China Headlines: China has the tools to tune up the economy

China's main stock index advanced for the fourth consecutive day, nearing a seven-year high on Tuesday, in anticipation of more support for stable growth.

The benchmark Shanghai Composite Index rose 1.55 percent to end at 3,502.85 points.

The run was prompted by Premier Li Keqiang's remarks last week that the government is likely to resort to a large set of "tools" to keep growth stable.

China has a full "tool kit" at its disposal and will use them if growth nears the lower end of its range, Li told a press conference after the annual parliamentary session.

"We are prepared to step up targeted macro-economic measures to boost market confidence if the slowdown hurts employment and salaries," said the premier.

China is under considerable downward pressure, and things probably won't improve much in 2015. Growth in industrial output is down. Retail sales growth is down.

Li admitted that it will be "by no means easy" to achieve this year's GDP target of around 7 percent, but where there's a will, there's a way.

QUICK FIX

Monetary and fiscal policies are powerful all-purpose utility tools and policy makers have already hinted that action is underway to prevent the economy sliding further .

Central bank governor Zhou Xiaochuan said last week that there would be some room for prudent adjustments to monetary policy, echoing the premier who is prepared to inject liquidity, "if necessary".

Benchmark interest rates were cut twice last year and the reserve requirement ratio (RRR) for banks has decreased. Some analysts expect more reductions soon.

In a recent research note, Barclays predicted at least two RRR cuts in the first half of 2015 and one benchmark interest rate cut in the second quarter.

As for fiscal policy, the government plans spend more by raising its 2015 fiscal deficit to 1.62 trillion yuan (264 billion U.S. dollars), 2.3 percent of GDP, up from 2.1 percent in 2014. Much of the increased expenditure is expected to go on infrastructure: at least 800 billion yuan on railways, and another 800 billion yuan on major water projects. Spending on infrastructure boosts demand in many ways while creating jobs.

If the economy remains anemic, bolder measures cannot be ruled out. Maintaining growth is an imperative for China with about 200 million people still living under the World Bank poverty line.

AMPLE ROOM

What makes more macro-economic regulation feasible is that China has much policy leeway, thanks to years of refraining from stimulus programs.

Although the consumer price index (CPI), the main gauge of inflation, rose to 1.4 percent in February from a five-year low of 0.8 percent in January, it is still well below the 2015 target of 3 percent.

The producer price index (PPI), which measures wholesale inflation, plunged 4.8 percent year on year in February, the 36th straight month of decline, pointing to continuing weak market demand. A subdued price level helps create a favorable environment for expansionary monetary and fiscal measures.

China's RRR of 19.5 percent is among the highest worldwide, meaning that Chinese banks have nearly one fifth of their huge deposits locked up.

The benchmark interest rate for one-year lending of 5.6 percent is very high compared with almost zero or even negative rates in some fragile economies.

The benchmark one-week Shanghai Interbank Offered Rate (Shibor), which measures the cost at which Chinese banks lend to one other, dipped 8.8 basis points on Tuesday to 4.62 percent - still high. An expensive interbank market is a major indicator that liquidity is probably not sufficient.

Barclays have said that China's recent RRR and interest rate cuts may start to ease lending conditions and boost aggregate demand, but any trend of strengthening credit growth is still too young to be confirmed.

FAR-REACHING ACTION p Although monetary and fiscal policy may be powerful and effective, China seems to prefer long-term and far-reaching measures: reform and innovation.

"The current economic downturn is mainly an outcome of accumulated structural and systemic imbalances, and only targeted reforms can effect a permanent cure," said Zhu Baoliang with the state information center, a government think tank.

Zhu believes mixed-ownership of state enterprises and less regulation in sectors like energy, finance and telecommunication, are also options.

"Reform will not undermine growth as long as it is arranged in a rational order and in line with short-term macro-controls," Zhu said. Endi