China concerned trade and debt risks could hit economic growth: economists

Beijing

CHINA'S leaders are signalling concern that growth in the world's second-largest economy could slow due to trade and financial risks - and that they're prepared to tweak policy to avoid a sharp deceleration, economists said.

Hard work is needed to meet this year's economic targets amid an increasingly complicated geopolitical situation, according to a statement released by state media on Monday following a Politburo meeting led by President Xi Jinping. Though growth remained robust in the first quarter, forecasters still see the economy slowing this year as trade tensions with the US and the campaign to clean up the financial sector remain as downside factors.

As the Politburo statement mentioned the need to boost domestic demand for the first time since 2015, and dropped a reference to deleveraging, investors are interpreting the change in tone as a signal that the government may ease off tightening measures if warranted. Stocks in Shanghai headed for their biggest rally in two months on Tuesday.

"There's a deep sense of risk underlying the calm surface, and the leadership's attitude has changed greatly," Deng Haiqing, chief economist at JZ Securities Co in Beijing, wrote in a note. "The attention attached to stabilising economic growth is the greatest since 2015," he added.

While trade tensions with the US have been easing, the statement indicates that leaders are preparing to preempt any potential economic turbulence. US Treasury Secretary Steven Mnuchin hinted at a truce on Saturday in Washington, saying he's considering a trip to China and is "cautiously optimistic" about bridging differences over trade issues.

"Against the backdrop of uncertain trade and investment tension with the US, the Chinese government has realised the difficulty of reaching the predetermined growth target," said Xu Jianwei, a senior greater China economist at Natixis SA in Hong Kong. "This is a significant, rather than slight, change of tone."

Economists surveyed by Bloomberg forecast growth will slow this year to about 6.5 per cent, the same as the government's target, and then continue decelerating for the next two years. The expansion picked up in 2017 for the first time in seven years, quickening to 6.9 per cent.

Leaders at the meeting urged "bolder reform and opening-up efforts and timely implementation of major opening-up policies", the official Xinhua News Agency reported.

As friction with the US intensifies over developing high-technology industries from biotechnology to robotics, the Politburo also called for breakthroughs in developing core technologies and support new industries and businesses.

The People's Bank of China cut its reserve-requirement ratio (RRR) last week, saying the move was to smooth potential disruptions of liquidity levels and ensure lending to the economy continues. Policy makers have also indicated in recent months that a planned tightening of fiscal policy still leaves room to react to macroeconomic developments.

The tone of the Politburo meeting and the RRR cut indicate "preemptive fine-tuning of the pace of tightening, likely due to the external uncertainty amid trade tensions and the faster-than-expected dip in broad credit growth" in Q1, according to a report by Robin Xing, chief China economist at Morgan Stanley in Hong Kong.

It's still too early to read official concern as a clear indication of the direction of policy, according to Larry Hu, head of China economics at Macquarie Securities Ltd in Hong Kong. "I wouldn't read it as a signal of stimulus," Mr Hu said. "The phrase 'boosting domestic demand' is a response to the latest US-China trade dispute. China might concede this time but such a trade dispute could be the new normal in the future." BLOOMBERG