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Mar. 10, 2015 - Updated 04:16 UTC



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Li Plays down China Risk

Sep. 10, 2015

Chinese premier Li Keqiang is trying to alleviate concerns about his economy. Li spoke at the World Economic Forum's summer meeting in Dalian, where he told business leaders from the world's fastest growing economies that his country is on the right track.

Li described China's economy as going through a "few fluctuations" but pledged to make sure there are no "hard landings."

"China is not a risk for the world economy," he said. "It's a source of growth."

While Li acknowledged China's own growth has slowed, he pointed to employment figures and increasing household incomes as signs things are on track. He said ups and downs are inevitable as the country faces structural reforms.

"We'll be able to handle the situation if the economy dips beyond a reasonable range," he said.

"Li clearly recognized that his audience is concerned," says NHK World's Takafumi Terui, in Dalian. Terui notes that Shanghai's stockmarket has been plunging and leaders in Beijing have surprised people by devaluing their currency three times in quick succession.

Terui says Li was trying to assure the world there's no cause for alarm.

Li said, "We'll perfect our controls to prevent systemic risk. China has some financial leeway as people's savings rate is high, and we have adequate foreign currency reserves."

Li added he doesn't want to see a currency war, as it would be harmful to his country.

The timeline of China's economic woes has fueled fears of knock-on effects among emerging economies. On August 24th, shares plunged on the Shanghai stock exchange. A selling spree followed, triggering further tumbles in markets around the globe.

The Chinese economy had been growing at an annual rate of over seven percent. It was seen as the engine of global growth. But the investment-driven model appeared to have hit a wall.

Economic problems could be seen during the global financial crisis 7 years ago. The Chinese government announced a pump-priming package worth about 600 billion dollars.

But the massive stimulus created white elephants across the country, such as half-built condominiums and roads that no one uses.

Today, the sluggish manufacturing sector is another drag on the economy. In the city of Dongguan in south China, it's estimated that more than 4,000 businesses have gone bankrupt in the past year alone. As labor costs have risen, the sector lost its competitiveness.

The government plans to shift from ordinary mass production to higher quality and value-added products. It expects these will be sold for higher prices. But the structural shift has yet to emerge.

Economist Ke Long at the Fujitsu Research Institute points out that state-run firms in China have a monopoly on all major industries. He says this stifles technological innovation.

"Monopolistic enterprises won't put the effort into research and development to achieve innovation. And productivity will not improve without it," he says. "That's why China is not capable of developing new technology, even though it excels at copying technologies. That's why 'Made in China' brands are not so appealing."

China's economic slowdown is beginning to hurt emerging economies. In India, many businesses are stuck with backlogs of inventories. Their exports to China have been cancelled.

"It's very confused. We see dark clouds everywhere," says Sharad Kumar Saraf, a cotton company executive. "We may have to declare our closure."

China's massive demand for resources is also on the wane. Australian iron-ore giant Rio Tinto saw its profits for the first half of this year plunge nearly 80 percent from the same period last year.

Greg Lilleyman, Rio Tinto Group Executive, says "High cost producers exit the market, which is inevitably happening and will continue to happen as the price squeeze comes on." He said his firm was trying to stay competitive. "We're keeping ourselves well and truly at the bottom of the cost curve, and as the lowest cost producer."

Takafumi Terui spoke to Aki Shibuya and Sho Beppu from Dalian about the concerns held by people from emerging economies about China's slowdown.

Shibuya: How did people react to Li's speech?

Terui: Some told me they were satisfied. Others said Beijing needs to do more, as China's downturn is already hurting them. Indian social entrepreneur Arbind Singh said, "It will definitely have bad impacts. China is struggling with that, the premier admitted quite frankly. The good thing is that they are planning on taking measures for that." We also spoke with Alexander Mora, the Costa Rican Foreign Trade Minister. He said, "Li addressed most of the important topics, the current situation and some of the challenges."

Beppu: It seems like Li's speech wasn't enough to wipe away their concerns. What can we expect the Chinese government to do next?

Terui: The big clue was Li saying he would pursue what the Chinese call their "New Normal" policies. That means China will no longer aim for the double digit growth it once enjoyed. Instead, Beijing is setting its sights on mid-to-high speed growth. China used to rely on investing in public works projects for growth. Now it's attempting to shift to an economic growth strategy that puts more priority on private enterprise. Today, Li said China wants to build closer economic ties with other countries, by fostering small and medium-sized businesses, and promoting deregulation to attract more foreign investment. Recent data suggest China's downturn may be worse than predicted. Li needs to follow through and implement the reforms he's promised. He needs to prove his speech wasn't just -- to quote his own words -- "blind optimism."