China’s annual Central Economic Work Conference (CEWC)—the most consequential economic policy meeting of the year—is reportedly under way. It will set the broad direction and tone for economic policy in 2020. Two important issues from the CEWC deserve attention, which I’ve dubbed the “two prospects.”
First, the prospect of stimulus. It is always worth paying attention to the specific verbiage Beijing chooses when assessing the economy. During last year’s CEWC, by pointing out that the economic outlook was “worrying,” Beijing clearly signaled its concern. That subtle but pessimistic forecast paved the way for cranking up the stimulus in early 2019.
Now that growth is on the verge of dipping below 6%, calls for a stronger stimulus to maintain growth above 6% have resurfaced.
But hopes for the CEWC to hint at a major stimulus will likely be dashed. First, the current situation is less dire than at the end of 2018. Although the Chinese economy is still relatively weak, it seems to have stabilized since September. As my latest Macro Outlook explained, the current stabilization, in contrast to the rapid deterioration in late 2018, will likely last for some time. This takes the urgency out of launching a large stimulus.
Second, it appears that the importance of GDP growth has weakened even further since the unemployment target was added in 2018. In the past, China’s economic policy essentially can be boiled down to hitting a growth target. But forecasting economic policy based on chasing a growth target will no longer be determinative. For example, the National Bureau of Statistics has been ordered to figure out how to assess whether economic performance is within “reasonable range”.
This is further evidence that Beijing is moving away from fixating on a singular target to what is likely a “dashboard” of targets. Throughout 2019, for example, many of Beijing’s efforts to support the economy were designed to help households and firms better cope with the slowdown. So even if growth weakens further, Beijing’s response will likely take the form of targeted measures such as tax cuts.
Second, the prospect of deleveraging. The campaign began in 2018 and remains one of Beijing’s three main “battles” (the other two being poverty and pollution), with the goal of achieving “decisive victory” in all three areas by 2020. Military metaphors were deliberately used to push for swift outcomes by applying overwhelming force. Indeed, Beijing deleveraged aggressively through mid-2018, leaving in its wake collateral like a sharp growth slowdown and widespread outcry from firms about credit scarcity.
These factors, combined with escalating trade tensions in 2019, have forced Beijing to reconsider its approach. In fact, it was always unrealistic to expect that China’s financial system could be made fundamentally safer in three years, when it took a decade for the vulnerabilities to build up. The main question, then, is whether Beijing intends to stick to its 2020 schedule of completing deleveraging.
That seems unlikely for a few reasons. First, based on the experience of 2018, deleveraging has a number of knock-on effects on credit that will hurt both firms and banks. Firms will be less likely to borrow and invest because they have to deal with roll-over debt. Banks, on the other hand, will also encounter liquidity problems. In an environment in which growth may naturally dip below 6%, adding more downward pressure from deleveraging seems risky for Beijing.
Other indicators also seem to point to a moderation in Beijing’s appetite for deleveraging, at least in the near term. In the readout from last week’s Politburo meeting, deleveraging now sits below poverty elimination and pollution on the priorities list (deleveraging had always been listed first). The order switch may seem too subtle, but Beijing has also reverted to “preventing systemic financial crisis”—the language it used to define the goal of financial regulation before the deleveraging campaign began (the old verbiage was used in the pre-2017 period).
These signs point to a Beijing that is prepared to reorder the priorities for 2020 because it now deems the deleveraging schedule to be too aggressive. The CEWC will offer more clarity on how much Beijing may moderate the pace and scope of its deleveraging campaign.
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