Likonomics keeps to its fine-tuning tone

Chinese Premier Li Keqiang arrived in the UK on Monday for an official visit, which he said in an article published in The Times on the same day was designed "to present the real China, change misperceptions, and ease misgivings".  [Special coverage]

As Li said in the article, his visit has a threefold purpose, including strengthening economic co-operation between two countries, presenting the real China so as to correct misperceptions and ease misgivings, and drawing on British perspectives and experience.

"The United Kingdom is a great country and an important partner to China," said Li, expressing his hopes for better diplomatic relations with Britain in the article.

The Premier noted that China is determined to promote urbanization, industrialization and modernization. In terms of external affairs, he hopes to ease any concerns that China's rise might undermine overall geopolitical stability. "China will actively engage in global dialogue, and will promote the 21st century as an era of peace and co-operation," he said.

Li also devoted considerable space in his article to the reality of China's economic situation. He reiterated as in the past that he has confidence that China can meet its 7.5-percent growth target this year. He said the Chinese government is ready to make any necessary adjustments to its policies and ensure that they function as planned.

With a series of intensive "micro-stimulus" policies having been implemented, macro-economic data released last week shows stable growth, which reflects a consensus in the market. In particular the "Keqiang index" (created by the Economist to measure China's economy using three indicators - railway cargo volume, electricity consumption, and loans disbursed by banks) has attracted considerable attention, and seems to provide some support for Li's growing confidence in the economic outlook.

The growth rate in the first quarter of 2014 was 7.4 per cent. In response to the slowdown, Premier Li pointed out "Growth is slower than in the past, but this is normal." "Despite considerable downward pressure, China's economy is moving on a steady course," he added. "China will continue to make anticipatory and moderate adjustments when necessary."

However, a media survey forecast that in the second quarter of this year, China's economic growth will decline a further point to 7.3 %, with a full-year GDP growth forecast of 7.3% representing its lowest point in 24 years.

The Premier has hinted that there is room for adjustments to ensure that the year's GDP growth objectives are met. Analysts interpret that the Chinese government is unwilling to see GDP growth fall towards 7% because that would exacerbate the problem of unemployment.

The Prime Minister has made several mentions of anticipatory fine-tuning in the past, but the overall tone of monetary policy is to emphasize continuity and stability. However, Li again presented the idea of "moderate adjustments when necessary" in his article.

"All the adjustments adopted since April this year continue to represent a moderate degree of fine-tuning, because since the end of last year, China's overall economic goal has not changed," said Zhao Xianwei, senior macroeconomic researcher, in an interview with China Business Radio.

China's economy has shown sign of deflation said Xu Nuojin, Deputy Director of China's state bank, in a round-table strategy forum last Sunday. But Xu also noted that China still has great potential for rapid economic growth as there is still plenty of room for urbanization - to date investment has been the main driver of growth.

Zhao Xianwei believes it is too early to anticipate quasi-deflation. He sees a rise in China's economic growth through data to be released for May after a decline in the first quarter. He believes that it will be necessary to analyze the next set of economic data to establish whether China is facing deflation.

In the second half, investment-led economic growth is expected to accelerate its pace through a number of recently-announced projects such as the construction of an underground pipe network and nuclear power facilities. Zhao expects a rebound of investment growth, though not as large as before, in the second half this year.

Editor's note: "Likonomics", the term to describe Chinese Premier Li Keqiang's economic policy, was coined on June 27 2013 by three economists at Barclays Capital.