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 Li, speaking at a news conference on the final day of China's
yearly parliament, hinted Beijing would tolerate slower economic
expansion this year while it pushes through reforms aimed at
providing longer-term and more sustainable growth.
Data released shortly after his comments suggested that tolerance
may face an early test. Growth in investment, retail sales and
factory output all slumped to multi-year lows, suggesting a marked
slowdown in the first two months of the year.
"A storm is coming," said Gao Yuan, an analyst at Haitong Securities
in Shanghai, while Hao Zhou, the China economist for ANZ said
"policy easing should be imminent."
At the carefully orchestrated briefing where questions had to be
vetted in advance, Li spent most time discussing the economy. But he
also touched upon other topics, including friction in relations with
Washington, corruption, pollution, and the disappearance of a
Malaysia Airlines aircraft.
While acknowledging the economy faced difficulties, Li suggested
Beijing would not let growth slip too far. The government has
targeted a rise of GDP in 2014 of 7.5 percent after actual growth
last year of 7.7 percent.
"We believe we have the ability, and all the means, to ensure that
economic growth will stay within a reasonable range this year," he
said.
He also signaled the government will allow further debt defaults
after Shanghai Chaori Solar Energy Science and Technology Co Ltd
failed last Friday to pay an interest payment on its five-year
bonds.
The first default on a domestic bond was hailed by experts as a
landmark that will impose more market discipline, a break from the
past when bonds enjoyed an implicit guarantee because the government
would bailout troubled firms to ensure stability.
Growth in Chinese corporate debt has been unprecedented. A Thomson
Reuters analysis of 945 listed medium and large non-financial firms
showed total debt soared by more than 260 percent to 4.74 trillion
yuan ($777.3 billion) between December 2008 and September 2013.
"We are reluctant to see defaults of financial products, but some
cases are hard to avoid," Li said. "We must enhance oversight and
solve problems in a timely way to ensure no systemic and regional
risks."
Li said financial and fiscal reforms are among top priorities this
year, reinforcing market expectations that long-awaited changes to
liberalize bank deposit rates and efforts rein in local government
debt could be in the pipeline.
Chinese leaders unveiled plans last year for sweeping reforms aimed
at transforming the economy's reliance on investment and exports,
which have fuelled double-digit growth for three decades, to one
that leans more on services and consumption. It included allowing
market forces to play a bigger part in the economy.
PRIORITY ON JOBS
The signs of a slowdown in the economy this year have raised worries
among some investors that China will miss the 7.5 percent growth
target.
"The momentum is really quite weak," Wei Yao, China economist for
Societe Generale said after Thursday's data. "Q1 GDP growth is
probably already below 7.5 percent. The government will probably do
some easing."
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Yao said she expected the central bank to reduce bank reserve
requirements by 50 basis points. Major banks currently have to put
aside a fifth of their cash as reserves and such a measure would
represent the central bank's strongest policy easing since 2012.
Sources involved in internal policy discussions told Reuters earlier
this week that the central bank was prepared to cut bank reserves if
economic growth slowed further. But they said policy action may only
happen in the second quarter.
Li skillfully dodged a question on how far Beijing would let
economic growth slip before it steps in with policy measures to
support activity. Still, he hinted at tolerance for below-target
growth, as long as enough new jobs are created.
"The GDP growth target is around 7.5 percent. 'Around' means there
is some flexibility and we have some tolerance," he said, adding
that the lower limit on growth must ensure job creation.
Finance Minister Lou Jiwei said last week that China can slightly
miss the 7.5 percent growth target as long as enough jobs are
created.
However, Xu Shaoshi, the head of the pro-growth National Development
and Reform Commission, said on Wednesday that the 7.5 percent target
would be the lower limit for the government.
Beijing wants to create 10 million new jobs in 2014 and Li has said
that the economy must grow 7.2 percent annually to do that. Some 13
million new jobs were created last year when the economy grew 7.7
percent.
Premier Li said the government will take a differentiated approach
to cool the property market, rather than using one-size-fits-all
policies used by his predecessors that have largely failed to calm
real estate inflation.
"We need to apply differentiated property measures in different
cities based on different types of demand and local conditions," Li
said.
But on government corruption, Li had an unequivocal answer.
"We will show zero tolerance for corrupt behavior and corrupt
officials. No matter who it is, or how senior their position,
everyone is equal before the law," Li said, without mentioning any
names.
Speculation has gathered around China's former domestic security
chief Zhou Yongkang, who sources say is at the center of a
corruption investigation reaching into the highest echelons of
government, though Beijing has yet to formally confirm this.
(Reporting by Adam Rose and Shao Xiaoyi; Additional reporting by
Beijing Bureau; writing by Koh Gui Qing and Kevin Yao; editing by
Neil Fullick)
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