China signals big shift in economic course due to US trade war headwinds
- Politburo’s omission of previously core elements of Xi Jinping’s economic plan significant, analysts say
China’s ruling Communist Party sent a strong message on Wednesday that it will significantly alter its economic policy course to respond to growing economic headwinds resulting from the trade war with the United States.
The shift was signalled in a statement after a meeting of the Politburo, the party’s top policymaking body, which analysts agreed marked an important change in tone compared to three months ago.
Past Politburo statements emphasised the “three battles” – of financial risk control, poverty alleviation and pollution curbs – that formed the core elements of President Xi Jinping’s economic plan. Reducing debt and excess industrial capacity were also top priorities. But these concerns were not mentioned in the most recent statement.
Instead, it indicated that the immediate economic threat posed by the US trade war was forcing a mid-course correction in economic policy.
Wednesday’s statement expressed concerns about “growing downward pressure” on the economy from a hostile international environment and noted “many difficulties with certain enterprises and the emergence of risks accumulated over long periods of time”.
“We need to attach great importance to this situation and be more forward-looking to respond in a timely manner,” it said.
“We have to enhance reform and opening up to focus on core problems with targeted solutions … We must get our own things done and firmly seek high-quality growth.”
The reference to the three battles, along with a positive reading of the economic situation as “stable with good momentum”, had been constants in Beijing’s official documents since December 2015, when Xi’s “supply-side structural reforms” concept came into shape at the annual central economic conference.
Since then, there have been nine meetings discussing the Chinese economy and summaries of the first eight included the same economic policy mantra. The change in wording in the statement from Wednesday’s meeting, therefore, was very important, economists said.
“Beijing finally realises the mounting challenges,” Nomura economists led by Lu Ting wrote in a note. At the same time, “Beijing is yet to make clear statements to address some key barriers”.
China’s most powerful inner circle generally meets behind closed doors to discuss the economy on a quarterly basis – in April, July, October and December – with official media releasing tightly controlled statements afterwards.
These public disclosures are brief and reveal little about the internal debate in the meetings. Still, the wording is carefully chosen, offering some clues for observers to interpret Beijing’s thinking and to make calls about the outlook for specific policies.
For instance, the Politburo meeting in December 2017, a month after US President Donald Trump visited Beijing, underscored the leadership’s buoyant mood about China’s economic role in the world. “China has become an important source of power and stabiliser for global economic growth, and China’s influence over the world economy and China’s voice in global governance has greatly improved,” the Politburo said in its statement then. This would allow China to focus on its domestic battles and make efforts to “keep the leverage ratio under control”, the Chinese leaders decided.
But just a few months later, the trade war between China and the US began, with economic growth quickly losing momentum and China’s stock market becoming one of the worst performing in the world.
Fudan University economics professor Li Weisen said debate was intense among academics and government advisers over the proper course for Chinese economic policy.
“The general consensus is that the Chinese economy is facing downward pressure and the pressure will only grow,” Li said. “But there’s no agreement on what to do about this – some are arguing for boosting investment but others may not agree.
“It’s a very delicate moment.”
The latest Politburo statement also included new lines about protecting the private economy and boosting the stock market. And at a symposium on Thursday, Xi assured a group of private business owners that they would be protected by the party.
At the same time, Wednesday’s statement left out previous comments about accelerating infrastructure investment and regulating the housing market.
Ding Shuang, chief China economist at Standard Chartered, said Beijing was ready to take a pro-growth stance in setting policy.
“Now the priority is to boost infrastructure investment, to cut taxes, and to ease monetary and credit policies ... all will be implemented very quickly,” Ding said.
He said deleveraging, a catchphrase that was once at the centre of China’s economic policy mix, was no longer the priority.
George Magnus, a research associate at the University of Oxford China Centre and author of Red Flags: Why Xi’s China is in Jeopardy, said the tweaks in monetary and fiscal policies would not be enough to lift the Chinese economy out of its troubles.
Magnus said that while Xi had enhanced the control of the state and party in the economy, the right alternative would be “bringing more market mechanisms into play and allowing the state to retreat or lessen so that there could be transfer of wealth from the public to the private sector, a recalibration of the state’s role, and a greater role for private decision-making”.
“That’s easy to say but it’s hugely political and would involve greater reliance on an independent judicial system, neutral contract enforcement, a competition and regulatory environment ... This is simplely not what Xi’s China is about,” he said.