Chinese Premier Li Keqiang on Wednesday warned that a “dysfunctional” real economy is the biggest threat to financial markets as he vowed to press on with industry restructuring while maintaining economic growth rates of 6.5-7 per cent.
Speaking at the end of China’s annual parliamentary meeting, Mr Li sought to reassure an anxious public that Beijing still has the firepower to meet its financial commitments despite economic ructions.
“There may be small ups and downs but we can employ innovative means to deploy macroeconomic regulation to keep within our targets,” Mr Li told reporters during his annual press conference. “A dysfunctional real economy represents the biggest risk to financial markets.”
Economic jitters, which spooked investors and rippled through global financial markets last year, are again percolating as Beijing seeks to prune the overcapacity in heavy industry — a long-term gain that will yield pain in the short term.
Plans to shut unproductive mines and steel mills while keeping state-owned companies afloat and managing lay-offs received their first direct challenge last weekend when thousands of miners in a distressed coal town took to the streets for three days to demand unpaid wages.
The orderly protests ended after lossmaking miner Longmay paid workers two months of overdue salary and bussed in hundreds of policemen. But the episode underscored the large gap between plans in Beijing and the realities in towns where a single company can be the largest taxpayer, employer and debtor.
Despite reforms to hand more taxes to provinces, many worry that indebted local governments will struggle to maintain the ruling Communist party’s priority of social stability in the face of mass lay-offs. Provinces most reliant on coal and industrial sectors will be hardest hit.
Many provincial leaders lobbied for more central government support. during the annual parliamentary session. Acknowledging the growing divergence between regions and sectors, Mr Li said: “Problems that have built up over the years have become more visible”.
China’s social safety net, designed to replace the “iron rice bowl” of the jobs for life in the planned economy, has only been rolled out nationally over the past few years and remains relatively untested.
Health insurance, for instance, is usually tied to a person’s registered home town even if he or she has moved thousands of miles away to work or, in the case of retirees, live with their children. Reforms to make insurance transferable across provincial lines are still under way.
Mr Li hinted that the central government could increase its contribution to a previously announced Rmb100m fund to “resettle” workers, designed to be matched by local governments and lossmaking employers in return for new loans. And he acknowledged the concerns over pensions that worry the urban middle classes.
“Honestly speaking, some areas have run into difficulty paying pensions but these are only isolated cases,” Mr Li said, noting the government had built up surpluses in the pension funds that could be tapped along with other financing sources.
“In the long run, the Chinese government can meet its pension obligations and there will be absolutely no problem,” he said.
“As long as local governments have done their best the central government can help.”