This year’s Economic Work Conference, the annual top-level economic policy meeting, was as much about politics as economics, though that can be said most years. Creating socially stabilizing jobs was the focus, not that China is alone in that, and particularly rural jobs to absorb the migrant labor left jobless by the slump in the export manufacturing sector.
Few concrete policy details have emerged from the closed door meeting yet; they rarely do immediately but there was a broad commitment to keep the stimulus going in what will be the final year of the current five-year plan and last full year of the Hu-Wen leadership. Monetary policy will be kept loose, despite the central bank having being gently reining that in for some months. Fiscal policy will be “proactive”, which presumably means an extension of tax breaks that have been so beneficial to industries such as car making and to a lesser extent export manufacturers. In particular, more public money will be pumped into the countryside to raise demand there and thus the need for local jobs.
But as a sign of the fragility of the reaccelerating of growth seen this year, industries suffering from overcapacity will continue to see excess production capacity stripped out, under the guise of modernization and consolidation, much as we have been seeing with energy intensive and polluting industries over the past several years. New industrial investment will be kept “moderate”, according to Xinhua‘s post-meeting report.
If anything, industrial overcapacity is getting worse, especially in steel and cement making. That is not what should be being seen if recovery was on a solidly sustainable footing. And it goes to the heart of the problem China faces in growing its way out of a slowdown through investment spending, the central planner’s go-to policy response.
It is unsustainable and becomes an increasingly inefficient way to grow. Other countries might end up building bridges to nowhere, but in China state spending flows through state-controlled banks to state-owned enterprises and thus potentially deflationary industrial overcapacity.
Switching spending from investment to consumption, as we have noted before, is no easy task. Joblessness is one of the political costs of not being able to do so. Next year will see more expensive tending to the symptons and not enough curing of the underlying disease. Investors haven’t priced that into equities yet, but they will, possibly the hard way.