China's Premier Li Keqiang gestures during a news conference after the closing session of the National People's Congress (NPC), China's Parliament, at the Great Hall of the People, in Beijing, March 15, 2015. REUTERS/Jason Lee (CHINA - Tags: POLITICS)
© Reuters

China is prepared to take action to stimulate the economy and boost market confidence, Premier Li Keqiang said on Sunday.

Mr Li gave his assurance in Beijing’s Great Hall of the People while warning that China would struggle to meet its annual growth target of “around 7 per cent” this year.

The economy grew at its slowest pace for a quarter of a century last year, and the premier’s pledge will be welcomed as evidence of his government’s willingness to support growth amid signs the slowdown is worsening. The government has already lowered its growth target for gross domestic product from last year’s goal of “around 7.5 per cent” after a 7.4 per cent expansion in 2014 — the slowest rate since 1990.

“It is true we have adjusted down somewhat our GDP target, but it will by no means be easy for us to reach this target.” Mr Li told reporters at the end of the annual parliamentary session. “China’s economy has already exceeded $10tn so a 7 per cent increase is equivalent to the entire economy of a medium-sized country.”

As well as a slowdown in headline growth, many investors and government officials worry about the worsening slump in the crucial property sector and the huge accumulation of debt in recent years. China’s overall debt load reached 282 per cent of GDP by the middle of last year, a higher proportion than either the US or Germany, according to estimates from McKinsey consultants.

Even more worrying is the speed at which it has grown, as total debt has quadrupled in seven years to about $28tn, from $7tn in 2007.

In answer to persistent questions on the state of the economy, Mr Li said the government still had a “host of policy instruments” at its disposal and would not hesitate to use them if the slowdown caused widespread unemployment or a drop in incomes.

Government officials have been saying recently that a “new normal” of slower growth is desirable as they seek to wean the economy off its dependence on debt-financed investment and try to clean up the environment — provided job creation targets are met.

“Under this ‘new normal’ state we need to ensure that China’s economy operates within a proper range,” Mr Li told Sunday’s press conference. “If our growth speed comes close to the lower limit of its proper range and affects the employment and increase of people’s incomes, we are prepared to step up targeted macroeconomic regulation to boost market confidence.”

The premier did not specify what the economy’s “lower limit” was, and did not elaborate on what shape any targeted measures might take. Last year, China’s economy still managed to create more than 13m new urban jobs, despite slower headline growth.

“The good news is that in the past couple of years we did not resort to massive stimulus measures for economic growth,” Mr Li added. “That has made it possible for us to have fairly ample room to exercise macroeconomic regulation.”

Li caught off-guard at off-script Q&A

Chinese Premier Li Keqiang speaks during a press conference after the closing ceremony of the annual session of China's legislature, the National People's Congress, in Beijing's Great Hall of the People on March 15, 2015. China's Communist Party-controlled legislature, the National People's Congress (NPC), gathers in the capital for the annual show of political theater, with the "rule of law" high on the agenda. AFP PHOTO / FRED DUFOUR
© AFP

Chinese premier faces tough questions at annual press conference

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At the onset of the global financial crisis in 2008, Beijing unleashed a Rmb4tn ($640bn) stimulus to bolster growth. It has since been dealing with the negative consequences of the related lending boom and a parallel explosion in sha­dow banking activities — chief among them a large accumulation of debt by local governments and Chinese companies.

Mr Li expressed confidence that the debt levels were not dangerous, saying 70 per cent of borrowing was for infrastructure and other investments that would support economic activity. “We are fully capable of forestalling systemic and regional financial risks,” he said.

Official data last week showed the Chinese economy slowed in the first two months of the year at its sharpest rate since the financial crisis. Virtually all monthly economic indicators, from factory production to retail sales to investment, came in worse than at any time since the 2008 collapse.

Weakening Chinese demand has been one of the main causes of falling global commodity prices and weaker emerging markets. An extended slowdown in the economy could further sharpen the divergence developing between the US, whose prospects have brightened, and other important global economies.

In response to suggestions China is exporting deflation to the rest of the world, Mr Li was unequivocal.

“China is not exporting deflation,” he said. “The truth is we have been on the receiving end of deflation [through lower commodity prices] . . . We are prepared to cope with such a situation and we hope to see a quicker global economic recovery.”

The International Monetary Fund recently cut its GDP forecast for China to 6.8 per cent this year and 6.5 per cent in 2016 — the first time in decades that the IMF has predicted lower growth for China than for India.

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