China’s manufacturing activity slowed down in January, giving an early sign of the difficult challenges facing the Xi Jinping leadership in keeping a steady pace of moderate growth while attempting to remove structural flaws that have constrained a healthy, balanced economy in 2014.
The HSBC purchasing managers’ index for the month slid to 49.6, below market expectation, from 50.5 in December. A figure below 50 represents economic contraction. The unexpected decline in China’s factory activity followed a slowdown in China’s economic engine in December. It came amid concerns this week that high interest rates caused by tight liquidity would dampen investment, which is one of the three engines of growth.
Taken together, economists have cautioned about the risk that economic growth would further slow in the first quarter, putting pressure on the leadership to quicken the pace of growth in the second half of 2014.
The weak start of the Chinese economy in 2014, nevertheless, has served as an early, if grim, reminder to the country’s top leaders of the potential risk of a sharp dip of the economy as they finalize economic growth targets and strategies and formulate policies for deepening reform this year.
Following a State Council meeting on Thursday, Premier Li Keqiang and his top aides will fan out to the regions to seek the views of local government officials and experts on the annual government work report, which is scheduled to be tabled at the annual National People’s Congress plenum in early March.
Speaking at a meeting with experts on Friday last week, the economics-trained premier has stressed the importance of keeping economic growth within a reasonable range. Doing so, he said, would help maintain market expectation of stable growth.
Analysts said Li’s remarks showed that China would stick to its “bottom-line thinking” about economic growth. Amid fears around the middle of last year that China might not be able to attain the 2013 gross domestic product target growth of 7.5 percent, Li had said a 7 percent GDP growth would still be acceptable.
Since then, there have been increasing signs that the Xi-Li leadership seems to have adopted 7 percent as China’s “bottom-line” GDP growth.
In line with traditional practice, it is widely believed the GDP growth target for 2014 has been tentatively set during the annual national economic work conference held in Beijing in December.
Media reports said China is likely to set the 2014 target at 7.5 percent and inflation at 3.5 percent, the same as in 2013. If true, it will be the second year in a row that Beijing leadership has set the goal for GDP expansion at below 8 percent, which had been adopted as the “bottom-line” growth rate for many years.
It will mark another major step in the evolution of China’s high-speed growth trajectory to a model featuring a steady, moderate pace of growth.
In a prepared speech delivered at the World Economic Forum in Davos this week, Li said China’s economy demonstrated resilience and vigor last year with full-year economic growth standing at 7.7 percent, inflation at 2.6 percent and 13 million new jobs created.
Li said at a State Council meeting on Thursday the economic achievements last year did not come easy. “[We should] seriously review and stick to those measures that have proved to be effective.”
His remarks gave a strong hint that the macroeconomic strategy would remain largely unchanged in 2014.
Taking a steady-as-it-goes course, however, does not mean that Beijing would refrain from dipping into the more difficult areas of reform, or what officials have described as the “deep-water zone”.
Speaking at the first meeting of a top-level working group on deepening reform, Xi, who chairs the group, said the next stage of reform would be fraught with difficulties in view of the enormous vested interests involved. “[You should] dare to roll out measures and take counter-measures. [You should] gallop with every step being taken in a solid and steady manner.”
During the State Council meeting, Li urged officials to closely monitor the economic situation, and assess and make judgment on the economic trend. Officials should take preventive, precautionary measures to avert risk as soon as the tell-tale signs emerge. “[We should] keep an upper hand over economic work,” he said.
Less than a month into 2014, there has been no dearth of signals of economic risk as the Chinese leadership braces for more uncertainty in the Year of the Horse. The days of the economy galloping at a double-digit growth rate are long gone. It did not take long for the new leadership to realize that keeping a steady, moderate pace of growth is no small challenge.
Chris Yeung is deputy chief editor of the Hong Kong Economic Journal. This column appears every Friday.
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