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POLITICAL ECONOMY
China industrial output growth at five-year low: govt
by Staff Writers
Beijing March 13, 2014


China's Li says debt defaults 'hardly avoidable'
Beijing March 13, 2014 - Chinese Premier Li Keqiang signalled on Thursday that Beijing was willing to accept debt defaults in the world's second-largest economy, which has a murky multi-trillion-dollar "shadow banking" sector. His comments come almost a week after the country's first-ever default on a domestic corporate bond and as traders grow worried that other firms could follow suit. Li said authorities "pay very high attention to the financial and debt risks", as he held his once-a-year news conference after the close of the annual session of the National people's Congress (NPC), the Communist Party-controlled legislature. He could not possibly "want to see" defaults in financial products, he said at the Great Hall of the People. "But I'm afraid sometimes certain individual cases of such defaults are hardly avoidable," he added. Shanghai-based Chaori Solar Energy Science & Technology Co. said Friday it was unable to make full bond interest payments of 89.8 million yuan ($14.7 million) sending it into default. And on Tuesday power equipment maker Baoding Tianwei Baobian Electric Co., said its bonds would be suspended from trading after it posted two consecutive years of losses. However, analysts said the Chaori default could benefit the market in the long term by raising awareness of risk and making investors more selective. "What we should do is to step up monitoring, properly handle relevant measures and be sure that there will be no regional and systemic financial risks," Li said. Early this year, worries surfaced in China over other financial products issued by trust companies, which have drawn comparisons to American "junk bonds" of the 1980s. Financial concerns in China also include high levels of local government debt as well as "shadow banking" -- a massive network of lending outside formal channels and beyond the reach of regulators. They include activities by online finance platforms, credit guarantee companies and microcredit firms. The "shadow banking" sector was as large as $4.8 trillion in 2012, more than half the country's gross domestic product, according to an estimate by ratings agency Moody's. But Li said authorities have a grip on financial and debt risks to the economy. "Last year we conducted a comprehensive audit of government debt that shows that the Chinese government has faced up to this challenge," he said. "We have released to the public the results of this comprehensive audit as it is, and the result shows that the risks are on the whole under control." In late December, China revealed in its long-awaited audit that liabilities carried by local governments ballooned to 17.9 trillion yuan as of the end of June. The figure, released by the National Audit Office in a statement on its website, compared with 10.7 trillion yuan as of the end of 2010 -- an increase of 67 percent. Concerns centre on borrowing by local authorities, which have long used debt to fuel growth in their regions, often by pursuing projects that are not economically viable or sustainable.

China's industrial production rose at its slowest pace in five years and other key indicators showed surprising weakness, data showed Thursday, raising alarm bells over the world's second-largest economy as Premier Li Keqiang outlined "serious challenges" ahead. Industrial output, which measures production at factories, workshops and mines, rose 8.6 percent in January and February year-on-year, the National Bureau of Statistics said on its website. The result was the lowest since the 7.3 percent recorded in April 2009, according to previous NBS data. The statistics covered a two-month period due to China's Lunar New year holiday week, which fell in both months. Retail sales, a key indicator of consumer spending, gained 11.8 percent in the two months from the year before, the lowest since an 11.6 percent increase in February 2011. And fixed asset investment, a measure of government spending on infrastructure, expanded 17.9 percent during the first two months of 2014, the NBS added. The pessimistic data set surprised economists and followed other recent indicators for manufacturing, trade and inflation that suggested weakness in China's economy, a key global growth engine. China's gross domestic product (GDP) grew 7.7 percent in 2013, unchanged from the year before, which was the worst result since 1999. Premier Li Keqiang announced earlier this month that it is targeting economic growth of about 7.5 percent in 2014, the same target it aimed for last year. Li suggested to his once-a-year news conference after the close of the annual session of the National People's Congress (NPC), the Communist Party-controlled legislature, that the country faces roadblocks ahead. "We are going to confront serious challenges this year and some challenges may be even more complex," he said. Li said China must "ensure steady growth, ensure employment, avert inflation and defuse risks" while also fighting pollution, among other tasks. "So we need to strike a proper balance amidst all these goals and objectives," he added. "This is not going to be easy." Zhou Hao, Shanghai-based economist for ANZ Bank, called Thursday's data "a complete mess" and said it showed that policies were needed to spur growth. "Basically none of the figures were in line with expectations, all came in much lower than expected," he told AFP. A Wall Street Journal survey of 13 economists had yielded a median forecast of a 9.5 percent increase in industrial output and 13.5 percent for retail sales. Societe Generale said in a research note that the results were a confirmation of "fast deterioration of China's economic growth". The figures come as China's leadership says it wants to transform the growth model away from an over-reliance on often wasteful investment, and instead make private demand the driver for the country's future development. Regarding China's growth target of "about 7.5 percent" for this year, Li suggested it was achievable. "Last year, without taking any additional short-term stimulus measures, we succeeded in meeting our target," he said. "Why can't we do this this year?" He emphasised the target was approximate. "This 'about' shows that there is a level of flexibility here." At any rate, he said authorities were not focused on the figure itself, but how it contributes to improving livelihoods, saying growth "needs to ensure fairly full employment and needs to help increase people's income". Still, some economists expect the government to take steps to deal with the weakness the latest figures indicate. "In the future, I don't rule out the possibility of new measures including cutting banks' reserve requirements, but the central bank might still need some time to deliberate," ANZ's Zhou said, referring to cutting the amount of funds banks must keep in reserve in a bid to boost lending and boost growth. But Julian Evans-Pritchard, Asia economist for Capital Economics, said that officials were unlikely to intervene. "Limited and seasonally-distorted data over the last few weeks have made it difficult to make sense of what's really happening in China's economy," he said in a note. "Despite this broad evidence of a slowdown, we don't think policymakers will necessarily step in to support growth," he said, adding that officials were "comfortable with a moderate slowdown". Li also signalled that China was willing to accept some debt defaults as it struggles to clean up its multi-trillion-dollar "shadow banking" sector, saying in some cases defaults are "hardly avoidable". He also said authorities have a grip on financial risks to the economy and played down worries over huge debts run up by local governments which have splurged on infrastructure and other investments.

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