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Beijing struggles to hit the right pitch on economy


By Pete Sweeney and Clement Tan

SHANGHAI/HONG KONG (Reuters) - China's leadership, its hands full trying to manage a cooling economy while laying foundations for future solid growth, is also struggling where Beijing used to excel: sending a clear and consistent message to markets and the public.

In the past weeks, financial markets have gone through repeated spasms as investors puzzled over Beijing's intentions behind some of its actions, its appetite for reforms and tolerance for the economic pain that comes with them.

As President Xi Jinping was quoted in official media on Tuesday emphasizing the need to restructure the economy, other official media hinted the country's development agency was considering the traditional stimulus of investment.

With uncertainty over where the world's second-biggest economy is heading, clarity is essential.

"It's very important now given that talk about a China hard landing is resurfacing again," said Jackson Wong, Tanrich Securities' vice-president for equity sales in Hong Kong.

"If Beijing doesn't talk about their plans to cope with the slowing economy, investors' confidence will be even more adversely affected."

Analysts say it is not that communication skills of Prime Minister Li Keqiang and his team have necessarily slipped compared with their predecessors.

It is that the message has become more complex - it is not just about the pace of economic growth anymore - and markets are particularly nervous.

Li's message is that Beijing is serious about reforms and rebalancing the economy from breakneck expansion fuelled by debt, heavy investment and exports towards a more sustainable and healthier, if somewhat slower, growth.

But he has also sought to assure markets and the public that while the new leadership had less heady growth targets than its predecessors and was willing to accept some cooling down, Beijing would act if the economy slipped too far.

It is how that message got translated into concrete numbers that has been the source of market nerves and confusion.

First, comments by Finance Minister Lou Jiwei reported by the Xinhua news agency from Washington and later corrected, suggested that China might de facto lower its 2013 growth target from its official 7.5 percent goal. Later, markets were left speculating what sort of slowdown would prompt the authorities to respond with fresh steps to support the economy.

It took several clarifications by top policymakers and in the official or semi-official media - the latest came on Tuesday - for markets to form a view that 7 percent appeared to be the floor for growth that Beijing was willing to tolerate this year.

Tanrich's Wong said China's new leaders have shown a greater tolerance for many things, including rising property prices and slower economic growth.

"It's ironic this has translated into a perceived lack of communication that's making investors jittery," he said.

Some analysts say it is less a matter of inconsistency and more the question that what the authorities were saying was open to interpretation.

"Beijing has been rather clear and consistent, so it's more a matter of market interpretation," said Linus Yip, First Shanghai Securities strategist, Hong Kong.

China shares listed in Hong Kong rallied on Tuesday the most in seven months after an official media report on high speed rail investment raised hopes Beijing was taking steps to support the economy.

Within hours, President Xi Jinping was quoted in official media urging the need for deeper economic restructuring, the reform that has been blamed for the slowdown.

In addition, some policymakers' actions left investors far from clear about their logic and intentions.

When the central bank let a severe cash squeeze grip the interbank money markets in June and fan fears of bank defaults, it drew fire for failing to address the concerns right away and explain its actions.

Last Friday, its move to free up lending rates was welcomed as part of rate policy reform, but the notion that it was a step that would support lending and the economy was greeted with widespread skepticism.

To be fair, part of the problem with communication may reflect the fact that Bejing's view of the economy could be changing quite rapidly.

Dariusz Kowalczyk, senior Asia economist at Credit Agricole CIB in Hong Kong, says the latest weak economic data could have forced the authorities to modify their "short-term pain for long-term gain" from last month towards one signaling greater willingness to avert a rapid slowdown.

"After they ensure economic stability, they will return to the restructuring message."

(Writing by Tomasz Janowski; Editing by Neil Fullick)