China’s outgoing PM Wen issues unusual warning on growth, that a 7.5% GDP target will be ‘hard to attain; President Xi’s task exposes limits of central control

Last updated: March 5, 2013 10:11 am

Wen issues China growth warning

By Jamil Anderlini and Simon Rabinovitch in Beijing

China’s outgoing premier issued an annual growth target of 7.5 per cent on Tuesday, while giving an unusual warning that this pace might not be reached easily this year.

In his final “state of the union” speech, Premier Wen Jiabao described the growth target, in line with last year’s, as a “goal we will have to work hard to attain”. Addressing the National People’s Congress, a largely ceremonial parliament, he also acknowledged a “growing conflict between downward pressure on economic growth and excess production capacity”. The annual economic growth target is more of a signalling device than a forecast, but if the economy were to grow by exactly 7.5 per cent this year it would be the slowest growth since 1990.Unlike previous years when growth consistently exceeded the official target by a wide margin, gross domestic product expanded by just 7.8 per cent in 2012 – its weakest annual pace for 13 years. After a decade in which the Chinese economy’s average annual growth reached double digits, most economists now predict significantly slower expansion in the coming years.

“In the past, the target was really just a floor and actual growth was much faster, but going forward it will not be an easy target to achieve,” said Yao Wei, an economist at Société Générale.

China’s state planning agency, the National Development and Reform Commission, lent weight to such views on Tuesday as it warned that the economy will now expand at a slower pace than that seen in the past decade.

“The foundation for economic turnround is not firm. Consumption is unable to provide a very strong impetus to economic growth, enterprises are less able and willing to invest, and external demand will not change for the better in the near future,” the agency told the NPC.

“We believe China’s growth potential this year is around 8 per cent but in the next five to 10 years China’s potential growth will move down to below 7 [per cent],” said Zhu Haibin, an economist with JPMorgan.

Meanwhile, in preparation for what is expected to be a tougher year, the government revealed a budget that included a plan to increase its overall fiscal deficit this year to Rmb1.2tn ($193bn), from Rmb800bn in last year’s budget.

That would increase the deficit from about 1.5 per cent of GDP last year to around 2 per cent of GDP this year, a level that is considered low by international standards and was described as “safe” by Mr Wen on Tuesday.

Increased government spending was intended to “ensure and improve people’s wellbeing and maintain support for economic growth and structural adjustment”, he added.

A major focus of increased government spending will be on public goods such as pensions, subsidised housing, environmental protection and particularly the state health system, where the government will increase spending this year by 27 per cent to Rmb260bn.

The publicly available budget for China’s rapidly modernising military will increase 10.7 per cent this year to Rmb720.2bn. Beijing’s broader policy goal is to adjust the structure of China’s growth model so it relies less on exports and government-directed infrastructure projects, and more on services, domestic consumer demand and less resource-intensive activity.

The government is targeting consumer inflation of 3.5 per cent for the year and also intends to create 9m jobs, Mr Wen said. The NPC will run until March 17, by which time Mr Wen will have been replaced by Li Keqiang, who is expected to serve as premier for the next decade.

The legislature will also formally approve a large number of ministerial and cabinet appointments decided beforehand by the ruling Communist party.

March 4, 2013 4:00 pm

Xi’s task exposes limits of central control

By Jamil Anderlini in Beijing

Parliament’s anointing of its president masks erosion of Beijing’s control

Politicians, bankers and business leaders in the west often look at China’s system of market leninism with a touch of envy.

How far-sighted China’s leaders are with their five-, 10- and even 20-year plans. How efficient the system is without the hindrance of popular elections or pesky concerns over individual liberties.

Many of these admirers may expect visionary policies to be unveiled at China’s annual parliamentary session, which opens on Tuesday and will formally anoint Xi Jinping as president for the next decade by the time it closes on March 17.

But apart from some tinkering around the edges and a bureaucratic reshuffle of ministries, the session is likely to disappoint anyone who hopes for serious root and branch reform of China’s current political or economic structure.

Mr Xi is the powerful son of a Communist guerilla commander who also served at the top of the Chinese government. Perhaps the best way for FT readers to think of him is as the newly appointed chief executive of an enormous conglomerate who has worked for the company his whole life and whose father was a founding shareholder and lifelong senior executive.

Success in his new role depends to a large degree on the support of upper and middle management, many of whom he has known since he was a young recruit.

He will also have to contend with a shadowy board of directors made up of senior and retired civilian and military officials and their families who retain veto rights over major policy initiatives even after they have left the political stage.

There is not a scrap of evidence that Mr Xi harbours a secret desire to radically overhaul the current Chinese system and that is one big reason why he got this job in the first place.

But even if he was somehow planning to introduce major reforms, the chances are slim that he would be able to vanquish any of the huge array of vested interests that oppose change in almost every sphere.

The most illuminating expression of Mr Xi’s guiding ideology probably came during a visit to a Chinese military base in December when he said: “To realise the great rejuvenation of the Chinese nation we must fully achieve both a rich country and a strong army.”

Since taking over as head of the Communist party and head of the military in November, Mr Xi has done a masterful job of playing to his various constituents.

He has talked tough for the nationalists. He has talked about constitutionalism for the liberals. He has talked up private enterprise and the revival of the decrepit welfare state. And he has launched a hugely popular but so far superficial anti-corruption campaign.

But what he has also done is raise expectations of reform in China far beyond what he and his new administration will be able to deliver and that is likely to backfire in the end.

All across the Chinese political spectrum people are projecting their hopes and dreams onto him but the reality is that power in China is much less concentrated than it was in the days of Mao and Deng.

Far from being the all-powerful behemoth that some in the west admire for its omnipotence, the central government can often be oddly ineffectual and powerless.

A slightly frivolous but nonetheless instructive example is the government’s complete ban on the construction of golf courses that has been in place since 2004.

Since then the number of golf courses in China has nearly quadrupled. The point is that Beijing produces many well-intentioned laws and regulations that are often not implemented or enforced unless they directly align with the interests of cadres at the lower levels of state power.

The central government can impose its will and mobilise the nation when it absolutely has to but it uses up an enormous chunk of political capital every time it does that.

Because of this, China’s leaders tend to spend a lot of time giving positive speeches but they only really swing into action when faced with a serious crisis.

A good example was the Sars epidemic that emerged from southern China almost exactly 10 years ago and presented the now outgoing administration of Hu Jintao and Wen Jiabao with their first big test at the outset of their time in office.

After trying first to cover it up they finally responded by mobilising the entire country and eventually brought the disease under control. Mr Xi and his team have not yet been tested with their equivalent of a Sars moment but when they are it will provide more of an insight into their ability to govern the world’s most populous nation than the next two weeks of political pageantry in Beijing.

March 5, 2013 3:41 pm

Investors pour record sums into China

By Simon Rabinovitch in Beijing

Capital flows out of China have reversed course dramatically with a record jump in a key gauge of inflows at the start of this year, an indication of renewed confidence in the Chinese economy.

Companies and individuals sold Rmb684bn worth of foreign exchange and bought an equivalent amount of Chinese currency in January, the most ever in any single month, according to data published by the central bank on Tuesday.

The surge in demand for renminbi assets came after a smooth handover of power to a new generation of leaders assuaged fears of political instability in China. The transition will culminate next week at the country’s parliament, which opened on Tuesday, when Xi Jinping is installed as president.

The inflows were also fuelled by a rebound in the country’s stock and property markets as China’s economy rebounded in the fourth quarter of 2012 from a two-year-long slump.

“Risk was on, China’s trade surplus was up and expectations of currency appreciation were back,” said Stephen Green, head of China research at Standard Chartered.

There are signs that the return of capital to China could already be slowing, however. The Shanghai Composite, the country’s main stock index, is up just 2 per cent on the year after falling steeply in February, and the government has unveiled tough new measures to cool the property market.

In his “state of the union” speech on Tuesday, Wen Jiabao, China’s outgoing premier, said the government was targeting 7.5 per cent growth this year, the same as its goal last year. Last year China ended up growing 7.8 per cent, it slowest in more than a decade. Although most analysts expect it to fare better this year, Mr Wen warned that the growth target would be hard to attain.

China recorded a capital account deficit in 2012 of $117bn last year, its first deficit since 1998. A small part of that reflected capital flight but the most important factor was the decision of Chinese companies to hold onto foreign currency rather than immediately trade it for renminbi, as they had done in the past.

The State Administration of Foreign Exchange, an arm of the central bank, said in a report last week that capital outflows had slowed in the final quarter last year and that “quite large-scale inflows began to appear in December”.

The renminbi has been basically level against the dollar over the past three months, suggesting that the Chinese central bank has been forced to intervene to keep the exchange rate from rising. More details on the extent of its intervention will become available next month when it publishes foreign currency reserve data.

Mr Green said he expected China to register a small capital account surplus in 2013 with investors and companies more optimistic about the country’s prospects now but growth likely to fade later in the year.

Ken Peng, an economist with BNP Paribas, said that the successful conclusion of the transition to Mr Xi’s administration removed the single biggest concern hanging over the country, and therefore made it unlikely that China would suffer serious outflows again this year.

“There were outflows last year when there was a general loss of confidence that China was politically stable. That was scary stuff. So some of this is just clawing that back,” he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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