompasses risky investment products, private lending between individuals as well as derivatives and money-market funds. It poses “systemic risks” to the global financial system, according to the Financial Stability Board, the Basel, Switzerland-based body that’s responsible for strengthening global financial rules on behalf of the G-20.

Potential Dangers

The size of China’s shadow banking industry is manageable, Lew said, although in a letter to his G-20 colleagues earlier last week he highlighted potential dangers in the country’s financial sector as one of several risks clouding the global economic outlook.

China’s economy will in 2014 maintain the same trend of steady growth as it did last year, Lou said yesterday, declining to give a detailed forecast. GDP increased 7.7 percent in 2013, the same pace as the previous year, and down from an average 10.6 percent a year in the decade through 2011.

GDP will expand 7.5 percent this year, according to the median estimate in a Bloomberg News survey of analysts from Feb. 14 to Feb. 19. That would be the least since 1990.

Sacrificing Growth

China’s leaders outlined in November the biggest expansion of economic freedoms since at least the 1990s, pledging to give markets a “decisive” role in allocating resources. Lew said some of the changes may mean sacrificing short-term growth for long-term more stable expansion.

Central bank Governor Zhou Xiaochuan expressed confidence in the country’s growth prospects even as a slowdown in manufacturing and stresses in the financial system damp the outlook.

“There’s no big problem” for China to maintain steady and healthy economic expansion, Zhou told Bloomberg News on Feb. 21 in Sydney, where he was also attending the G-20 meeting.

— With assistance by Xin Zhou

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