China parliament to juggle reform drive and slower growth

2 Mar8:11 PM

[BEIJING] China's slowing economy will be at the forefront as parliament convenes for its annual meeting this week, with a weekend interest rate cut a reminder of the challenge of balancing painful restructuring with combating the onset of deflation.

Senior leaders at the National People's Congress, which opens on Thursday, will send an unambiguous signal about the extent of the slowdown when they cut this year's GDP growth target to around 7 per cent, which would be the lowest growth in a quarter of a century.

"The focus will be on state-owned enterprise reforms, price reforms and fiscal reforms," said Wang Jun, a senior economist at the China Centre for International Economic Exchanges, a well-connected think-tank in Beijing.

"The economic growth target will definitely be lowered. A target of 7 per cent is more appropriate."

Officials are expected to argue that a lower growth target provides the opportunity to overhaul state firms, laws and the fiscal system.

They hope to transform the world's second-largest economy away from the export- and investment-led model that powered three decades of rapid expansion into one that is driven by more sustainable domestic consumption.

But with fears of deflation rising - annual consumer inflation plumbed a five-year low of 0.8 per cent in January - there is also a need to step in to support the economy, evidenced by two interest rates cuts since late November.

The latest cuts to benchmark lending and deposit rates, announced by the People's Bank of China (PBOC) on Saturday, pre-empted official data showing a second consecutive month of shrinking manufacturing activity.

A rate cut makes debt servicing more manageable, a big issue in China where debt surged amid the stimulus spree launched in the wake of the global financial crisis, and freeing up cash may help ward off deflation.

But it does not necessarily advance the reform process.

The biggest beneficiaries of lower borrowing costs would be big state-run firms such as Air China. The national flag carrier has a debt-to-asset ratio of 72 per cent, its 2013 annual report showed.

In the long run however, state companies like Air China are still plagued by deeper problems such as inflexible hiring and firing rules for employees, and a lack of currency hedging expertise that exposes airlines to foreign exchange risks.

One of the biggest challenges is getting local governments to implement Beijing's reforms. Bad debt levels have climbed as the economy has stuttered, heaping pressure on local governments and state-owned companies and prompting some to push back on more stressful changes.

The proposed changes to the fiscal system would force local governments to deal with a funding gap worth 4.2 per cent of China's US$10 trillion economy, economists at ANZ Bank said.

"If it is not properly managed, the funding gap will drag on the growth in government investment and lead to lower-than-expected GDP growth," they said.

Reforms to stop unauthorised borrowing by local governments, which owe more than US$3 trillion, would hurt budgets already squeezed by falling tax receipts and land sales even as they are still expected to spend to support the economy.

Even a plan to let local governments raise funds by selling bonds - a milestone adopted in January - may not win their full support as they would need to disclose their accounts, an unattractive prospect given their unhealthy budgets.

To clean up state finances, a new budget law prohibits local governments from guaranteeing any debt incurred by firms, or local government financing vehicles, which were created to borrow billions of yuan from banks on governments' behalf.

"The fiscal reform will be very difficult this year," said an influential economist who advises the government on policy and reform issues. "If they report more debt, they may be blamed for incurring the debt. If they report less debt, they may get a fewer quotas for municipal bond issuance."

REUTERS

      

Gold futures trade near two-week high on China interest-rate cut

Gold futures were little changed after reaching the highest in almost two weeks after a surprise cut in interest rates in China, the world's second-largest consumer. 

PHOTO: BLOOMBERG

2 Mar10:58 PM

[NEW YORK] Gold futures were little changed after reaching the highest in almost two weeks after a surprise cut in interest rates in China, the world's second-largest consumer.

The People's Bank of China lowered the benchmark lending and deposit rates by a quarter per centage point on Saturday. Gold imports by India, the top consumer, may jump to 100 metric tons in March from about 25 tons in February, according to Rajesh Mehta, chairman of Rajesh Exports Ltd.

"China's action is keeping gold supported," Tai Wong, the director of commodity products trading at BMO Capital Markets Corp in New York, said in a telephone interview. "Also, reports about higher imports by India are positive."

Gold futures for April delivery rose less than 0.1 per cent to US$1,213.60 an ounce at 9:45 am on the Comex in New York. Earlier, the metal reached US$1,223, the highest for a most- active contract since Feb 17.

The "surprise" cut in Chinese rates "is expected to lift demand for physical gold," Kitco Metals Inc in Montreal said in a report.

Prices pared gains after US consumer purchases adjusted for inflation rose in January. The 0.3 per cent increase followed a 0.1 per cent drop the prior month, a Commerce Department report showed on Monday.

Gold climbed 70 per cent from December 2008 to June 2011 as central banks increased money supply on an unprecedented scale, spurring concerns that inflation would accelerate.

In 2014, the metal posted a consecutive annual decline for the first time since 1998 as the dollar rallied amid concern the Federal Reserve will raise US borrowing costs.

Silver futures for May delivery rose 0.2 per cent to US$16.585 an ounce.

BLOOMBERG

      

ECB uncomfortable with leading role in Greek funding drama

European Central Bank policymakers decamp to Cyprus on Wednesday wrestling with the uncomfortable fact that they may hold the keys to Greece's continued membership of the euro. 

PHOTO: BLOOMBERG

2 Mar7:24 PM

[FRANKFURT] European Central Bank policymakers decamp to Cyprus on Wednesday wrestling with the uncomfortable fact that they may hold the keys to Greece's continued membership of the euro.

With no political appetite for a 'transfer union' that could see wealthier countries subsidise Greece, the central bank figures prominently among the main options for staving off an impending funding crunch in Athens.

This is awkward for the ECB, an independent central bank desperate to stay out of the political debate over Greece's future but whose lender-of-last-resort function may leave it as the only institution able to stop an economic collapse there.

"The ECB is justified in being cautious because of the highly political exposure," said Richard Portes, professor of economics at London Business School, noting that the bank has just completed a sensitive, political debate over a sovereign bond-buying plan.

After that debate, the ECB sought to remove itself from the political firing line. Observing its rules strictly, the ECB cut off Greek banks from its funding after Athens abandoned its bailout programme, a condition for access to the ECB funds.

The move forced Greek banks onto emergency liquidity assistance (ELA) from their national central bank - a temporary facility that raised the pressure on governments to find a political solution before the banking sector tipped into crisis.

ECB President Mario Draghi defended the move in an at-times heated exchange at the European Parliament last week, telling lawmakers: "The ECB had no choice". The discussion illustrated the ECB's sensitivity to the Greek question.

Now another looming funding crunch, this time for the Greek government, means the 25 members of the ECB's policymaking Governing Council have little option but to enter the political arena due to their say over key funding operations.

The Council meets in Cyprus on Wednesday and Thursday.

Shut out of debt markets and faced with a steep fall in tax revenues, Athens is expected to run out of cash by the middle or the end of March. Without unlocking bailout funds by completing - or at least beginning - reforms it has vocally opposed, the government faces the prospect of defaulting in a matter of weeks.

With other options apparently closed for now, the ECB is central to the Greek government's only other prospective funding channel: raising a 15 billion euro (US$16.82 billion) cap on Athens' issuance of Treasury bills, or short-term debt.

The cap has already been reached, and the ECB has a veto over lifting it. The issue here is that Greek banks have used the T-bills to access central bank funding and then invest in more T-bills, helping the state cover its short-term needs.

Raising the T-bill limit would be tantamount to putting central bank cash in the pocket of the Greek government. The ECB is prohibited from such central bank financing of governments.

One person familiar with ECB thinking said that any extension of the T-bill limit was "very unlikely".

Although they are eager to avoid playing a decisive role in Greece's fate, eurozone central banking officials fear Greece could stumble into an accidental exit from the bloc by defaulting without any form of back-up plan.

Greek Finance Minister Yanis Varoufakis spoke at cross purposes with Mr Draghi and other top ECB officials when they met in Frankfurt early last month.

Hawkish eurozone central bankers are growing impatient with Athens and its reliance on central bank funding, with some wanting to restrict this financing to Greece regardless of the consequences. "I would agree with the theory that if you get rid of the rotten apple, then the others are more in line," one central bank official said.

REUTERS