Ahead of China’s key economic meeting, ‘risk of potential instability’ looms large in decision-making

China’s Politburo highlights the central government’s concerns over weak investment and sluggish demand in the lead-up to its annual central economic work conference
If slowdown in economic growth is worse than expected in 2022, authorities may expand monetary and fiscal policies and return to infrastructure spending

China's economic recovery

Amanda Lee

Published: 11:00pm, 7 Dec 2021

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China’s economic planners are expected to switch their focus from financial discipline to gradual easing while boosting investment and consumption to fend off headwinds to growth, experts said ahead of the annual central economic work conference that may begin this week.

But analysts also warn that it would be premature to expect an abrupt end to property crackdowns and other financial speculations. Instead, a gradual easing would be designed to keep economic growth within a minimum stable range ahead of a major leadership reshuffle in October.

China’s 25-member Politburo – the centre of power within the Communist Party – met on Monday to discuss the economic situation for next year, prior to the central economic work conference, and said the country will “put the word of stability as the top priority” in its economic decision-making for 2022.

It also highlighted the central government’s concerns over weak investment and sluggish demand, pledging to “proactively boost investment” and “support the sustained recovery in consumption”.

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For the first time, a statement following the Politburo meeting used the phrase “stability is the top priority”, said Larry Hu, chief China economist at Macquarie Capital, in a research note on Monday.

“In other words, top leaders are deeply concerned about the risk of potential instability,” he said.

Beijing has been sounding the alarm on economic risks, including a weak export outlook, possible turbulence resulting from a monetary policy shift in the United States, and changes to the global supply chain amid a geopolitical rivalry with the US-led West.

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It has also called for economic and social stability prior to the key party congress next autumn when Beijing will unveil its twice-a-decade leadership reshuffle.

China’s economy grew by 4.9 per cent in the third quarter of 2021 compared with a year earlier, down from the 7.9 per cent growth seen in the second quarter.

So far this year, Beijing has stuck to its guns by focusing on quality growth and debt reduction, reining in the borrowing practices of property developers and local government financing vehicles, which are the main platforms for off-balance funding.

While Beijing is expected to focus more on supporting economic growth, some analysts say it is too soon to expect an end to tightening measures in the property market.

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“Both monetary and fiscal policies will turn from tightening to loosening in the coming quarters,” Hu predicted. “That said, the easing will still be gradual, and it’s too early to loosen the controls on property and local government debt. The current growth down-cycle might only hit the bottom around mid-year, when more easing might come.”

Other analysts have warned that a prolonged downturn in the property market could spell trouble for China’s growth going forward, while developer Evergrande Group’s debt restructuring may also trigger a tightening of the credit market.

They say China is likely to expand its monetary and fiscal policy in the coming months, and return to its old playbook of infrastructure spending.

“If growth slows more than we currently expect – we forecast GDP will increase by 5.3 per cent in 2022 – then it is more likely that the authorities will ease policy further and provide fiscal support, including for infrastructure spending,” said Martin Petch, vice-president and senior credit officer at Moody’s Investors Service.

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China’s central bank said on Monday that it will cut the reserve requirement ratio (RRR) for major commercial banks by 0.5 percentage points, releasing 1.2 trillion yuan (US$188 billion) worth of long-term liquidity into the interbank system on December 15 to shore up the economy.

Nomura analysts, however, do not expect the RRR cut to have a significant impact on the growth slowdown. They say China’s growth is likely to weaken further next spring due to factory closures and tight social-distancing measures imposed for the Winter Olympics, along with intensifying property-sector curbs and a slowdown in export growth.

“We believe Beijing may have to significantly step up its policy-easing measures, including by dialling back some property curbs in the spring of 2022 to prevent a hard landing,” Nomura said in a research note on Tuesday, adding there could be another RRR cut in the first half next year, while the chance of a policy rate cut is small.

Iris Pang, chief economist for Greater China at ING, said China could also increase fixed-asset investment in infrastructure, transport and telecommunications to boost growth.

“This RRR cut is not aimed at small and medium-sized enterprises, so we expect that there will be more low-interest-rate financing schemes for small to medium enterprises (SMEs), which will be part of the fiscal stimulus,” Pang said in a research note on Monday.

“We are waiting for the draft of the economic work report to evaluate how much fiscal stimulus is likely. We expect two large items in the draft – one for SMEs, another for achieving the zero-carbon-emissions target.”

Given that Beijing’s raft of regulatory clampdowns this year have affected various parts of the economy, analysts said Monday’s Politburo statement sent a strong message that further easing could take place in the coming months, and that more of the same could come out of the central economic work conference.

“We expect that the spirit of the [upcoming] central economic work conference will basically continue with this tone, but it may be more specific and carry more details,” CICC Securities said in a research note on Tuesday.

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Peng Wensheng, chief economist at CICC, wrote in an op-ed published on Tuesday by Caixin that there could be measures to loosen residential mortgage loans to support real estate sales in the coming months, but added that the Politburo statement should not be “over-interpreted” as giving the green light for a relaxation in the property market.

“‘Housing is for living in, not for speculation’ is still the key message, and the Politburo meeting statement was limited in length,” Peng said, adding that the phrase “may return in the statement following the central economic work conference”.

The central economic work conference, which usually takes place for two and half days in mid-December, will cover a wide range of subjects. These include adjustments in the economy and markets, balancing the pandemic control and economic growth, and carbon-emission targets.