China puts reform ahead of growth
INVESTORS getting stung by China's worst financial-market rout in years should find solace in the fact that the government, in particular Premier Li Keqiang, is willing to play hardball to force through much-needed policy change.
China shares ended flat in choppy trade yesterday, trimming early losses as Chinese financial markets were calmed by the central bank's pledge to prevent any lasting credit crunch.
China's stock market dived to 41/2-year lows on Tuesday, and major indexes have tumbled more than 9 per cent since last Wednesday.
The central bank's refusal to intervene last week to ease an unprecedented cash crunch, where interest rates in the interbank market shot as high as 30 per cent, was the clearest sign yet that China's new leaders are willing to stomach economic pain for the long-term good.
The People's Bank of China takes its cue from the government under China's communist system. It has allowed interest rates to stay high to slow runaway credit growth and to punish banks for reckless practices that include using short-term funding for long-term lending.
In a country where 30 years of double-digit economic expansion has created a culture of prizing growth above all else, Beijing's decision to let the money market seize up at the risk of choking China's slowing economy is a milestone.
"Clearly, we are now in a different ball game," said Mr Louis Kuijs, an economist with RBS in Hong Kong.
"Even though people are reducing their (economic) forecasts, the government is comfortable with a policy stance that emphasises reform."
Accustomed to China's previous government, where leaders bent over backwards to produce stellar rates of growth, Beijing's new stance has shocked investors.
Some investors said the central bank's brinkmanship could backfire if it triggered a banking crisis.
Others lauded Premier Li's tactics as tough love that could gird China for other challenging economic reforms such as further slimming down giant state firms to make them more efficient.
Mr Li took office in March, along with President Xi Jinping. As premier, he is responsible for managing the economy.
His grit is reminiscent of former premier Zhu Rongji, credited for leading China's previous round of major economic reforms in the late 1990s, when he sacked more than 50 million workers at state firms to trim the bloated sector.
"Welcome to doctor Li Keqiang's surgery," analysts from Standard Chartered said in a note.
"We had suspected that Premier Li would want to drive significant reforms. We underestimated, however, his apparent willingness to make policy choices that would risk putting further downside pressure on the economy."
The CSI300 index of the leading Shanghai and Shenzhen listings shed early losses and edged up 0.1 per cent in its first gain in six sessions, while the Shanghai Composite Index fell 0.4 per cent at 1,951.49 points yesterday.