Caixin View: Curb Your Enthusiasm Over Big China Meetings
It's set to be a big week for economic policy in China. President Xi Jinping will give a speech commemorating the 40th anniversary of reform and opening up policies on Tuesday that may set out his vision for the next phase of reform. The annual Central Economic Work Conference (CEWC), a key meeting that will decide on economic policies for 2019 will also take place, likely also starting on Tuesday or Wednesday, although there's been no official confirmation as yet.
These events could present Xi with the ideal platform to offer some concrete policies to push forward with reforms, some pledged as far back as 2013, that have been slow to materialize. Optimists are hoping for news of "structural changes" that will meet the U.S.'s demands outlined in the 90-day trade war truce announced on Dec. 1. These include a dismantling of non-tariff barriers, an end to forced technology transfers, cyber theft and intrusion, opening up of the services and agriculture industries, and better protection of intellectual property, according to the U.S. account of the Xi-Trump meeting. Other items on the wish list of the private sector, and foreign governments and companies include creating a level playing field between favored state-owned enterprises and everyone else.
While minor concessions are possible, we don't think major changes or announcements are likely, mainly because last week's Politburo meeting, usually a reliable indicator of what's to come at the CEWC, gave little sign of movement on these issues. We think the meeting added to evidence that the leadership is choosing to focus on previously stated targets and priorities.
The familiar priorities highlighted were:
● Stability — for employment, the financial sector, foreign trade, [domestic] investment, market expectations, and foreign investment.
● Supply-side structural reform — one of Xi's signature policies which involves among other things, reducing overcapacity, lowering costs for business, deleveraging the business sector and dealing with “weak links” in the economy.
● "Three tough battles" — these were set out at last year's CEWC and comprise fighting pollution; reducing risks, especially financial risks; and battling poverty.
Two of the "three tough battles" — countering pollution and financial risks — have in practice seen varying degrees of retreat in the second half of 2018 in the face of slowing economic growth. But their presence as priorities in the Politburo meeting summary, released by the official Xinhua News Agency, reflects the need for emphasis on continuity at the top of the policymaking process, despite the increasing economic headwinds.
● Controls on winter heating and heavy-industrial output to curb pollution have been less onerous than last year. The government has relaxed its original target for cutting particulate matter and ditched the one-size-fits-all approach to pollution curbs used last year, giving local governments more discretion to set their own production quotas. This has been widely seen as opening up opportunities for less strict enforcement.
● The official tone toward shadow banking, seen as a key source of financial risk, has softened considerably this year after a regulatory crackdown led to a severe liquidity crunch in the financial sector and the real economy, making it much harder for some companies, particularly small and private-sector companies, to access loans. Yi Gang, the central bank governor, said in a speech last week that shadow banking is a “necessary supplement” to financial markets.
The summary of the Politburo meeting also contained additional phrasing that we think supports our view that China is not contemplating a major overhaul of its policy priorities:
● The meeting emphasized that international and domestic conditions should be viewed through a "dialectical" lens, although it did not elaborate. We think this rather esoteric Partyspeak means the Politburo sees the pressure on China's economy as tied up with broader international developments, including, but not exclusively, the trade war with the U.S. This implies that some of the challenges facing the economy are out of the government's hands and therefore, a domestic policy revamp is not warranted.
Apart from familiar policy themes and an extra dose of grit, we expect Xi's speech and/or the CEWC meeting to put a greater emphasis on shoring up the economy in 2019. The Politburo meeting said growth should be kept “at a reasonable level” next year. Another loose gross domestic product growth target will probably be set — likely around 6%-6.5%, compared with “around 6.5%” for 2018, although this will not be officially announced until next March. Marginal concessions with an eye on the U.S. are possible, of the kind that have already been offered — like bringing car tariffs on U.S. vehicles back down temporarily to 15% from 40%, and agreeing to buy more soybeans.
Analyzing the signals coming from the Politburo meeting and other recent government and regulatory pronouncements, and looking at the market opening policies and concessions to the U.S. that have been announced this year and are already underway, we see little prospect that the CEWC or Xi's speech will offer any major announcements or new departures.
Dec.18: 40th anniversary of the announcement of reform and opening up will be held in Beijing
The annual Central Economic Work Conference will begin this week
The annual Central Rural Work Conference will begin late this week or early next week
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