China’s growing challenge

China's Premier Li Keqiang may be looking to shore up confidence by maintaining growth targets but investors are becoming worried.
Chinese Premier Li Keqiang
Chinese Premier Li Keqiang

Premier Li Keqiang promised China’s National People's Congress to speed up reform, manage mounting risks in the financial system, tackle pollution and maintain a 7.5% economic growth rate all at the same time - quite an undertaking.

To be sure, Li gave himself some wiggle room in his first annual report on Wednesday by dubbing the growth target flexible. He needs it as risk in the shadow banking system is building and water pollution is reaching critical levels.

But even with it, he will still need to perform a careful balancing act.

On the financial front alone Li plans this year to establish a deposit insurance scheme, further liberalize interest rates, expand the floating band of the renminbi exchange rate, and move towards capital account convertibility.

As if to underscore the challenges that lie ahead, news broke just before his speech that China was set to suffer its first-ever default in the publicly traded bond market.

Solar power company Shanghai Chaori Solar Energy Science and Technology’s statement that it might not be able to service its debt will alert investors to the growing credit risks in China and correct pricing.

The fact a default is being allowed may signal the political leadership’s greater willingness to embrace market discipline, warts and all.

But this strategy carries its own risks – the Chaori bond has many retail investors.   

Li may be looking to shore up confidence by maintaining growth targets but stock market falls and the renminbi’s recent depreciation show investors are becoming worried.

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media