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China signals focus on reforms and leaner, cleaner growth

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(Globalpost/GlobalPost)

By Kevin Yao and Xiaoyi Shao

BEIJING (Reuters) - China sent its strongest signal yet that its days of chasing breakneck economic growth are over, promising to wage a "war" on pollution and reduce the pace of investment to the slowest in a decade as it pursues more sustainable expansion.

In a State of the Union style address to an annual parliament meeting that began on Wednesday, Premier Li Keqiang said China aimed to expand its economy by 7.5 percent this year, the highest level among the world's major economies, but stressed that this level of growth would not get in the way of reforms.

In carefully crafted language that suggested Beijing had thought hard about leaving the forecast unchanged from last year, Li said the world's second-largest economy will pursue reforms stretching from the environment to the financial sector, even as it generates sufficient growth to support incomes and employment.

After 30 years of red-hot double-digit growth that has lifted millions out of poverty but also polluted the country's air and water and saddled the country with ominous debt levels, China is trying to change tack and rebalance its economy.

"Reform is the top priority for the government," Li told around 3,000 hand-picked delegates in his first parliamentary address in a cavernous meeting hall in central Beijing.

"We must have the mettle to fight on and break mental shackles to deepen reforms on all fronts."

Idle factories will be shut, private investment will be encouraged, and work on a new environmental protection tax will be speeded up to create a greener and more balanced economy powered by consumption rather than investment, Li said.

To aid the transformation, China's economic planner, the National Development and Reform Commission, told parliament that the government will target 17.5 percent growth in fixed-asset investment this year, the slowest in 12 years.

Investment is the largest driver of China's economy and accounted for over half of last year's 7.7 percent growth by expanding 19.6 percent, exceeding an 18 percent target.

Some analysts welcomed the plans for steady economic growth as a sign that the giant Chinese growth engine will stay on an even keel despite its wobbly start for the year.

Regional currency markets were slightly firmer as the news emerged, since there had been concerns Beijing would lower the target toward 7 percent, and investors often over-react to even the smallest of changes in China's outlook.

"While some may view this "target" approach as being past its use-by date, financial markets remain rather sensitive to it as China remains a large unknown," said Annette Beacher, head of Asia-Pacific Research at TD Securities in Singapore.

"Given that GDP growth is expected to be 7.5 percent for "longer", we see this target as supportive for the Asian region, trade, and for commodity currencies more generally."

But other analysts worried that the government's refusal to tolerate slower economic growth was a sign China may not be as bold in its reforms as some had hoped.

"By keeping the target at about 7.5 percent, it's a sign that maybe they are not going to tackle credit growth as quickly as we thought they might," said Julian Evans-Pritchard, an economist at Capital Economics in Singapore.

NATURE'S RED-LIGHT WARNING

At a plenum meeting of the ruling Communist Party last November, China announced ambitious reforms that signaled the shift from investment- and export-fuelled growth towards a slower, more balanced and sustained expansion.

Wednesday's announcements signal that it is well on track, but moving cautiously.

Li, China's first premier with an economics doctorate, said the government would maintain an inflation target of around 3.5 percent for 2014, increase broad M2 money supply by 13 percent, and keep fiscal deficit at 2.1 percent of GDP. All were widely expected.

He repeated the government's standard rhetoric on financial reforms, saying that authorities' grip on the yuan will be gradually relaxed and deposits eventually insured, but did not provide a time line.

On the environment, however, Li did not mince his words.

"Smog is affecting large parts of China and environmental pollution has become a major problem, which is nature's red-light warning against the model of inefficient and blind development," Li said in his address that lasted a little over 100 minutes, in what state media said was the shortest ever.

He said the battle against pollution will be waged via reforms in energy pricing to boost non-fossil fuel power and cutting capacity in the steel and cement sectors which are the sources of much air pollution.

But plans to outdated steel capacity this year comprise less than 2.5 percent of total capacity and will be outstripped by new capacity currently under construction, although this will be more modern and less polluting.

The targeted cement closures also comprise less than 2 percent of last year's total production. Many steel and cement factories have also been shutting down for economic reasons, putting China's willingness to go the extra mile on pollution into question.

Analysts have warned in the past that China will loathe to rock the boat when it comes to reforms for fear of fuelling job losses and undermining social stability. As such, they say difficult changes such as government downsizing or closures of debt-laden factories in sectors gripped by overcapacity are likely to take a back seat.

During the parliament meeting, key government ministries and the central bank will hold a series of press briefings to cover a wide range of economic and social issues.

Li is scheduled to hold a news conference at the end of the parliament meeting on March 13.

(Additional reporting by Fiona Li, Michael Martina and David Stanway; Writing by Koh Gui Qing; Editing by Raju Gopalakrishnan)

http://www.globalpost.com/dispatch/news/thomson-reuters/140304/growth-reform-spotlight-china-parliament-meeting-opens