Challenges Mount for China’s President

Whatever honeymoon Chinese President Xi Jinping may have been having appears to be over. If you think you are having a difficult Monday, consider his challenges.

China has now reported 63 infections and 14 deaths from the H7N9 bird flu virus and the flu has spread to Beijing and Henan Province. A seven-year-old girl, daughter of Beijing poultry sellers, is in hospital and recovering from the virus. A four-year-old neighbor tested positive for the virus although he has not yet shown any symptoms, which at least one expert says may be worrisome:

“With asymptomatic cases around, I think everything changes,” said Ian Mackay, an associate professor of clinical virology at the University of Queensland in Brisbane, in a telephone interview today. “There has been a spike in pneumonia cases that have drawn the health officials’ attention, but the virus may have been going around as a normal cold.”

China has invited four foreign flu experts to visit the country to “offer technical advice… to identify the source and mode of transmission of the H7N9 avian influenza.” Chicken consumption is falling and companies with exposure to Chinese poultry like Yum Brands may not see a quick recovery.

Tensions surrounding North Korea are still high. Secretary of State John Kerry was in Beijing this weekend but left for Tokyo with no evident breakthrough on North Korea. The good news is that Kim Jung-Eun did not use today’s birthday celebration for Kim Il-Sung, the founder of the Democratic People’s Republic of Korea and his grandfather, to test fire a missile as some had expected.

China’s goal appears to be to lower the acute level of tensions so that the status quo can be maintained. Conflict, collapse or reunification are not in China’s interest but neither is regime change. The United States should not expect China to exert expect real, sustained pressure on North Korea barring a real provocation from Pyongyang that may force Beijing’s hand.

THE ECONOMY MAY BE SPUTTERING, another headache for Mr. Xi’s new administration. First-quarter growth slowed to 7.7 percent year-on-year from 7.9 percent in the fourth quarter of 2012 and below the consensus forecast of 8 percent growth.

Capital Economics’ Mark Williams and Wang Qinwei, who forecast 7.6 percent growth in the first quarter gross domestic product, wrote today in the note “Hopes for sustained recovery fade” that:

“Given that policymakers already seem concerned about the current pace of credit growth and excess investment in property, neither seems likely.

Widely held hopes of a continued acceleration in growth into 2014 have taken a big knock today. Our 2013 GDP forecast remains 8.0 percent with risks to the downside. Our 2014 forecast is 7.5 percent”

China’s official GDP growth target for 2013, reiterated last month by outgoing premier Wen Jiabao, is 7.5 percent. Last weekend Mr. Xi, in a meeting with business leaders, reiterated that the era of “super- high or ultra-high-speed growth” is over and said that the slowdown in 2012 was “partially due to our efforts to control the speed of growth.”

One of the reasons so many analysts overestimated first quarter GDP growth is that total lending in the quarter surged to 6.1 trillion renminbi. The government has announced steps to reign in credit growth but a significant drop in lending could cause painful short-term economic challenges.

The government says publicly that it is willing to absorb the pain as it grapples with ballooning debt, entrenched special interests and the difficult rebalancing of the economy from investment to consumption. A Chinese economist affiliated with the National Development and Reform Commission said after Monday’s G.D.P. release that:

…using short-term stimulus to boost growth to back above 8 percent would be like “drinking poison to quench a thirst,” arguing that moves to ease policy are seeing diminishing returns.

“They’re having a smaller and smaller impact on boosting growth â€" first quarter lending was quite strong but growth still wasn’t that good,” she said. “This is what people call overheating finance but a cooling economy.”

Premier Li Keqiang on Sunday hinted at the possibility of short-term stimulus measures, though not if they cause long-term damage, as the stimulus response to the 2008 financial crash so clearly did. While chairing a seminar, the premier said that “if interim measures have to be carried out, they should not set up barriers for promoting market-oriented reform and development in the future.”

Many analysts blame the disappointing quarterly growth in part on Mr. Xi’s “Eight Rules” and the ongoing frugality and anti-corruption campaigns. If the crackdowns really took a dent out of G.D.P. growth then one has to wonder how much of the consumption over the last few years has actually been government spending.

Those campaigns are set to continue. The People’s Daily newspaper on Friday had three supportive articles and Saturday’s CCTV Evening News broadcast an expose of officials in Beijing satisfying their gluttony by quietly visiting private clubs instead of public restaurants.

Mr. Xi’s efforts to reign in corruption may “make cleansing the Augean stables simplicity itself” but he seems more determined than many expected. Frugality bites, for restaurants and investors.