China puts focus on industrial policy, skips big demand stimulus
CHINA’S top leaders including President Xi Jinping vowed to make industrial policy their top economic priority next year, a message likely to disappoint investors seeking big stimulus to boost growth.
The ruling Communist party’s annual economic work conference stressed the use of “technological innovation to lead the construction of a modern industrial system”, according to a readout published by state media. It also called for steps to “vigorously” develop the digital economy and artificial intelligence technologies.
The meeting’s emphasis on supporting companies to produce higher-value products above trying to spur consumer spending will worry some economists, who have been calling for more aggressive policies to juice the world’s second-largest economy.
The meeting showed that “technology self-reliance is more important” than in previous years, said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered. “I don’t see any signs of large-scale stimulus.”
Sluggish domestic demand this year has been one of the biggest drags on China’s economy, which is hampered by a real-estate crisis and a weak jobs market, and a recent slide into deflation.
Calls for “prudent” monetary policy and “appropriately stepped up” fiscal measures echoed a meeting of the party’s 24-member Politburo last week, which was seen as taking a pro-growth stance.
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That conclave upgraded the importance of making economic “progress”, raising expectations the official GDP growth target will be kept at around 5 per cent next year. In practice, that would be more ambitious than this year’s goal, because the consumption rebound from the end of Covid restrictions has largely played out.
The overall message of the two-day work conference that ended on Tuesday (Dec 12) was that officials should “rely more on structural reforms rather than cyclical measures to revive the economy”, Citigroup economists led by Yu Xiangrong said in a note.
Officials also said the pace of credit growth should be in step with both the GDP and inflation targets. Economists said that could mean monetary easing next year to offset deflation, which has led to higher “real” or inflation-adjusted interest rates this year.
“Monetary policy could turn more accommodative in the face of deflationary risks,” implying more cuts to interest rates and bank reserve requirements in the year ahead, Larry Hu, head of China economics at Macquarie Group, wrote in a note.
Some economists saw a call to coordinate economic and non-economic policies as telling officials to think more about growth when enforcing regulations in areas such as security and the environment.
Beijing is on target to meet its conservative annual growth target of about 5 per cent this year. But the meeting acknowledged a need to boost confidence and address some of its main challenges, including record-high youth unemployment and a lingering property crisis.
Leaders pledged to meet property developers’ reasonable financing needs, ensure employment for “key groups” of people, and maintain ample liquidity. The language on housing was unchanged from previous statements, with an emphasis on social housing.
“The measures sound rather traditional and nothing much was very creative,” said Jacqueline Rong, chief China economist at BNP Paribas. “Investors’ reaction to this might be rather plain because it takes an indication of a vastly stronger-than-expected pro-growth policy to trigger very excited response.”
The final day of the event overlapped with Xi’s visit to Vietnam, marking the first time the Chinese leader has travelled abroad during the annual economic meeting, according to his public schedule.
There were some signals of new incremental measures. Policymakers hinted at providing subsidies for households to buy new appliances, cars and furniture to spur consumption. There was also a vague vow to launch a “new round of tax reform”. Tax cuts were mentioned in the readout, in a departure from last year.
Compared to last year’s work conference, there was also more emphasis on economic problems caused by a supply-side focus. The report also warned that the “complexity, severity and uncertainty of the external environment is rising”.
That was likely a veiled reference to geopolitical headwinds. The US has imposed sweeping curbs on China’s access to cutting-edge chips, as tensions simmer between the world’s two largest economies, increasing Xi’s focus on homegrown innovation.
Trade relations with blocs such as the European Union have become more strained due to China’s rising manufacturing trade surplus.
“China’s policymakers firmly believe that developing new technologies, upgrading existing industries and fostering new emerging sectors are key to enhance prosperity and productivity,” said Duncan Weldon, chief China economist at Pantheon Macroeconomics. “This strategy carries geopolitical risks.” BLOOMBERG
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