A return to stimulus in China?

A slew of bad data from China has many wondering whether Beijing might intervene to stimulate the economy again. Whether it does that is largely dependent on one factor.

It has been a great week for China bears. Investors have been spooked by a slew of weaker than expected data from China including a rare trade deficit. Iron ore and other commodities, which are heavily linked to Chinese economic performance, have slumped amidst the slowdown fears.

Industrial production, retail sales and fixed asset investments are all weaker than expected. Industrial production fell from 9.3 per cent in December 2013 to 8.6 per cent in the first two months of 2014. Industrial production in the state sector nearly halved from 8.3 per cent in December to 4.4 per cent in January and February.

Retail sales growth also slowed down from 13.6 per cent year on year to 11.8 per cent. It was 1.6 per cent lower than expected. Fixed asset investment, a key growth engine for China’s economy, grew 3.3 per cent less than the same period last year and 1.6 per cent lower than expected.

Chinese exports, which are expected to perform better this year on the back of a slowly recovering US, recorded a surprising 20 per cent slump last month and a rare trade deficit when imports exceeded exports by nearly 140 billion yuan.

Chief economist of the State Information Centre Fan Jianping told Chinese media that all of this data was weaker than expected and it would be hard to meet the official growth target of 7.5 per cent during the first quarter of this year.

Can we expect Beijing to intervene to stimulate the economy if it falls below the official target? Premier Li Keqiang’s press conference at the end of National People’s Congress offers hints about the Chinese government’s potential response.

Premier Li shrugged off a question from a CNBC journalist about whether China was able to grow at 7.5 per cent without further stimulus. He told a large gathering of domestic and foreign media that the country was able to grow at 7.7 per cent last year without artificial stimulation and China could do it again this year.

However, he admitted the situation this year was more complicated than last year. While he sounded confident and relaxed about achieving the goal, he was clearly mindful of a multitude of challenges facing China this year, including the prospect of a debt default and the risk of a broader financial contagion.

But the most important hint was what he said about employment. Premier Li said the goal of 7.5 per cent was flexible and the government could tolerate both higher and lower growth rates. However, he said the floor growth rate that was acceptable to Beijing must guarantee sufficient employment as well as income increases.

It must be noted that the Chinese finance minister Lou Jiwei repeatedly emphasised the same point Premier Li made only a few days ago. “It does not matter whether the GDP grows faster than 7.5 per cent or below 7.5 per cent. What it matters is employment,” he said (Should China abandon its growth target?, 7 March).

In 2014, Beijing needs to find jobs for 10 million new labour market entrants in cities as well as for six million people in the countryside. So for people who are watching the Chinese economy this year, one of the most important figures that we need to pay attention to is the employment figure.

Beijing’s goal is around about 4.6 per cent unemployment in urban areas. It is interesting to note that the US Federal Reserve is also equally obsessed with job numbers as a key determinant of its decision on whether to taper its quantitative easing policy.

So the policy decision of whether Beijing will step in and boost the economy through stimulus measures is largely dependent on the country’s employment situation. It must be remembered that the Chinese government unleashed their massive 4 trillion yuan stimulus package back in 2008-09 when there was evidence of raising jobless rates in China’s manufacturing heartland.

It is understandable because the overriding political objective for the ruling Communist party is maintaining social stability. Beijing cannot afford to have unemployed people massing on the streets as a threat to its rule.

So one of the most figures for China analysts to watch out for this year is the jobless rates, which will be the key determinant of Beijing’s economic policy.

Follow Peter Cai on Twitter: @peteryuancai

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