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Li’s Cash Squeeze Risks Miss Of China Growth Target
Perspective | 28 June 2013

China’s biggest squeeze on credit in at least a decade is increasing the chance that Li Keqiang will be the first premier to miss an annual growth target since the Asian financial crisis in 1998.

Goldman Sachs Group and China International Capital Corporation joined banks from Barclays to HSBC Holdings (on 24 June) in paring their growth projections this year to 7.4 percent, below the government’s 7.5 percent goal. The cuts followed a tightening in central bank liquidity that yesterday left the overnight repurchase rate more than double the year’s average.

“The current leadership is trying to build its reputation in a different way than the previous administration, which felt that its target was holy and had to be met regardless of the circumstances,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Group in Hong Kong, who previously worked for the World Bank.

The danger is that putting the growth goal aside undermines public confidence in China’s economic policy making that’s already been shaken by limited communication on the government’s objectives behind the cash squeeze. On 24 June, the central bank contributed to the biggest drop in Chinese stocks in almost four years by releasing a week-old statement saying liquidity was “reasonable.”

The government set the 7.5 percent target at a March conference where Li became premier. Seventeen of 56 respondents to a Bloomberg News survey gave estimates of 7.5 percent or less for gains in gross domestic product (GDP) this year.

Estimates Cut
Kuijs, who said the target may be at risk this year, on 10 June cut his 2013 call to 7.5 percent from 7.8 percent and projected 8.1 percent growth next year, down from 8.4 percent.

“If they fail to achieve 7.5 percent, they will lose credibility with the markets, provincial leadership and financial institutions,” said Liu Li-Gang, Australia & New Zealand Banking Group’s head of Greater China economics in Hong Kong, who also formerly worked at the World Bank.

“That means that in the future, whenever they say something, the market may interpret it differently, and the credibility issue is something very critical for them to consider,” said Liu, who this month cut his 2013 growth forecast to 7.6 percent.

The benchmark Shanghai Composite Index of stocks fell by most on 24 June since August 2009, entering a bear market with a 20 percent drop since 6 February. The overnight repurchase rate was 6.47 percent on 24 June, more than double this year’s average of 3.09 percent, according to a fixing compiled by the National Interbank Funding Center. The seven-day repurchase rate declined on 25 June for a third day.

Concentrated Credit
Also on 24 June, a private survey showed Chinese bankers reporting increased lending this quarter while fewer companies are taking out loans. The incongruity indicates that “credit appears to be concentrated on a few borrowers,” according to the report from New York-based China Beige Book International, modelled on the US Federal Reserve’s Beige Book.

China last failed to exceed the government’s annual growth target as Asia grappled with its financial crisis in 1998, when Zhu Rongji became premier. That year, the economy expanded 7.8 percent, compared with an 8 percent goal.

Growth averaged 9.9 percent from 1999 to 2012, when Premier Wen Jiabao was at risk of missing a 7.5 percent target before interest-rate cuts and accelerated investment approvals helped stoke a rebound late in the year.

‘Fundamental Shift’
Policy makers’ willingness to allow a prolonged cash crunch this month signaled a “fundamental shift in attitude from Beijing,” analysts led by Stephen Green, head of Greater China research at Standard Chartered in Hong Kong, wrote in a 21 June note.

“We had suspected that Premier Li would want to drive significant reforms,” the analysts said. “We underestimated, however, his apparent willingness to make policy choices that would risk putting further downside pressure on the economy.”

The median estimate of 56 economists surveyed by Bloomberg News from 14 June to 19 is for growth this year of 7.7 percent. That compares to a median forecast of 8.1 percent three months earlier.

Industrial production rose a less-than-forecast 9.2 percent in May from a year earlier, while export gains were at a 10-month low and imports dropped.

Analysts at Goldman Sachs and Pacific Investment Management, manager of the world’s biggest bond fund, see growth slowing in coming years.

Growth Downshift
Average annual expansion may fall “to the vicinity of 6 percent” in the seven years through 2020, according to a 10 June report by Ha Jiming, vice chairman and chief investment strategist of Goldman Sachs’s investment management division for China.

Ramin Toloui, Pimco’s Singapore-based global co-head of emerging markets portfolio management, said in a June note that growth will downshift to between 6 percent and 7.5 percent over the next five years as investment declines as a portion of GDP.

Chang Jian, China economist at Barclays in Hong Kong, said Li is building his authority rather than hurting his credibility by showing that “he knows the structural problems and key risks facing the Chinese economy.”

Li’s government may defend against China’s growth falling below 7 percent instead of the 7.5 percent target, said Xu Gao, chief economist with Everbright Securities in Beijing.

Even so, “it’s Li’s first year in office, and it won’t look good if he misses that,” Xu said of the 7.5 percent goal.

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