China hints at pro-business push, smaller fiscal boost in 2023

CHINA’S top leaders said they will focus on boosting the economy next year, hinting at business-friendly policies, further support for the property market while likely scaling back fiscal stimulus.

After three years of strict Covid Zero restrictions, a crackdown on financial risk in the property market and targeting excessive growth of Internet platform companies, President Xi Jinping now appears to be loosening the reins.

At a two-day Central Economic Work Conference that wrapped up on Friday (Dec 16), Xi and other senior officials pledged to revive consumption and support the private sector, a marked shift from recent years.

Economists said the signals are clear that the focus next year is on boosting gross domestic product (GDP), with policymakers likely to target growth of 5 per cent or higher.

That task will be a challenging one though given China is facing a surge in Covid infections in the coming months after virus controls were hastily abandoned and consumer and business confidence remains at near record low levels.

Here’s a look at the key takeaways from the Central Economic Work Conference and what analysts say it means for policies next year.

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More business-friendly policies, including for tech firms

Officials said they will implement favourable policy to encourage private enterprises to grow and broaden market access for foreign firms. Singling out Internet platform firms, the officials said they would support the companies in playing a leading role in economic development, creating jobs and competing in the international market.

The language on platform companies was much more positive than used during last year’s meeting when leaders emphasised supervision of the industry and curbing its “wild growth”.

“The biggest change this year seems to be the increased focus on improving the business environment for foreign and private companies, especially the Internet platform companies,” said Adam Wolfe, an economist at Absolute Strategy Research. “That could help restore confidence and boost investment in light manufacturing and the service sector.”

A GDP growth target probably around 5 per cent

Officials took a stronger pro-growth stance at the meeting than in recent years, stating the “amount” of economic expansion is important. Topping the list of priorities for next year was expanding domestic demand.

In particular, officials said consumer spending and employment growth should both be given a “more prominent position”. Incomes of urban and rural residents would be increased “through multiple channels”, they said, in order to expand spending in better housing, new energy cars, and elderly care.

Consumer spending has been a weak spot for the economy during the pandemic and economists expect a rebound next year as Covid restrictions end and infections subside. That’s likely to drive growth next year to 5 per cent or above, from an estimated 3 per cent this year.

Senior officials are debating a GDP growth target of around 5 per cent for next year, Bloomberg News reported earlier this month. Several government-linked officials have argued the economy needs growth of at least that amount in coming years to meet China’s longer-term ambitions.

Fiscal stimulus could be scaled back

While promising active fiscal policy, officials shunned phrases such as “front-loading” infrastructure investment and “new tax cuts”, which were highlighted during last year’s meeting.

For next year, officials said the focus of fiscal policy will remain to support growth, while also pledging to maintain a “necessary” magnitude of public spending, ensure fiscal sustainability and keep local government debt risks in check.

“We think this means a continued proactive fiscal policy but likely with a smaller additional fiscal stimulus than 2022,” UBS economists led by Wang Tao wrote in a note.

China’s budget deficit soared to all-time high levels this year and local government debt burdens have become unsustainable because of sliding tax and land revenue and higher spending on Covid controls. The central government boosted transfer payments to local governments and turned to unconventional income sources such as central bank profits to increase revenue.

The UBS economists expect infrastructure investment to grow 5-6 per cent next year, slowing from an estimate of more than 12 per cent in 2022. The broad fiscal deficit may rise by less than 0.5 percentage point of GDP, much smaller than this year’s increase of more than 3.5 percentage points, they forecast.

Monetary policy likely to remain loose

The fiscal limits mean monetary policy may remain relatively loose given the government is keen to expand domestic demand and the economic recovery remains fragile.

That could mean further monetary easing, like interest rate cuts, and a push to get banks to boost loans, especially to small businesses. Officials said liquidity will remain “reasonably ample”, and they’ll aim to expand credit at a similar pace to nominal GDP growth.

Comments from Liu Guoqiang, deputy governor of the People’s Bank of China, this weekend appeared to confirm that accommodative stance. He said the “magnitude of monetary policy will not be smaller than this year”, and it could be stepped up if needed, unless growth and inflation exceeded expectations, according to a report in the local media.

Further support for property market

The official slogan that “housing is for living, not for speculation” was repeated — a phrase used in previous years to signal efforts to make the economy less reliant on property as a source of growth.

Yet there were clear signs of a softening of tone, with officials pledging to support consumer demand for “better housing”, ensure “stable growth” in the sector and meet the financing needs of property companies.

Citic Securities said the language around the property market signalled the stance has “completely shifted to support and care-taking”.

“We think the government’s determination to put a floor to the property market slump is unquestionable,” Citic analysts including Ming Ming wrote in a report. “Policies will likely be eased further until the market show signs of a stabilisation and recovery.”

Senior officials have recently switched rhetoric on the property market. Vice Premier Liu He told a foreign business delegation last week that the property market was a “pillar” of the economy and new measures are being considered to improve the financial condition of the sector and boost confidence. BLOOMBERG