China’s turbocharged economy is growing at its slowest pace in a quarter of a century and is expected to slow further, the ruling Communist party is engaged in a sweeping anti-corruption purge and the country’s leaders are trying to clean up decades of rampant industrial pollution.
As he greets the Financial Times in the Great Hall of the People in Beijing’s Tiananmen Square, China’s second most powerful man seems to be taking all this in his stride.
Li Keqiang is directly responsible for managing what is now the world’s largest economy — at least in purchasing power terms — and leading Beijing’s efforts to move from the credit-fuelled, investment-led growth model of the past to a more sustainable future.
In his first interview with a western media organisation, Mr Li was relaxed, gregarious and clearly in command of his brief during an hour of questioning in the Hong Kong room of the Great Hall, a highly symbolic venue to receive a British newspaper editor.
His main message to the world was China’s continued commitment to the current global financial order, particularly in the wake of Beijing’s move to set up the Asia Infrastructure Investment Bank.
As late as January, no western country seemed ready to join an institution that poses such a clear challenge to the established, US-dominated global order. But since then, most of America’s allies have signed up in a striking example of how the centre of geopolitical power is shifting east.
The UK’s move last month to join the AIIB, despite protestations from Washington, prompted a scramble from other European and western allies that has left the US looking leaden-footed and isolated. Even senior US officials have described the episode as a stunning diplomatic victory for Beijing.
But throughout the interview, Mr Li refrained from even a hint of gloating and repeatedly insisted that China has no desire to create a new world order.
“China wants to work with others to uphold the existing international financial system,” Mr Li says. “[The AIIB] is intended to be a supplement to the current international financial system.”
He explicitly welcomed Britain’s application to join the bank and emphasised that the AIIB and the Japan- and US-dominated Asian Development Bank could “work in parallel in promoting Asian development”.
China has sometimes complained that the postwar liberal international order created by the Bretton Woods institutions — the International Monetary Fund and the World Bank — was set up in order to contain it and other Communist states. Some Chinese academics and officials have argued that it is now obsolete and needs replacing.
To the specific question of whether China wanted to replace the Bretton Woods institutions, Mr Li was categorical: “There is no such thing as breaking the existing order,” he insists.
“We gained advanced experience from working with the World Bank and other institutions and our [World Trade Organisation] membership has also helped Chinese companies gain deeper knowledge about how they can compete with others under international rules. So China has been a beneficiary of the current international system in terms of both peace and development.”
Mr Li even expressed cautious enthusiasm for the Trans-Pacific Partnership, a US-led trade initiative in Asia that has been seen by many as an “anyone-but- China club” since it pointedly excludes the world’s biggest goods trader.
Chinese leaders like to use metaphors in their speeches and Mr Li was most lyrical in explaining his concerns about quantitative easing and the US Federal Reserve’s plan to end unconventional monetary policy.
“It is quite easy for one to introduce QE policy, as it is little more than printing money,” he says. “When QE is in place, there may be all sorts of players managing to stay afloat in this big ocean. Yet it is difficult to predict now what may come out of it when QE is withdrawn.”
He warns that most countries have not yet undertaken the necessary structural reforms to address the root causes of the global financial crisis and compares the world economy to a patient on an “IV drip and antibiotics” who has not been allowed to strengthen their immune system to recover on their own.
Unlike many interviews with senior Chinese leaders, this encounter was unscripted and the FT’s questions were not submitted to the premier or his staff beforehand.
Although the substance of the meeting was initially intended to be off the record, Mr Li later agreed to the FT publishing the entire discussion without any changes to his remarks — also unusual in the Chinese context.
Mr Li’s relaxed and casual demeanour contrasted with the ornate and imposing venue and the immaculately coiffed attendants serving hot towels, soft drinks and copious amounts of tea.
The son of a low-level party official from the rural province of Anhui, the 59-year-old Mr Li spent four years toiling on the land at the end of the 1966-1976 cultural revolution before he was accepted to study at the newly reopened Peking University law school in 1978.
His time at the country’s most prestigious university coincided with China’s version of glasnost, an extraordinary period of openness to long-banned western political ideas. Along with other students he helped translate The Due Process of Law by the late senior British judge Lord Denning and classmates from that time say he was influenced by liberal professors, some of whom believed strongly in constitutional democracy.
In 1998 he became China’s youngest governor, when he was appointed to run the impoverished province of Henan. His time there was marred by a scandal in which tens of thousands of peasant farmers contracted HIV from an official government blood donor scheme.
Seen as a protégé of former president Hu Jintao, Mr Li was considered by many to be his most likely successor until 2007, when it became clear that Xi Jinping would take that role. Since taking over as premier in early 2013, Mr Li’s priorities have been slashing the size and power of the country’s unwieldy bureaucracy while also pushing more sustainable urbanisation, financial reforms and declaring “war on pollution”.
Some political insiders in China have suggested the office of the premier has been overshadowed by President Xi’s consolidation of power since he and Mr Li ascended to their current roles.
But on the economy in particular, an area where the premier has traditionally taken the lead, Mr Li expressed confidence and gave the impression he was in charge of government policy at a time of growing concern over the slowdown.
China grew 7.4 per cent last year, the slowest pace in 24 years. But government data released on Wednesday revealed that growth fell to 7 per cent in the first quarter from the same period a year earlier, the lowest quarterly reading since the depths of the global financial crisis and down from 7.3 per cent in the fourth quarter of last year.
Most other economic figures were surprisingly weak in March, indicating that the slowdown is likely to continue.
Speaking two weeks before Wednesday’s figures were released, Mr Li acknowledged the difficulty his government faces maintaining employment and meeting the government’s growth target this year of “around 7 per cent”.
“It’s true that our economy is still under downward pressure,” he says. “It won’t be easy to achieve another 7 per cent growth this year.”
But he insists Beijing has the wherewithal to hit its target while also maintaining “fairly sufficient employment, [an] increase in household income and improvement of the environment”.
“We have the ability to keep economic operation within the proper range,” he says. “Since the fourth quarter of last year we have made fine-tuning adjustments to our fiscal and monetary policies but these adjustments are not a QE policy. Instead they are targeted regulatory steps and they have paid off.”
China cut interest rates for the second time in three months at the end of February and has also announced plans to overhaul local government finances and boost infrastructure investment in parts of the country where growth has slowed the most.
Some Chinese economists and academics who advise the government have told the FT they believe the leadership is more concerned about sliding growth rates than it has publicly acknowledged. Many believe the biggest risk to growth is the country’s slumping real estate sector, where prices and sales volumes have been falling for the past year but where things could still get a lot worse.
An enormous property boom, particularly of residential housing, had been the main driver of growth in China for a decade until it ran into trouble last year.
Mr Li acknowledges the real estate downturn — where housing sales dropped 7.6 per cent last year even as overall investment in the sector continued to increase by 10.5 per cent — is a particular area of concern.
“We want to have steady and sound growth of the real estate market. The government will continue to encourage the homebuying for self use or improved living conditions and guard against property bubbles. There may be certain conflicts of interest among these goals and we need to strike a proper balance among multiple goals and exercise proper regulation. This is not going to be easy but we . . . believe we can do it.”
Mr Li appeared more confident when quizzed on the question of falling prices in China, where factory gate prices have contracted for 37 straight months, the longest period on record.
“The tumble of international commodity prices did put our [producer price index] under much pressure,” Mr Li says. “So, in a certain sense, we are on the receiving end of deflation but this does not mean there is deflation in China.”
Consumer prices increased 1.4 per cent in March from a year earlier, well below the government’s stated target for this year of “around 3 per cent” but still in positive territory.
With Japan and Europe both engaged in unconventional monetary policies partly aimed at devaluing their currencies, many global investors are asking whether China may be tempted to devalue its own tightly controlled currency, especially if growth slows more than expected.
Historically, Beijing has resisted the temptation to enter into competitive devaluation, most notably during the 1997-98 Asian financial crisis. Mr Li holds a similar view to his predecessors although he does not categorically rule out the possibility that China could act to push down the renminbi.
“We don’t want to see further devaluation of the Chinese currency because we can’t rely on devaluing our currency to boost exports,” he says. “We don’t want to see a scenario in which major economies trip over each other to devalue their currencies. That would lead to a currency war. And if China feels compelled to devalue the renminbi in this process we don’t think this will be something good for the international financial system.”
Mr Li delved into topics ranging from relations with Japan to China’s anti-corruption drive, which has mostly been led by President Xi and which Mr Li says is “intensifying”.
“We want to ensure that government power will be exercised with restraint,” says Mr Li, “and the government will live up to its due responsibilities to boost market vitality, eliminate the space for rent-seeking behaviour and uproot corruption.”
According to public figures hundreds of thousands of officials have been investigated on suspicion of corruption or breaching Communist party discipline in the past two years.
On relations with Japan, Mr Li stuck closely to the party’s official script on the need for Tokyo to face up to atrocities committed during Japan’s occupation of China before and during the second world war.
“The current China-Japan relationship is still in a quite difficult spot. There is [a] wish from both sides for improved relations but such improvement needs a foundation,” Mr Li says. “The crux of the issue is how to view the history of the second world war and whether one can draw lessons from that part of history to ensure that the war will never repeat itself.”
While the premier is adamant China is not trying to challenge the existing global order Mr Li is also clear that changes are necessary to accommodate its rise and that of other developing countries.
“We are ready to continue to play our role in building the current international financial system,” he says. “We are also ready to work with other countries to help make the system more just, reasonable and balanced.”
In that context, China’s moves to set up the AIIB and other institutions are probably best seen as bargaining chips and leverage that Beijing can use to push for faster reforms, rather than as alternatives or challenges to the existing global order.
Mr Li’s task is to make China’s voice on the global stage commensurate with its growing stature while simultaneously ensuring the domestic economy does not go off the rails. Whether he is successful on the former will probably not be known until after he has retired. The verdict on the latter will almost certainly be within his first five-year term, which ends in 2018.
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