China is pressing the growth button after recent data showed the nation’s economy cooled to a multi-year low.
On April 18, Premier Li Keqiang chaired a meeting of the National Energy Commission and announced that the government will launch a number of major projects this year.
Among them, new nuclear power plants equipped with state-of-the-art safety measures on the eastern coast will start “at a proper time”. Other projects will mainly include construction of hydropower stations, wind and solar power stations and ultra-high-voltage transmission lines to send power from the west to the east.
Li made his intention clear: “These energy projects can ensure stable economic growth and increase China’s capability to safeguard energy security.”
The major projects came after two rounds of mini-stimulus measures had been announced weeks ago.
A number of policies — such as speeding up railway construction, tax concession for small and tiny businesses, reconstruction of shantytowns and reduction of reserve requirement ratio for rural lenders — are all aimed at preventing the economy from sliding further.
In the first quarter, China’s GDP grew only 7.4 percent, hitting a five-year low. Although a statement issued after a State Council meeting on April 16 insisted that the economic growth was within the reasonable range, Li does not want to take any risk to bet on the resilience of the Chinese economy.
The recent policy changes reflected a few points.
First, top policymakers can tolerate the economy growing at a pace smaller than 7.5 percent. Previously, market observers generally believed that 7.5 percent, the yearly target written into the annual government work report, was a bottom line.
But if we read the report more carefully, we can find that it says the growth target is “about” 7.5 percent. In this sense, it is no wonder that Li concluded that the first quarter’s 7.4 percent was still within the reasonable range.
Probably Li’s ultimate bottom line is set at 7.2 percent. If growth slows below that level, the premier believes it would damage employment.
But that is not to say he will allow the economy to grow less than 7.5 percent. Indeed, 7.5 percent is deemed as a precaution line. In case of a growth lower that that, fiscal polices will be employed to boost the economy.
Second, top policymakers still believe investment is the key to quickly shore up growth. This thinking, inherited from the previous government, can be clearly seen in the recent measures to kick-start major projects.
But policymakers are trying to stay away from bailing out the property market, which is on a downward trend with small developers and some speculative investors reportedly suffering a broken capital chain.
While the property sector is kept out, projects that carry strategic significance such as energy projects and projects that are highly related to people’s livelihood such as reconstruction of shantytowns have come to the top of the agenda.
Third, this year’s mini-stimulus measures covered more areas than those last year. So, policymakers should be cautious about expanding them. If not, mini-stimulus has the tendency to evolve into the 4-trillion-yuan stimulus rolled out in 2008, which proved to have many side effects that are still haunting the Chinese economy.
Fourth, policymakers will not further loosen the monetary stance unless the financial default spreads to an extent that needs government intervention or capital outflows build up too much to call for a liquidity injection.
Although the monetary stance has been loosened a bit as compared with the last quarter of 2013, policymakers are keen to retain some grip on money supplies in a bid to prompt credit to flow from highly speculative sectors such as property to real-economy sectors. They also want to reduce the leverage of local governments, lenders and shadow banking agencies to prevent the economy from running to a financial crisis.
If monetary policy is loosened by moves such as slashing interest rates or reserve ratios for all lenders, it will send a signal to the market that the government is throwing in the towel. That will evolve into another round of lending and speculation spree, eroding all the success of reform that has been achieved.
In addition, as policymakers need some time to assess the effect of mini-stimulus measures, they will not rush to roll out more monetary loosening policies.
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