China’s economic optimism derided as ‘disconnected from reality’

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Call him the Optimist-in-Chief.

China's Premier Li Keqiang plays a central role in managing the country's economy.

That gives him a front-row seat to the tide of sour recent developments, including mounting government and corporate debt, warnings that layoffs will number in the millions, heavy overcapacity, and, according to a new report, a corporate sector that has grown deeply pessimistic about the future.

But to hear Mr. Li tell it, there is no reason to worry.

"We have full confidence in the bright future of China's economy. Our confidence is not founded on flimsy grounds," he said during an annual press conference in Beijing Wednesday morning. It's one of few opportunities on the Chinese calendar for foreign journalists, albeit pre-selected ones, to ask questions of the country's second most important leader.

On Wednesday, his sunniness matched China's commitment to keep growth above 6.5 per cent over the next five years.

"As long as we stay on the course of reform and opening up, China's economy will not suffer a hard landing. Because we still have enormous potential in our big market, and there is immense creativity among our people."

To skeptics, however, it's further grounds for doubt about China's economic management as growth falls to its slowest pace in a quarter century, and Mr. Li's comments will do little to reassure those worried that the country is making promises that stretch the bounds of credibility.

It "really makes them seem disconnected from reality," said Christopher Balding, an associate professor with the HSBC School of Business at Peking University. "I'm not entirely sure that they really grasp the depth of the problems that they're dealing with."

He added: "It leaves a lot of uncertainty as to essentially who is steering the ship and on what basis."

A business sentiment report released Wednesday by the Cheung Kong Graduate School of Business, for example, found the industrial economy contracted last year. Only 18 per cent of 2,038 firms surveyed in the fourth quarter of 2015 called current operating conditions "good," and only 10 – just 0.5 per cent – planned expansionary investments in the coming year.

Prof. Balding's research into Chinese overcapacity has found a growing number of areas where the median national operating ratio – a measure of how much capacity is actually operating – has fallen to alarming levels. For silicon metal, it's now at 7.1 per cent; silico-manganese, 18 per cent; ferro-nickel, 33.5 per cent; ferro-manganese, 40 per cent; chromium, 45 per cent.

The chemicals industry is doing slightly better: Only half its capacity stands idle.

China has pledged 100 billion yuan ($20.3-billion) to relocate and retrain workers from struggling industries.

But the scale of the problem suggests the country will "blow through 100 billion in no time," Prof. Balding said.

On Wednesday, Mr. Li admitted as much.

"If there is a need, it could be further increased," he said of the funds allocated to laid-off employees. Beijing will also backstop local authorities who have run out of money to meet pension obligations to retirees, he said.

It was one of a series of reassurances that Beijing has its economic affairs solidly in hand.

China's much-criticized government meddling in stock markets last year? It "achieved the desired purpose" to bring stability, Mr. Li said.

Rising rates of bad loans, with some estimates that Chinese debt is now growing at twice the pace of its economy? "We are still in a good position to defuse financial risks," the Premier said, and "we can also use such market-oriented formats as debt-for-equity swaps to help bring down corporate leverage ratios."

China's ability to rapidly transition to a more consumer-driven economy? "New forces that drive China's development are fast taking shape, in a way that has gone beyond our expectations," Mr. Li said.

Millions of unemployed factory, steel and co-workers? "We will ensure there will be no massive job losses," he said.

Mr. Li's vision is of a country that can maintain growth while rearranging its economic structure – a nation that can, in other words, forge through a painful transition with little pain.

"There's been a lot of talk about them prioritizing growth and whether that's right or wrong, and whether that's avoiding tough decision or structural reforms," said John Zhu, greater China economist with HSBC. "But we don't think there's necessarily a tradeoff."

In fact, he said, "You can and maybe even should do both."

And, he added, China has ways to do so, in part through typical steps like further cutting interest rates and reserve requirement ratios, while using deficit spending to bring forward infrastructure investment. But China also has large segments of its population that remain impoverished, and major areas of its economy still constrained by state policies.

Both represent opportunity.

"If you do the kind of reforms and modernizations that China is talking about, you can still get quite a lot of growth that can be unlocked," Mr. Zhu said.