China clar­i­fies eco­nomic poli­cies, re­form agenda at G20 meet­ing

The Pak Banker - - BUSINESS -

Chi­nese pol­i­cy­mak­ers on Fri­day sketched out the coun­try's eco­nomic poli­cies and re­form agenda, re­as­sur­ing the world that the govern­ment has plenty pol­icy tools to com­bat down­ward pres­sure as fi­nan­cial lead­ers from G20 na­tions gath­ered in Shang­hai.

In a video mes­sage to the G20 Fi­nance Min­is­ters and Cen­tral Bank Gov­er­nors Meet­ing, Chi­nese Premier Li Ke­qiang re­it­er­ated that China has the con­fi­dence to han­dle the com­plex eco­nomic sit­u­a­tion at home and abroad. "The Chi­nese econ­omy has great po­ten­tial, re­silience and flex­i­bil­ity, and we will cap­i­tal­ize on such strengths," he said.

Fri­day's gath­er­ing came amid weak eco­nomic growth world­wide and in­creas- ing volatil­ity in the fi­nan­cial mar­kets. The IMF ear­lier this week high­lighted in­creas­ing risks to global re­cov­ery and called for ur­gent and bold ac­tion to sup­port growth. In Jan­uary, the fund pre­dicted growth of 3.4 per­cent for the world econ­omy this year but may down­grade the fig­ure when it pub­lishes its next fore­cast in April. Li called for G20 na­tions to stand to­gether dur­ing the dif­fi­cul­ties. "When for­mu­lat­ing macroe­co­nomic pol­icy, G20 mem­bers need to keep in mind not just their own growth, but should also watch for the spillover ef­fects of their poli­cies," he said.

Con­tin­ued tur­bu­lence in the stock mar­ket and yuan de­pre­ci­a­tion at the start of 2016 did lit­tle to dis­guise what could be a very dif­fi­cult year ahead, putting the coun­try's eco­nomic poli­cies and re­form agenda in spot­light at Fri­day's meet­ing. At a press briefing ahead of the G20 meet­ing, China's cen­tral bank de­scribed its mon­e­tary poli­cies as "pru­dent with a slight eas­ing bias". The shift of of­fi­cial tone, which had been char­ac­ter­ized as "pru­dent" for the past few years, brings lan­guage on the pol­icy stance into line with re­al­ity, Bloomberg econ­o­mist Tom Or­lik wrote in a re­search note.

To ar­rest the cool­ing of the econ­omy, which logged its low­est an­nual ex­pan­sion in a quar­ter of a cen­tury at 6.9 per­cent in 2015, China has cut bench­mark in­ter­est rates and the re­serve re­quire­ment ra­tio of banks sev­eral times since 2014. For pos­si­ble down­side risks, China still has the space and tools for mon­e­tary eas­ing, cen­tral bank gov­er­nor Zhou Xiaochuan said. He also stressed that China will not "overly" base its macroe­co­nomic po­lices on ex­te­rior eco- nomic per­for­mance or cap­i­tal flows.

"Our in­ter­pre­ta­tion is that there is still room and space for use of low-pro­file tools like the medium-term lend­ing fa­cil­ity to guide loan costs down, and the need to avoid sell­ing pres­sure on the yuan will make it more dif­fi­cult to cut bench­mark rates in the short term," Or­lik noted. Aside from sup­port of mon­e­tary poli­cies, gov­er­nor Zhou Xiaochuan has called for more to be done on the fis­cal front and struc­tural re­forms. The mes­sage echoed with the re­marks of fi­nance min­is­ter Lou Ji­wei. "In times of eco­nomic slow­down, ex­pan­sion­ary re­forms such as re­duc­ing ad­min­is­tra­tive ap­proval, tar­geted tax cuts and grant­ing ru­ral mi­grant work­ers wel­fare and ben­e­fits should take prece­dence," he said.

China still has room to ex­pand fis­cal pol­icy to push struc­tural re­forms, he said, pre­dict­ing an in­crease in bud­get deficit this year. China raised its bud­get deficit to 2.3 per­cent of GDP in 2015, up from 2.1 per­cent in 2014. A 3-per­cent deficit ra­tio is nor­mally con­sid­ered a red line not to be crossed. But di­rec­tor of the cen­tral bank's sur­veys and sta­tis­tics depart­ment Sheng Songcheng on Wed­nes­day sug­gest China could raise the ra­tio to 4 per­cent of GDP or even higher to off­set the im­pact of re­duced fis­cal rev­enue and to sup­port broader re­form.

"The 3-per­cent warn­ing line does not fit with China's re­al­ity," he said, cit­ing China's rel­a­tively small out­stand­ing debt, ra­tio­nal struc­ture, con­tin­ued growth in fis­cal rev­enue and solid as­sets of state firms as among the fac­tors back­ing his con­clu­sion. China's cur­rency has been head­ing south since the coun­try re­vamped the for­eign ex­change mech­a­nism last year, and con­cerns about cap­i­tal out­flows have been on the rise. Zhou on Fri­day re­peated that there is no ba­sis for con­tin­ued weak­ness of the Chi­nese cur­rency as the coun­try's eco­nomic fun­da­men­tals re­main sound. He also cited China's cur­rent ac­count sur­plus and for­eign ex­change re­serves as solid sup­port for the bal­ance of in­ter­na­tional pay­ments.

There is no con­cern over China's for­eign ex­change ad­e­quacy and China has the abil­ity to make over­seas pay­ments, he said. HSBC reck­ons that the Ren­minbi will likely weaken mod­er­ately be­yond the near term, given the chal­lenges on the cycli­cal front and in China's bal­ance of pay­ments. It fore­cast the ex­change rate against the US dol­lar at 6.9 by end of 2016.

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