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Skipping New Stimulus Round, Beijing Has Other Ways to Spur Growth

Chinese Premier Li Keqiang wants to boost the nation’s slowing economy through market reforms and existing infrastructure spending programs.

For a while it looked like Beijing would ride to the Chinese economy’s rescue again. When March exports dropped 6.6 percent year-over-year, missing market expectations, many government officials pushed for a stimulus of up to 300 billion yuan ($48 billion) annually in the next few years to reverse flagging economic growth.

But Premier Li Keqiang, who’s pledged to give domestic consumers a bigger role in the nation’s economy, has other plans. “We will pay more attention to sound development in the medium and long term, and strive for sustained and healthy economic growth,” Li said during a speech at last month’s Boao Forum for Asia, an annual gathering of government, business and academic leaders in the southern Chinese fishing town of Boao. China’s economy will hit its 7.5 percent growth target for 2014 and doesn’t need more stimulus, he asserted, despite the fact that the pace of expansion slowed to 7.4 percent, a 24-year low, in the first quarter. One of Li’s top advisers, People’s Bank of China governor Zhou Xiaochuan, reiterated that message at the same event. “We don’t have to roll out significant policies,” Zhou said. “What may be required is only fine-tuning.”

The Chinese government has good reason to pull its punches. In 2009, shortly after the global financial crisis began, then-premier Wen Jiabao announced a 4 trillion yuan stimulus that combined with an additional 8 trillion yuan poured into the unregulated shadow banking sector by banks and government-owned companies. Most of the money funded infrastructure such as highways, subways and bridges, but a big chunk went to real estate, more than doubling property prices in China’s major cities. The ensuing bubble, along with off-balance-sheet speculative lending by banks, trusts and other financial firms — especially through the sale of wealth management products — has triggered a rise in nonperforming loans.

China could suffer a rash of defaults on corporate bonds, typically one- to three-year notes that offer annual rates of up to 15 percent. In March solar-panel maker Shanghai Chaori Solar Energy Science & Technology missed an 89.8 million yuan interest payment on a 1 billion yuan bond, becoming the first onshore issuer to default. Many other Chinese corporate borrowers might face default pressure, says May Yan, Hong Kong–based head of China banks research with Barclays Capital.

Beijing will focus on accelerating approvals of existing infrastructure projects set out in its current five-year plan, which ends in 2015, Premier Li said at the Boao forum. That plan includes 1.3 trillion yuan to build some 12,500 miles of railways and 600 billion yuan for telecommunications, environmental protection and R&D; by some estimates, only half has been spent. Just expediting approvals would be a “mini stimulus,” says Wang Tao, head of China economic research with UBS in Hong Kong.

The country has plenty of tools to stimulate growth without new spending, says Hu Yifan, Hong Kong–based chief economist at Haitong International Securities. China has 80 cities with a population of 1 million or more and 40 with a population exceeding 2 million, and most of them don’t have subway systems, Hu notes. “Some have projects under way but have stalled due to planning issues,” she says. “The government plans to speed up approvals.” Hong Hao, head of research at Bank of Communications International in Hong Kong, thinks urbanization and infrastructure are the best ways to push growth in the short term. They have a “multiplier effect,” by hiking spending in associated sectors such as construction materials, Hong explains.

Premier Li favors nonstimulus measures that include market reforms. Last month the China Securities Regulatory Commission announced a pilot program to let Shanghai and Hong Kong investors access each other’s markets through local securities houses — the first time China has allowed direct mainland investment offshore. The plan, which has quotas of 300 billion yuan in Shanghai and 250 billion yuan in Hong Kong, will help boost capital markets and the economy, contends Shen Jianguang, Hong Kong–based chief economist with Mizuho Securities Asia. “We consider the Shanghai–Hong Kong Stock Connect pilot scheme an important step in China’s capital account liberalization, which is a main pillar in internationalization of the renminbi,” Shen says.

The program is the first major step toward ending China’s rigid capital controls, he adds. “The plan also reinforces our view that the renminbi will achieve basic convertibility in 2015,” Shen says. “That too will drive growth in China’s capital markets and in the economy.”

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