Tag Archives: economic policy

A Better Quality Economy

WHAT CAUGHT THIS Bystander’s eye from the annual Central Economic Work Conference, the key closed-door economic policy meeting of the year held in the PLA’s Jingxi Hotel in Beijing last week, was that economic policy priorities were set for the next three years rather than the usual one.

That will take policymaking to the midpoint of President Xi Jinping’s second term and the start of what should be the next cycle of leadership regeneration. It likely signals that there will be no alternative economic path than the one that leads to making good on Xi’s promise to build a “well-off society” by then.

The work conference was the first gathering of the Central Committee since the 19th party congress. It marked a start to translating Xi’s concepts of the next stage of China’s development being a transition from ‘rapid growth’ to ‘high-quality growth’ into plans and targets that each province and ministry will then have to turn into tasks and initiatives.

Xi has greatly tightened his grip over economic policy since taking power five years ago.The State Council, the mechanism through which the prime minister had formed economic policy, has become an implementation agency. The Central Leading Group of Financial and Economic Affairs, headed by Xi, is where the decisions that matter now get taken.

The outcome of the discussions at the work conference, which involved the 400 most important officials in the country, will not be disclosed until next March when they will be announced within the government’s work report to the annual parliamentary session as the economic targets for 2018.

All that is known at this point from state media is the already well-advertised transition from rapid to high-quality growth involving an economic model with “more focus on fairness, the environment and a joyful life”. The top three priorities for delivering that are alleviating poverty, pollution and financial risks.

Parsing that suggests that poverty relief will take precedence over maximising overall GDP growth, and financial stability over reform and liberalisation. Thus financial policy will focus on deleveraging through controlling credit growth rather than reducing existing corporate debt. Monetary policy will tighten in 2018; the external account will be kept stable, rather than opened up.

Systemic financial industry corruption will be tackled, particularly by cracking down on murky practice within shadow banking; more regulation in this area, particularly for asset management products, is likely next year. The introduction of a 3% value-added tax on some financial products will also provide a useful administrative tool for policymakers to bring shadow banking more in line.

It all adds up to a gamble on steering the real economy clear of financial risk through controlled growth and economic management. The gamble is probably most vulnerable to an external economic shock such as a deterioration in economic relations with the Trump administration in the United States.

The concern for Beijing is not the general macroeconomic one from US monetary policy ‘normalising’ but the danger that Washington’s China hawks get the upper hand in the administration and attempt to constrain China’s access to and trade in technology thereby crimping the innovation so necessary to rebalancing the economy.

What is less uncertain is that Beijing’s efforts to tackle environmental problems, and particularly air pollution, will be driven forward aggressively, regardless of the cost. That is for reasons of domestic stability, new-industry development and international leadership.

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China’s Stimulus Two Planners Have A Weaker Hand To Play

James Kynge, of the FT’s China Confidential, writing in the parent newspaper at the weekend, makes grim reading for any European or American policymaker hoping that a second Beijing stimulus would be able to pull the world economy though its latest sluggishness:

The sustained haemorrhage of state bank deposits has swelled the unregulated shadow banking system to such a size that it now supplies more credit to the economy each month than the formal banks do, according to China Confidential, a research service at the Financial Times. This means that Beijing, which has wielded financial control as a key tool of Communist party power, now finds itself largely at the mercy of an unregulated collection of trust companies, private banks, kerb lenders and loan sharks.

Even allowing that China’s trust banks, the largest part of the shadow banking system, are registered businesses and in hock to the big state owned banks — although that is a double-edged sword; which is tail and which is dog? — and there is some local-official sway over some local underground lenders, central economic policymakers are unlikely in the new circumstances in which then find themselves to be able to replicate the instant growth they stimulated with cheap state-driven credit in 2009.

A larger concern is that even if policymakers wanted to use the large state-owned banks to deploy Stimulus Two, the banks are in no shape bank to put it into effect. Beijing has already  moved to shore up the big banks’ balance sheets. Central Huijin, the domestic arm of the country’s sovereign wealth fund, started buying shares in the country’s four largest banks on Monday to “support [their] healthy operations” and “stabilise the share prices”.

Central Huijin is already the majority shareholder in the Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China. Investors have been increasingly jittery about the balance-sheet strength of the big state-owned banks, fearing they are carrying potentially too much bad debt from the loans made since 2008 in the cause of Stimulus One.

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China Announces 30-Point Financing Plan To Stimulate Economy

The to-dos from the recent high level economic policy planning meeting are starting to emerge. The State Council has announced a broad range of measures to make sure that there is plenty of liquidity in the economy next year and that consumers, companies and infrastructure projects get the loans they need so their spending can boost domestic economic activity.

Among the 30-point mandate (in Chinese):

  • a 17% target increase in money supply in 2009, a substantial increase from the 15% annual rate in November (M2: bank and cash deposits);
  • a suspension of government issuance of three year bills and fewer one-year and three month bills, which were used to sop up liquidity when inflation was the problem;
  • a loosening of bank lending rules;
  • more state directed lending to projects that fall into the 4 trillion yuan stimulus package;
  • keeping the yuan stable;
  • new steel and grain futures markets, an expanded corporate bond market and a Nasdaq-like market for start-ups.

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