The annual Central Economic Working Conference was held between 19-21 December.The post conference news release represented a continuation of recent policy goals with no major surprises.
The following points are worth noting:
- As 2019 is the 70th year anniversary of the founding of the People’s Republic and a critical year in achieving a “middle income level society” (this is related to the previous administration’s goal of doubling income and real GDP from 2010 to 2020), managing the economy well is of critical importance. In practice this implies the government will not tolerate a sharp slowdown in the economy though policymakers are likely to tolerate lower GDP growth than the recent level of around 6.5%.
- The release stated the main challenges facing the economy are mainly supply-side structural issues. This implies demand management is a secondary issue though the detailed policy measures stated made it clear that demand issues are also important.
- On monetary policy, the official description is changed from “prudent and neutral” to “prudent and appropriately loose and appropriately tight”. Some media reports stated the word “neutral” in “neutral and prudent” was taken out of the tone. We believe this is inaccurate as this word has been in and out of policy statements in recent months. The Politburo meeting in October already omitted this word though the PBOC still used it in the TMLF statement. The statement repeated the recent party line goals such as providing ample liquidity and lowering cost of financing for corporates.
- There was no mention of exchange rate policy. Usually this is stated as maintaining currency stability at appropriate level. The omission of this statement does not necessarily imply the government will allow depreciation soon, especially given the trade negotiation. Having said that this remains as an option especially if the dollar appreciates.
- On fiscal policy the government will increase the size of cuts in taxes and fees, though no specifics were offered. The actual tax burden is often not reduced as much as the simple estimate calculated from the simple metric of “previous year’s tax collections times the reduced tax rate” since tax collection has become more stringent.
- The size of local governments’ special purpose bond issuances will increase meaningfully. Indeed, we have expected that to significantly ramp up. These bonds are not included in the budget balance calculations on the grounds that they are self-sustaining investment activities. This implies a more proactive fiscal policy stance, all else equal. No specific numbers were offered so again we don’t know how significant this will be. However, the NPC standing committee meetings on December 23-29 will consider possible pre-announcement of some of next year’s local government bond quota, which has conventionally been announced only in March.
- On property policy the statement reiterated the need to “build a long term mechanism”. This phrase is widely regarded as implying the property tax. While it is possible that the legislation may start next year, given the state of the economy and property and financial markets it is not likely to be rolled out next year. Local governments hold the responsibilities to manage local markets. This leaves plenty of room to loosen without the central government loosening policy. Hangzhou and Zhuhai today announced effective loosening measures which will make it easier for property buyers to make purchases.
- On environmental protection policy, it should “coordinate with other economic policies and avoid blunt implementation”. This is consistent with an effective loosening that has already been implemented over the past several months.
- On SOE reform the government will make state capital “bigger, stronger and better”. The focus of the government should be on managing state capital (vs micro manage companies directly). This is the standard policy tone. The reform of the Central Railway Company was singled out as a key focus. There was the usual statement on the supports for private companies which has been a recent focus of the top leadership.
- On employment the government will put maintaining employment stability in a more prominent position, especially the employment issues related to college graduates, migrant workers and former members of the armed forces. Employment has become an increasing focus of the government in recent month and is one important consideration behind the policy loosening.
- The government aims to allow inefficient firms to exit the markets. This will be a positive change if implemented though how much pain tolerance there will be remains to be seen. For one thing, this goal has tensions with the goal of maintaining employment stability.
- On demand management the statement mentioned both consumption and investment through the tone makes it clear investment is a bigger focus. The areas to be supported are broad-based and include infrastructure on AI and other industrial networks, intercity and intra-city transportation and logistics, and manufacturing equipment upgrades. These investments will require significant amount of funding to be implemented. A modestly larger deficit, more special purpose bond issuance and other quasi fiscal borrowing will help though the magnitude of the investments will continue to be limited by the continued focus on local government debt control and “structural deleveraging”, which was first stated in the meeting of Central Financial and Economic Affairs Commission in April.
- On external policy the government will push to broad opening up of the economy and negotiate with the US after the two presidents met in Argentina.
- Industrial policy was put in a very prominent position as the first task for the year among seven “key tasks” for 2019. This view is significantly affected by the trade war. On one hand the trade war forced the leadership to reassess the state of development which is clearly not as advanced as they wished it and probably not as they thought. There is also no belief in the international specialization of different areas as there can be embargoes. These made them want to do more to support the development of domestic industry. On the other hand, partially because of the trade war the focus is now more on providing incentives via better IPR protection and less on direct fiscal supports. The “Made in China 2025” plan is no longer mentioned.
- Relative to previous year’s CEWC there were more emphasis on the healthy development of an open, transparent, vibrant and versatile financial market. The new equity exchange in Shanghai will start trading.
- Economic targets on growth, inflation, fiscal deficit and money and credit growth were not announced, as usual. These will not be formally announced until the National People’s Congress next March. However, state media sometimes would quote the unofficial views of experts which effectively announces the targets. We continue to expect the targets we forecasted previously.
Although this meeting is supposed to set the tone of economic policy making for the next year as a whole, it’s actually more a reflection of the policy stance in the next few months. Actual policy making will be adjusted on a real time basis according to the latest developments. This is especially true for next year as the trade conflict with the US, one of the biggest factors affecting the economy, remains highly uncertain.