China Top Leaders Warn on Financial Risks as Rebound Falters as PSC, China’s top decision-making group, held a special economy-focused session, the first time since 2004

Chinese leaders more worried about financial risks than slower growth

Kate Mackenzie

| Apr 26 07:59 | 14 comments | Share

China’s Politburo Standing Committee, the country’s top decision-making group, held a special session yesterday to discuss the economy — apparently the first time they’ve held this sort of economy-focused meeting since 2004, according to Xu Gao at China Everbright Securities (via Bloomberg).

So what came out of it? It’s always hard to tell, but it probably wasn’t good news for anyone hoping for big stimulus measures.

The official Xinhua report is here and its headline suggests some worry at the economic growth rate. “China needs to cement its domestic economic growth momentum and guard against potential risks in financial sectors,” seems to be the key line, from the third paragraph, although it goes on to point out that Q1′s 7.7 per cent growth that had many China watchers worried was in fact higher than the 7.5 per cent official target.Then there’s this:

While focusing on improving the quality and efficiency of economic development, the country should keep a proactive fiscal policy and prudent monetary policy while making them more targeted, it said.

Hmm… more targeted…

Bloomberg’s take is here and they’ve also noted that the official statement focused on risks despite the slowdown; they also point out the emphasis on boosting the consumption (ie, rebalancing the economy; which as we’ve outlined before, can’t really happen unless growth slows).

Nomura’s Zhiwei Zhang says it shows China’s senior leaders have reached a consensus to tolerate slower growth. “The press release emphasized that, “we should focus on the quality and profitability of growth”, and did not mention “downward pressure on growth”. This, he says, means stimulus can probably be ruled out for the near-term:

The endorsement by the Politiburo is critically important, as it supports Premier Li’s government in resisting pressure and avoiding further stimulating the economy. As growth slows, pressure on the government is building to loosen policy further. The Politiburo is the most powerful authority in China, and its endorsement indicates that policy stimulus is unlikely in Q2.

Zhang also highlighted the concern about risk, which has been a theme from many government agencies such as the central bank and the banks regulator for several months now — particularly local government financing vehicles:

The press release demonstrates the government’s explicit concerns over financial risks. Again, it echoed statements made by Premier Li during the recent State Council meeting, which highlighted risks from local government financing vehicles (LGFV) and rapid credit growth. The Politiburo decided to “regulate the fund raising activities of local governments”, a new statement that implies there are downside risks to LGFV financing.

Update: Our Beijing colleague Simon Rabinovitch’s report on the meeting has just been published as we finished writing this post, and is well worth a read. A key excerpt:

It was partly a reaction to the disappointment of the first-quarter data in saying the country needed “to strengthen its economic growth momentum”. But it also served as a warning against taking drastic actions to boost growth by cautioning against “potential risks in the financial sector”.

April 26, 2013 7:19 am

China’s leaders warn on financial risks

By Simon Rabinovitch in Beijing

China must work to strengthen its economy while also guarding against financial risks, the country’s top leaders said in a special meeting convened amid rising concerns about the near-term growth outlook.

The Politburo Standing Committee, the highest decision-making body in China, met to discuss economic policy two weeks after reporting that growth slid to 7.7 per centin the first quarter, an unexpected decline from its 7.9 per cent pace in the final quarter of 2012. A survey of purchasing managers published by HSBC this week suggested that momentum has remained sluggish in April.

The politburo pledged to bolster domestic consumption and to make it easier for companies to gain approval for investment projects. At the same time, it vowed to standardise the financing mechanism for local governments, addressing concerns about the mountain of debt they have accumulated through backdoor channels.

The statement underlined the economic dilemma facing China. It was partly a reaction to the disappointment of the first-quarter data in saying the country needed “to strengthen its economic growth momentum”. But it also served as a warning against taking drastic actions to boost growth by cautioning against “potential risks in the financial sector”.

“It is difficult to achieve both objectives. From the context, I’m left with the impression that they may tolerate lower growth to emphasise more the quality of growth and reduce financial risk,” said Ding Shuang, an economist with Citi.

He noted that Xi Jinping and Li Keqiang, China’s new leaders, are only at the start of what is expected to be a 10-year term in office.

“They have a long time horizon. The last thing they would like to do is to exhaust all their growth-support tools at the beginning of their tenure only to face problems later,” he said.

But Xu Gao, chief economist of Everbright Securities, took a very different message from the politburo meeting, saying that the comments about guarding against financial risks were more limited than recent government statements.

“The meeting has given a very strong message about stabilising growth, going beyond previous policy signals,” he wrote in a note to clients, saying that more active policy moves could fuel a recovery in this quarter.

Mr Xu added that it was highly unusual for the Politburo Standing Committee to meet in April to discuss the Chinese economy, having last done so in 2004. Normally, the standing committee convenes economy-focused meetings at the start, the middle and the end of the year.

China Top Leaders Warn on Financial Risks as Rebound Falters

By Bloomberg News – Apr 26, 2013

China’s top leaders said the country must guard against financial risks and boost consumption amid signs that the recovery in the world’s second-biggest economy is faltering.

“China needs to cement its domestic economic growth momentum and guard against potential risks in financial sectors,” the Politburo Standing Committee said in a statement late yesterday published by the official Xinhua News Agency. Macro-economic policies should be stabilized and micro controls in some sectors should be loosened, it said after what Xinhua said was a “special session” on the economy.

Data this week showed China’s manufacturing is expanding at a slower pace, adding to evidence a recovery is losing steam after an unexpected slowdown in growth in the first quarter. Goldman Sachs Group Inc. and JPMorgan Chase & Co. last week cut forecasts for 2013 expansion while Nomura Holdings Inc. said this week that growth needs to moderate to avoid a systemic financial crisis.

The Politburo Standing Committee’s comments “provide support to the State Council’s decisions and don’t imply policy changes,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong. “While the leadership is saying China needs to boost growth momentum, it’s also warning about financial risks — it isn’t going to pursue the old way of stimulus to push up growth at the expense of long-term structural reform.”

Government Financing

Stocks in China fell, with the benchmark Shanghai Composite Index down 0.4 percent at 1:54 p.m. local time. The gauge slipped 0.9 percent yesterday, the third drop in four days, and is heading for a third straight monthly decline.

The Politburo Standing Committee pledged to accelerate the establishment of a standard local government financing mechanism after “explosive” growth in local debt raised concerns about the financial health of the economy, according to Xinhua’s report which didn’t give more details.

Greater efforts are needed to bring out the potential of domestic consumption, according to the statement. While focusing on improving the quality and efficiency of economic development, the country should maintain a proactive fiscal policy and prudent monetary policy while making them more targeted, it said.

Indiscriminate Expansion

On housing, the Standing Committee said a “good job” should be done on development of the real-estate industry and building affordable housing. The government will remove or delegate power to approve investment projects in some areas while strictly limiting the “indiscriminate expansion” of energy-inefficient and polluting industries, it said.

Xu Gao, chief economist at China Everbright Securities Co. in Beijing, said this was the first time the Politburo Standing Committee held an economy-focused meeting in April since 2004 when it decided to step up efforts to control overheating investment. The meeting delivered a “strong message of stabilizing growth,” he said in a note. Normally such meetings are held in February, July and at the end of the year, Xu said.

The Standing Committee’s comments echo those made by the State Council, China’s cabinet, after a government report last week showed gross domestic product in the first quarter rose 7.7 percent from a year earlier, down from a 7.9 percent pace in the previous three months and trailing the median estimate of 8 percent in a Bloomberg News survey.

“As growth slows, pressure on the government is building to loosen policy further,” Zhang Zhiwei, Nomura’s chief China economist in Hong Kong, said in a note today. The Standing Committee’s comments show “the senior leadership has reached a consensus to tolerate slower growth” and indicate that policy stimulus is unlikely, he said.

Weaker Growth

Nomura estimates economic growth will slow to 7.2 percent in the fourth quarter year-on-year, and will be 7.5 percent for the full year. Goldman Sachs and JPMorgan estimate a 7.8 percent pace for 2013, the same rate as 2012 which was the weakest in 13 years.

In an April 24 report, Nomura said its China Stress Index, which monitors the risk of a hard landing, recorded its highest reading since it started in November 2011, driven by credit and property market booms. The bank defines a hard landing as an abrupt slowdown in real gross domestic product growth to an average of 5 percent or less year-on-year over four consecutive quarters, and estimates a one-in-three likelihood of such an event starting before the end of 2014.

Less Progress

Fitch Ratings Ltd. cut China’s long-term local-currency debt rating this month, citing risks to the country’s financial stability. Moody’s Investors Service also lowered its outlook for the country’s ranking to stable from positive, saying the nation has made less progress than anticipated in reducing risks from local-government debt and credit expansion.

China’s local governments may have more than 20 trillion yuan of debt, former Finance Minister Xiang Huaicheng said this month, almost double the figure given in a 2011 report by the National Audit Office. Aggregate financing, a broad measure of credit that includes non-bank lending and bond sales, was a record 2.54 trillion yuan in March, central bank data show.

China’s policy makers are also grappling with renewed inflows of capital from looser monetary policies in developed economies and expectations of yuan gains. The nation’s financial and capital account surplus surged to $101.8 billion in the first quarter from $56.1 billion a year earlier, data from the State Administration of Foreign Exchange showed yesterday.

–Nerys Avery. With assistance from Zhou Xin and Liu Li in Beijing. Editors: Nicholas Wadhams, Nerys Avery

To contact Bloomberg News staff for this story: Xin Zhou in Beijing at xzhou68@bloomberg.net