BANGKOK – Chinese leaders met this week to plot economic policy for the coming year, sketching out plans to raise government spending and relax Beijing’s monetary policy to encourage more investment and consumer spending.
Leaders of the ruling Communist Party wrapped up their two-day Central Economic Work Conference on Thursday with praise for President Xi Jinping's guidance and a pledge to “enrich and refine the policy toolbox” and defuse risks facing the world's second-largest economy. One of the biggest: threats by President-elect Donald Trump to sharply raise tariffs on imports from China once he takes office.
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Here’s a look at the priorities outlined in this week's meetings in Beijing and their potential implications.
A focus on fundamentals
Analysts said the broad-brush plans from the annual Central Economic Work Conference and an earlier meeting of the 24-member Politburo were more of a recap of current policy than any ambitious new initiatives.
China's economy has been growing slightly more slowly than the “about 5%” target leaders set for this year as a prolonged crisis in its real estate sector has weighed on business activity. Weaker housing prices and job losses during the COVID-19 pandemic have left many Chinese unable or unwilling to spend as much as they may have in the past. That has meant supplies of many goods outstrip demand, causing prices to fall or at least remain flat.
The government began rolling out a range of initiatives earlier this year that included paying subsidies when people turn in old appliances and vehicles to buy new ones, expanding access to affordable housing and cutting interest rates to make mortgages more affordable.
According to a readout by the official Xinhua News Agency, the leaders agreed this week to put “greater emphasis on ensuring and improving the people's well-being and giving people a growing sense of fulfilment, happiness and security.”
That includes policies to stop people from relapsing into poverty, providing a stronger healthcare system and expanding care for older people, it said. It could also include subsidies to families to encourage them to have more children, now that the population is declining.
Who pays, and how?
The leaders committed to raising China’s deficit, which has been long capped at 3% of its GDP, and to doing more to encourage consumer spending by bringing wage increases in line with the pace of economic growth. The government will issue more special ultra-long-term bonds to do that, state media said without giving any dollar amounts.
At the national level, China can afford to do that. Its national debt-to-GDP level is about 68%, compared with Japan's 250% and 120% in the United States. At the local level, huge amounts of debt remain a problem, with many Chinese workers going under- or unpaid. City and regional governments are deeply in debt after their tax revenues fell due to the property crisis and the pandemic, while spending continued to rise.
Details of any increased spending may emerge later, possibly during the national legislative session in March, analysts said.
Easier credit for investment and housing purchases
Earlier this week, the Politburo endorsed plans to pursue “moderately loose” monetary policies, rather than the “prudent” stance that had prevailed for the past decade.
The last time China adopted that approach was in 2008-2010, when the central bank eased credit aggressively as an antidote to the shocks of the global financial crisis, noted Tao Wang of UBS.
Earlier this year, the People's Bank of China began cutting interest rates and the required reserves banks must keep on deposit, and is expected to cut rates further in coming months, Wang said.
Cheaper credit would make it easier to finance purchases of housing and other investments as the central bank plays a growing role in helping keep markets stable and boosting the economy.
Expectations of lower interest rates have caused bond prices to soar. But overall, investors who were hoping for more details of planned policies appeared disappointed with the outcome of the week's meetings. On Friday, the Shanghai Composite index fell 2%, while Hong Kong's Hang Seng sank 2.1%.
Overall, a cautious approach as China awaits Trump's second term
Xi's longer-term blueprint for building an innovative, high-quality modern economy remains the framework for China's future course as leaders fine-tune policy details while watching to see what Trump does once he takes office.
As the U.S. and o ther trading partners have imposed ever tighter controls on China's access to advanced technology, such as the latest computer chips and the tools and materials to make them, Beijing has retaliated with its own targeted measures.
Economists say China's leaders are holding back on more drastic moves to support the economy, which is growing at a reasonably fast pace despite its chronic weaknesses, as they wait to see what happens.
'Chinese authorities have been stuck in a more reactionary policy mode, as the uncertainty of U.S. tariff plans makes it difficult for policymakers to make any commitment just yet," Yeap Jun Rong of IG said in a report. “There may still be room for positive surprises, but much will lie in any upcoming policy specifics.”