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Growth amid Painful Readjustment
Summary:Premier Li has demonstrated a dedication to painful economic restructuring at the expense of economic growth, but he’s now signaling that he won’t let growth slip too far. The NDRC, along with other agencies, has compiled a plan to achieve this while still refraining from reckless stimulus.


By Zhang Xiangdong(
张向东), Kang Yi(康怡) and Zhang Bin (张斌)
Issue 629, July 22, 2013
News, page 4
Translated by Tian Shaohui
Original article:[Chinese]

The economy will continue to slow in the second half of this year, Premier Li Keqiang was recently told by theMinistry of Finance, Ministry of Commerce, the Central Bank and the National Development and Reform Commission (NDRC).

The NDRC compiled a report for the premier laying out its strategy for the second half of the year. From what the EO has learned, the report stressed the need to maintain stable growth by introducing targeted stimulus policies.

"The current economic indices don’t look good,” an official from the Ministry of Industry and Information Technology (MIIT) told the Economic Observer on July 18. “Most of them are in the lower half of their target range”

Once again, China faces a dilemma: keep GDP growth going according to the current model and risk making things worse in the long run, or fundamentally restructure the economy?

Li Keqiang has made clear his determination to push ahead with economic restructuring, though he’s now also emphasizing the need for short-term stable growth.

At a July 16 economic forum, Li said that along with policies to control inflation, restructuring and measures to promote reforms, policies will also aim to keep economic growth within a reasonable range.

Officials at the NDRC said polices aimed at maintaining economic growth will involve credit and taxation measures, as well as investment in environmental protection, energy-saving technology, small and medium-sized enterprises and rural infrastructure. 

It’s said that the NDRC’s plan to maintain stable growth will be gradually implemented after it is discussed and agreed to by the Political Bureau of the CPC Central Committee. The Ministry of Commerce has separately announced that it will soon roll out policies aimed at supporting trade.

Underlying Polices

China’s GDP growth has slowed for nine of the past 10 quarters and many industries have severe overcapacity. Since taking office, Li has consistently demonstrated a determination to stop reckless short-term growth and instead focus on more far-sighted reforms. This has greatly disappointed many hoping for the type of stimulus that kept GDP growth humming in the wake of the 2008 Global Financial Crisis.

But a turning point came at a July 9 economic forum in Guangxi. There, Li outlined more specifically what his bottom line tolerance was for slowing economic growth with his “two lower limits and one upper limit.” This refers to GDP growth and employment levels having a bottom line and inflation having an upper limit. He said the economy should be kept within this “reasonable range.”

The NDRC report outlines the major policy measures that should be taken in the second half of the year. It is a first draft of the policy settings that Li Keqiang will adopt in order to deal with a continuously slowing economy. 

“The policy suggestions from the NDRC aren’t intended to stimulate the economy on a large scale,” an official from the agency told the EO. “It’s to prioritize policy coherence and give guidance regarding specific problems.”

“The policy suggestions put forward by the NDRC at the July 17 meeting were put together after consultation with other relevant departments. Firstly, it’s not a large-scale economic stimulus plan, an official from the agency told the EO. “The emphasis is on maintaining continuity with the policies outlined at the start of the year and on this basis take the lead on carrying out targeted policy intervention aimed at dealing with specific outstanding problems that exist at the moment.

One measure is that credit will be guided to support entities on the basis of their industry and current capital situation. Advanced manufacturers, environmental and high-tech industries, as well as service industries that can increase employment levels, will get the most policy and economic support.

However, enterprises in the manufacturing industry with severe overcapacity will be barred from receiving new loans. Other enterprises will be outfitted with upgraded technology to address production capacity and reorganized through merger and acquisition loan support.

Moreover, the NDRC will shift from focusing on urban programs to rural infrastructure.

Moves from Different Agencies

NDRC: An NDRC research project on industrial restructuring is pending, which should pave the way for industrial restructuring policies in the future. From late-June to mid-July, several NDRC deputy directors did field work and received reports from local governments and relevant departments about the hardship of local enterprises so that they can better target future polices.

Ministry of Industry and Information Technology (MIIT): MIIT advocates active measures for manufacturers and SMEs, which not only affect industrial output, but also employment. 

"On the one hand, large creditors aren’t willing to give loans for investment,” said an MIIT official. “On the other hand, the majority of SMEs and smaller enterprises lack broader financial channels.”

The official said that if the profit imbalance between the financing and manufacturing sectors can’t be addressed, then capital will flow back into the financing system in the long run, which can't be solved through short-term policy intervention

The Central Bank: Under the guidance of Li Keqiang, the Central Bank has already started to lend a hand to SMEs.

"The credit structure will be further optimized and credit for SMEs will be expanded," said Zhou Xiaochuan (周小川), chairman of the Central Bank, at a conference on July 15.

State Council Vice-Premier Ma Kai (马凯) said on the same day that, apart from credit growth for SMEs, collective bonds and short-term financing bonds will be further expanded.

On July 19 the Central Bank announced that existing restrictions on lending rates at financial institutions would be lifted from July 20.

State-owned Assets Supervision and Administration Commission (SASAC): As prices of major industrial resources like steel and aluminum gradually increase, SOEs’ main sources of "stable growth" are expected to improve slightly compared to the first half of the year. 

SASAC demanded that SOEs guarantee their capital chains remain smooth and losses be minimized. SASAC has also required SOEs to quickly decrease costs, improve efficiency and rid themselves of inefficient assets.  

However, due to “carryover effects” from last year’s economic slump, SOEs’ growth rate may continue to drop. Thus, the 10 percent annual growth target that SASAC demanded from SOEs for 2013 will be very difficult for some to achieve. 

Ministry of Commerce: Risks and pressure remain high on foreign trade, though a spokesman from the Ministry of Commerce said further measures to stabilize foreign trade will soon be released, but he gave no details.

“The moves that Premier Li Keqiang is taking now signal that as long as the direction is right, we can take action," said an official from the Ministry of Commerce. “Priority should be given to productive investment; otherwise we’ll be mired in this fix.”

Links & Sources
Economic Observer:  Li Keqiang’s Bottom Line



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