Tags: china | state | economy | slowdown

China Slowdown Shows Advantage of Supreme State Role in Economy

Monday, 20 Apr 2015 06:02 AM

When it comes to stimulating an economy, China is betting state control has its advantages.

Confronted with mounting weakness, China’s policy makers are ramping up their response in a shift from their restrained measures last year. The central bank will swap some of its foreign-exchange reserves for stakes in two state-owned policy banks, Caixin reported Monday, allowing them to increase lending for projects such as shantytown redevelopment. The same day, authorities cut the amount of reserves banks must hold in a move to spur about $200 billion in lending.

While U.S., European and Japanese policy makers have struggled to revive private-sector investment with cheap money since the financial crisis, China’s state-led approach may be quicker, albeit more wasteful. President Xi Jinping and Premier Li Keqiang’s two years in power have been marked by efforts to rein in corruption, pollution, debt and other excesses. Policies this week echo a playbook that saw China shrug off past slowdowns, both domestic and global.

“Infrastructure spending and bank loans — this is the way China does stimulus,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “For China it’s very easy to coordinate; the problem is sometimes there’s over- investment and bridges to nowhere. The problem in the U.S. or Germany is that private companies still don’t want to invest because the economic outlook is still sluggish.”

Policy Firepower

Even after its easing efforts so far, China’s policy makers retain significant firepower and are a long way from pursuing out-and-out stimulus, as they did in 2008-2009 when export demand slumped in the wake of the global financial crisis. Keen to avoid a repeat of that debt binge, leaders have been taking incremental steps to ensure growth doesn’t slide too abruptly.

The biggest lenders must still set aside 18.5 percent of deposits as reserves, which can be lowered to offset liquidity leakages elsewhere. Meanwhile, the benchmark lending rate is 5.35 percent, giving room for reductions, and central-government debt is well below U.S. and euro-area levels.

Chen Long, Beijing-based China economist at research consultancy Gavekal Dragonomics, said the central bank is focusing on bringing down borrowing costs that it fears could trigger a spike in defaults among heavily indebted borrowers.

“This year is more about managing debt than growth,” Chen said.

That’s a different scenario from the aftermath of the 2008 global financial crisis when the PBOC unleashed a lending boom. This time, the central bank is actively seeking a much slower pace of lending, Chen said.

Conflicting Goals

George Magnus, a senior independent economic adviser to UBS Group AG in London, said policy makers are trying to boost liquidity amid capital outflows and also offset deflationary pressures triggered by weak construction and industry.

“The authorities are conflicted,” Magnus said. “They want to tame credit and reform the economy but their actions suggest that they are unwilling to preside over a period of slow growth and difficult reform.”

For the near term, Magnus doesn’t see China needing to resort to the kind of quantitative easing deployed by its peers.

People’s Bank of China Governor Zhou Xiaochuan and Finance Minister Lou Jiwei in recent days have stressed they have the tools to cope with the downward pressure crimping growth. In the latest move, the central bank has recapitalized China Development Bank with $32 billion and the Export-Import Bank of China with $30 billion, Caixin magazine reported Monday.

Double Edged

“Empowering policy banks to make more long-term loans to infrastructure projects is a double-edged sword,” said Yuan Gangming, an economist with the Chinese Academy of Social Sciences who has studied the Chinese economy for the past three decades. “It can quickly generate demand in the short term, but in a long-term view, it means funds will be sucked into projects that generate very low returns — in other words, it’s bad for the economy.”

The key question is whether China’s policy makers will have more success than U.S. and European counterparts in shielding employment from a property-led downturn. So far, so good on that score, with urban employment rising about 13 million last year, beating the 10 million target even as the economy expanded at the weakest pace since 1990.

Li last month flagged the labor market as key, vowing to step in if the economy’s slowdown dented jobs and wages. Fatter paychecks are needed to increase consumer spending and demand for services as China seeks to rebalance from a reliance on debt-fueled investment-led growth.

“Growth stabilization now becomes the priority policy consideration,” said Zhu Haibin, the Hong Kong-based chief China economist for JPMorgan Chase & Co. “We expect further actions to be taken in the coming months, to address the near-term growth concern.”

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When it comes to stimulating an economy, China is betting state control has its advantages.Confronted with mounting weakness, China's policy makers are ramping up their response in a shift from their restrained measures last year. The central bank will swap some of its...
china, state, economy, slowdown
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2015-02-20
Monday, 20 Apr 2015 06:02 AM
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