Xi Says China Must Adapt to ‘New Normal’ of Slower Growth

Chinese President Xi Jinping said the nation needs to adapt to a “new normal” in the pace of economic growth and remain “cool-minded” amid a slowdown that analysts forecast will lead to the weakest expansion since 1990.

China’s growth fundamentals haven’t changed and the country is still in a “significant period of strategic opportunity,” Xi said, according to a Xinhua News Agency report on the central government website on May 10. At the same time, the government must prevent risks and take “timely countermeasures to reduce potential negative effects,” he said.

Policy makers are trying to keep economic expansion from slipping below Premier Li Keqiang’s 2014 target of about 7.5 percent while reining in a credit boom that a central bank official said threatens to undermine the financial system. The government has so far limited its support to tax breaks, and speeding up infrastructure and social housing investment, with Li saying last week the focus remains on the quality of growth and on changing the structure of the economy.

“Xi’s comment showed that the Chinese government is reluctant to roll out large stimulus now,” said Xu Gao, chief economist with Everbright Securities Co. in Beijing, who previously worked for the World Bank. “At the same time, economic weakness remains and pressure from the property market is rising. The government has to gradually step up policy easing, especially on the monetary policy side.”

Preventing Risks

The government will continue to balance the relationship between economic expansion, reform, restructuring, improving people’s well-being and preventing risks to ensure sound economic growth and social stability, Xi said during an inspection tour to the central province of Henan from May 9-10, according to Xinhua.

“We must boost our confidence, adapt to the new normal condition based on the characteristics of China’s economic growth in the current phase and stay cool-minded,” he said.

The ruling Communist Party in November laid out plans for the broadest shifts in economic and social policies since at least the 1990s, pledging to give markets a decisive role in pricing resources including interest rates, boost private and foreign investment, change household registration rules to encourage urbanization, and overhaul the land and fiscal systems.

Delay Changes

U.S. Treasury Secretary Jacob J. Lew said he will call on Chinese leaders to avoid postponing measures to overhaul the economy as growth falters, when he visits Beijing this week.

“They obviously have to worry about their short-term economic situation,” Lew said in an interview on Bloomberg Television’s “Political Capital with Al Hunt” aired on May 10. “What they can’t do is treat the long-term reforms as something they can just put off.”

China’s benchmark Shanghai Composite Index of stocks has dropped 5 percent this year on concern economic expansion is slowing. Gross domestic product increased 7.4 percent in the first quarter from a year earlier, the least since 2012, and will expand 7.3 percent this year, the slowest pace since 1990, based on the median estimate in a Bloomberg News survey last month.

Even so, at that pace, China’s expansion would remain more than 4 percentage points faster than what the International Monetary Fund forecasts this year in the U.S., where Pacific Investment Management Co. in 2009 popularized the term “new normal” to describe the post-financial crisis era of slower growth.

Sustaining Rebound

“Xi is in line with what the Chinese government has been saying in the last couple of months, that a stimulus-driven rebound won’t be sustainable,” Everbright’s Xu said. “On the other hand, there are few details from Xi about what the ‘new normal’ is.”

Fan Gang, a former academic member of the central bank’s monetary policy committee, said in January the nation’s potential growth rate, the maximum pace an economy can sustain over the medium to long term without stoking inflation, may have slowed to a range of 7 percent to 8 percent this decade from 8 percent to 9 percent in the previous 10 years.

Premier Li said in April the government won’t adopt “short-term and strong stimulus policies in response to temporary fluctuations in the economy.” PBOC Governor Zhou Xiaochuan reiterated that stance on May 10, according to a report of his comments posted on the sina.com website.

Zhou told a closed-door session of a forum in Beijing that the PBOC is always fine-tuning its policies and some of that is invisible to the market, according to the report. Zhou was responding to a question about whether a cut in banks’ reserve requirement ratio is imminent, it said.

Reserve Ratio

Almost half of the economists surveyed by Bloomberg News last month predicted a cut in the reserve requirement ratio this year as part of an easing of monetary policy to support the economy. Expectations for a reduction have increased after a government report last week showed consumer inflation moderated to an 18-month low in April and factory-gate prices fell for a 26th month.

“Lower inflation readings are opening up room for monetary easing,” Kevin Lai and Tang Junjie, economists at Daiwa Capital Markets in Hong Kong, wrote after the inflation data. They forecast two cuts of 50 basis points each in reserve requirements in the second half of the year, with the first likely in July. The ratio, which was last lowered in May 2012, is currently 20 percent for the biggest banks.

Shadow Banking

Authorities have stepped up efforts to curb more lightly regulated shadow financing, where loans are extended outside the formal banking system, as they seek to rein in credit growth. China’s total debt rose to 229 percent of GDP by June 2013 from 160 percent in 2008, Ha Jiming, vice chairman and chief investment strategist of Goldman Sachs Group Inc.’s investment management division for China, estimated in a March report.

Deputy central bank governor Liu Shiyu warned that shadow banking threatens to undermine the financial system and called for tougher rules to control an industry that’s driven up borrowing costs and done little to support the economy and productivity.

Shadow finance creates a “gambling” mindset, with funds channeled into short-term investments where returns are more lucrative, Liu said at a conference in Beijing on May 10.

Investors may be offered an 8 percent yield on a wealth management product, Liu said. The layers of fees and extra interest charged by intermediaries can push the interest rate for the end borrower up to 14 percent, he said.

“If everyone in society is trying to get into the financing business, we may have entered a phase where a fever has started to affect our ability to think,” Liu said, “We must make up our minds to rectify interbank operations and all kinds of wealth management products.”