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Forex Flash: China Politburo meeting highlights concerns over Financial risks - Nomura

FXstreet.com (Barcelona) - Nomura economist Zhiwei Zhang notes that yesterday, China‟s Politiburo held a meeting to discuss economic conditions.

Firstly, he notes that the Politiburo is comfortable with growth in Q1 and the press release echoed Premier Li's comments on 17 April, and shows that senior leadership has reached a consensus to tolerate slower growth. He sees that the press release emphasized that, "we should focus on the quality and profitability of growth", and did not mention "downward pressure on growth".

Secondly, he notes that the press release demonstrates the government's explicit concerns over financial risks. Again, it echoed statements made by Premier Li during the recent State Council meeting, which highlighted risks from local government financing vehicles (LGFV) and rapid credit growth. he writes, “The Politiburo decided to "regulate the fund raising activities of local governments", a new statement that implies there are downside risks to LGFV financing.”

Finally, he adds that the endorsement by the Politburo is critically important, as it supports Premier Li´s government in resisting pressure and avoiding further stimulating the economy. He writes, “As growth slows, pressure on the government is building to loosen policy further. The Politiburo is the most powerful authority in China, and its endorsement indicates that policy stimulus is unlikely in Q2.”

Overall, he notes that the messages are consistent t with expectations and support our views that policy may tighten to contain financial risks, and growth will slow through 2013. He writes, “We believe the current policy stance is on the right track, and it is critically important not to stimulate the economy again and exacerbate financial risks. We maintain our view that growth in 2013 will slow to 7.5% (Consensus 8%).”

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