China seen sacrificing some growth to reduce debt risks

Tue May 16, 2017 5:57am EDT
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By Elias Glenn

BEIJING (Reuters) - China's growth is set for its weakest patch since the global financial crisis as authorities pull back on the stimulus that helped the economy get off to an unexpectedly strong start this year, and keep funds tight to deter risky lending.

After clocking 6.9 percent in the first quarter thanks to spending on infrastructure and a property boom that policymakers want to rein in, analysts surveyed by Reuters reckon economic growth will just about make Beijing's target of 2017 of 6.5 percent as it slows over the rest of the year.

Massive debt - standing at nearly 300 percent of GDP - and serious budgetary imbalances mean Beijing can't carry on pump priming. The brakes went on in April, when annual growth in fiscal spending dropped to 3.8 percent from 21 percent the first quarter.

And worries about speculative bubbles have forced the central bank to tighten short term liquidity, while trying to keep medium term funding available for investment.

"Noticing how serious policymakers seem to be at the moment about reining in financial risks, it's not impossible we're going to see a significantly lower economic growth target next year," said Louis Kuijs, an economist at Oxford Economics in Hong Kong.

Scope for further tightening in monetary policy could be limited if economic growth became uncomfortably slow.

"I don't think we're going to see much more additional tightening… but the risks now are on the downside," said Julian Evans-Pritchard, an economist at Capital Economics in Singapore.

Trying to generate growth through exports by letting the yuan depreciate isn't an option, due to concern about capital flight that saw foreign exchange reserves fall below $3 trillion earlier this year, and the worry that it could provoke the Trump administration into some kind of retaliation.   Continued...

Labourers work on an electricity transmission tower in Chuzhou, Anhui province, China, May 16, 2017. REUTERS/Stringer