It’s time for China’s annual economic check-up: what prescription can we expect from leaders?
Hopes Xi Jinping will turn attention to economic liberalisation and structural reforms in second five-year term
When China’s leaders meet at the end of each year to judge the state of the economy and set policy priorities for the next 12 months, they do so behind closed doors and only release a summary of their findings when the meeting is over.
However, few who care about the global economy can afford to neglect the central economic work conference, held annually since 1994 in a heavily guarded hotel in Beijing, because it sets the direction for what is now the world’s second-largest economy.
This year’s gathering could be even more important because President Xi Jinping will be setting economic policies after consolidating his power at the Communist Party’s five-yearly national congress in October, when he was elevated to the same status as late paramount leaders Mao Zedong and Deng Xiaoping by having an eponymous ideological “banner term” – Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era – written into the party’s constitution.
There are hopes that Xi, after focusing on a sweeping anti-corruption campaign in his first five-year term, will seek to advance economic liberalisation and structural reforms in his second. The conference will also offer clues on whether the leadership will address a fundamental question: how to reconcile free market forces with an increasingly illiberal state management system.
“This year’s conference will be particularly key,” Zhao Xijun, associate dean of Renmin University’s school of finance said. “It will shed light on Beijing’s prescription for addressing unbalanced economic development, which not only applies to next year but probably also for the next decades as Xi has laid out a plan for China’s development through 2050.”
On Friday, the Communist Party’s Politburo set the tone for the upcoming work conference, saying that curbing financial risks, eradicating poverty and fighting pollution would be the top priorities for next year. In its post-meeting statement, the decision-making body also expressed the need to reform the country’s property market.
At the October congress, Xi laid out an ambitious plan to make China a “great modern socialist country” in two stages in the next 30 years – part of what he has called the “Chinese dream”. The road map envisions China becoming a “global leader in terms of comprehensive national strength and international influence” by 2050, with rule of law, innovative companies, a clean environment and reduced disparities between urban and rural areas.
China’s leadership has been trying to avoid an economic crash or financial crisis in the wake of the mid-2015 stock market meltdown that wiped US$5 trillion off China’s stock market capitalisation. But the country’s debt problem has been worsening, making its financial system more fragile, and external pressure has been building up due to interest rate increases by the US Federal Reserve.
Beijing’s heavy-handed control of capital outflows has curbed an exodus of money and stabilised the yuan, but long-term investment funds, both domestic and foreign, have been retreating. The tax cut plan being pushed through by US President Donald Trump may provide a fresh incentive for businesses to head to the United States.
Zhao said the leadership was expected to address the risks of monetary tightening in many countries, the escalating possibility of conflicts as China pursued a bigger role in the international political and economic arenas, and domestic financial risks.
Zhou Hao, senior emerging markets economist at Commerzbank, said one focus at the conference would be the need to squeeze bubbles out of the economy.
“Reducing debt financing, reining in the impulse of increasing leverage and encouraging companies to serve the real economy are likely to be highlighted,” he said.
Scott Kennedy, director of the project on Chinese business and political economy at the Centre for Strategic and International Studies in Washington, said: “We may expect a top-down, government-directed programme aimed at slowing the pace of investment growth, reducing leverage among local governments and state-owned enterprises, and expanding consumer spending beyond housing, where spending has grown too quickly.
“We may, as a supplemental tool, see modest progress in financial liberalisation, reduction of some tariffs, and relaxing investment restrictions in a limited number of sectors.”
While China was likely to continue to move forward with structural adjustments to the economy, Kennedy said “economic liberalisation is not likely to feature prominently in this effort”.
The mainland has already taken some steps to open its market wider to foreign players. Beijing has promised to let US credit rating agencies do businesses on their own, remove the cap on foreign ownership of Chinese banks and asset management companies, lift limits on investment in securities houses and further open up the financial sector in the next three to five years.
But American and European distrust of Beijing’s promises persists. Xi’s emphasis on developing bigger and stronger state-owned enterprises and China’s stricter controls on cross-border data transfer have generated criticism and dented foreign investors’ confidence in China.
“While President Xi Jinping has amassed unprecedented powers following October’s Communist Party congress, we do not foresee an acceleration in the pace of economic reforms,” said Ricard Torne, head of economic research at FocusEconomics in Barcelona, Spain. “The key challenge to address next is ensuring financial stability.”
Zhou Xiaochuan, who has governed China’s central bank for the past 15 years, said in an article published last month that the country had deep-rooted problems that could lead to financial troubles down the road. For instance, local governments were constantly pressuring the central bank to ease monetary policy, regardless of the economic conditions, he wrote.
Since the 2008-09 global financial crisis, China has flooded the economy with money. The nation’s broad money supply, M2, surged from 18.5 trillion yuan at the end of 2002 to 165.6 trillion yuan (US$25 trillion) at the end of September. However, it still failed to meet the investment demands of local governments and state-owned enterprises. China’s total debt soared from 141 per cent of gross domestic product in 2008 to 258 per cent of GDP this year. The International Monetary Fund warned in August that China’s non-financial-sector debt would exceed 290 per cent of GDP by 2022.
Gary Liu Shengjun, president of the China Financial Reform Institute, a Shanghai-based research group, said controlling financial risks had been identified as a priority by Xi at the five-yearly national financial conference in July, and concrete moves to that effect has included a tightening of the leash on asset management products and cash credit services to individuals and the setting up of a financial stability and development committee under the State Council, China’s cabinet.
“The agenda of the meeting will probably be set by Xi and his top economic team led by Liu He, who is likely to succeed vice-premier Ma Kai to head the financial stability committee in the coming months,” Liu said.
Liu He, Xi’s trusted economic lieutenant, secured a seat on the party’s 25-member Politburo after the party congress, preparing the ground for his appointment as a vice-premier at the annual meeting of the National People’s Congress, China’s legislature, in March.