China's Premier Li Faults Local Governments and Banks

An analysis by Michael Lelyveld
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Workers walk across steel beams on a construction site in Beijing, Dec. 18, 2014.
Workers walk across steel beams on a construction site in Beijing, Dec. 18, 2014.

As China feels the effects of its economic slowdown, the government is searching for causes and showing signs of political strain.

During a one-week period last month, Premier Li Keqiang leveled criticisms, first at local officials and then at state-owned banks, for not cooperating with efforts to boost economic growth, which fell to a six-year low of 7 percent in the first quarter.

At a meeting in northeastern Jilin province on April 10, Li blasted regional officials for "intentional neglect" in implementing development projects.

Li accused them of "dereliction of duty" and "reluctance ... to perform their work amid the nation's anti-corruption campaign," the official English-language China Daily said.

The premier was particularly angered by the appearance of inactivity on construction projects in Changchun, Jilin's capital city.

"I felt upset when I saw industrial equipment standing idle along the roads when I traveled through Changchun," Li was quoted as saying.

"Why was it there? Was it waiting for the next project? Land has been wasted without being developed, and officials have to be held accountable," he said.

Li charged the officials from Jilin and neighboring Heilongjiang and Liaoning provinces with "not taking the initiative to find new projects and for wasting the region's natural advantages in land and energy resources," the paper reported.

Sluggish northeastern provinces

Quarterly growth figures from the three provinces were among the five lowest of China's 31 provincial-level administrations, according to figures compiled by Reuters.

Liaoning, where Li once served as Communist Party secretary, posted the lowest result with an economic growth rate of just 1.9 percent.

On Monday, the party's Central Committee announced the appointment of a new party secretary for Liaoning, replacing Wang Min, who had served since 2009. Li Xi, former deputy secretary and acting governor, was named to the post.

David Bachman, a China scholar and political science professor at University of Washington in Seattle, said some of Premier Li's criticisms may be justified in cases of projects not completed due to inadequate planning or finance.

But Li's language, described in the report as "unusually harsh," suggests that the government may be trying to shift responsibility for its economic troubles.

"It's always easy at the top to blame people below for problems," said Bachman.

On April 17 in Beijing, Li delivered a similar message to state-owned banks as he urged them to boost lending to the "real economy."

"If we compare the real economy to flesh, finance is the blood within it. They rely on and supplement each other," Li told a banking conference in Beijing.

During visits to China Development Bank and the Industrial and Commercial Bank of China, Li urged more lending to small and medium-sized enterprises, Reuters reported.

The pressure reflected frustration with the banks' reluctance to support productive sectors of the economy and their preference for financing stock market speculation, the news agency said.

Deaf ears to lending appeal

Li's appeal appeared to fall on deaf ears.

One banker was quoted as saying that lenders "will do some deals as a gesture, but no, money won't go in that direction."

Li's lobbying efforts are a sign of the limits that the central government faces in pursuing its "new normal" policies to stabilize the economy.

Official figures from the People's Bank of China (PBOC) show a 14-percent rise in outstanding yuan-denominated loans to the real economy in March from a year earlier.

But private surveys suggest that funds are flowing only to a small group of companies, said Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington.

Banks are said to be wary of higher-risk lending for private businesses, small and medium-sized enterprises or the real estate sector, which is suffering from falling prices and weak demand.

In the meantime, a succession of seven-year highs in share prices has drawn investors to the stock market in droves, driving up borrowing for speculation and prompting regulators to issue new limits for trading on margin.

The lure of easy money may do little for job creation and economic growth.

But Li's outburst at the meeting with regional officials lends itself to differing interpretations, said Scissors.

One is that the premier is blaming the previous government under Wen Jiabao for consequences of the massive 4-trillion yuan (U.S. $645-billion) stimulus binge announced in 2008. The shot of liquidity staved off recession but left China with a hangover of poorly-planned projects, pollution and debt.

"They've used up their stimulus money and developed all the viable projects. Now they're out of stimulus money and there are no good projects left," Scissors said.

Another interpretation is that China's real economic growth rate is much worse than the official gross domestic product (GDP) figures suggest, prompting Li to fall back on old stimulus policies. The result is more pressure on local officials to pursue development for the sake of development.

"It seems like frustration because he's blaming them for not doing what they've been told not do and what hasn't worked before," Scissors said.

Anti-corruption campaign stalls decision making

Since taking office in 2013, Li has resisted calls for another big stimulus program, but the government's long list of "targeted" stimulus measures may soon add up to much the same thing.

State media reports of Li's comments in Jilin seemed to send a mixed message.

While he called for more investment in "transportation, water conservation and upgrading urban sewage systems," Li also urged more construction that may have harmful environmental effects.

"To maintain smooth economic development in northeast China, the main issue is to launch major infrastructure projects, which will give big incentives to the local economy," he said.

Scissors points to signs that economic growth has fallen far below the official 7-percent rate.

In particular, power consumption in the first quarter rose by a scant 0.8 percent from a year earlier, while use by the manufacturing sector fell 0.7 percent.

"It certainly sounds like the situation in the economy has gotten so bad that they have to get things moving again by whatever means they have, and the new normal is being replaced by the old normal," Bachman said.

The inactivity that Li witnessed in Changchun may have stemmed from insufficient financing or initiative, but it may also be a product of the government's anti-corruption push.

"You have to wonder how much of this is from people being so afraid of the corruption campaign that they're afraid to do things," said Bachman.

On April 23, the Central Commission for Discipline Inspection (CCDI) announced a new crackdown on corruption among lower-level officials dealing with land use, rural funds, resource management and other local functions, the official Xinhua news agency reported.

By browbeating local officials, Li may only have added to anxieties and made it less likely that they will initiate new or more productive projects.

"There's a great sense of what do I do that's safe, or what do I do that won't get me in trouble, or do I just want to keep my head down and not take responsibility for anything," Bachman said.





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