Bets on China to balance reform and growth despite market fright

Tue Jan 28, 2014 6:03am EST
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By Kevin Yao and Tomasz Janowski

BEIJING/TOKYO (Reuters) - Investors fretting over the impact of China's economic slowdown on its once red-hot emerging market peers have a powerful ally in Beijing's leadership, which has both the means and strong motivation to forestall a sharp downturn.

Economists at government think-tanks and China watchers say Beijing will act if the economy loses traction too quickly, threatening financial and social stability, as it pushes towards more balanced and sustained economic growth.

That comforting message comes with a caveat: while Beijing may yet again hit its growth targets it does not have much margin for error. It must keep the economy on an even keel while at the same time pushing reforms.

"The economy is fragile right now and the downside risk could be very big if there are any external shocks," said Li Heng, an economist at Minsheng Securities in Beijing.

China's intended shift from three decades of double-digit, investment- and export-fuelled growth towards a slower, but more balanced and sustained expansion more geared to consumption and services, has been well telegraphed.

Yet every set of weak data jolts global financial markets from Brazil to Australia by raising questions about the risk of an uncontrolled slump and the toll it could take on economies relying on Chinese demand.

The last bout of angst over China's outlook was triggered last week by an HSBC/Markit business survey that suggested manufacturing activity dipped in January for the first time in six months.

The data coincided with renewed signs of tightening in China's financial markets and worries a troubled investment product could set off a debt scare, factors that added to wider concerns about emerging markets and prompted the global selloff.   Continued...

A man walks past the headquarters of the People's Bank of China (PBOC), the central bank, in Beijing November 20, 2013. REUTERS/Jason Lee