Prepare now for looming economic headwinds

If evidence were needed of the depth of uncertainty about the global economy next year it is to be found in the chief objectives agreed at China’s annual Central Economic Work Conference, which sets the agenda for the world’s main driver of economic growth. The country’s leaders said after meetings attended by President Xi Jinping (習近平) and Premier Li Keqiang (李克強) they would focus on keeping the yuan on an even keel and controlling financial risk – fundamentals of economic management. Both external and domestic conditions justify the emphasis on stability. Externally, a US interest-rate rise has already roiled markets, raised pressure on the yuan exchange rate and underlined growing financial risks. Looming in the year ahead are a new US leader promising change in the world’s largest economy and even more uncertainty in Europe .

As a result, the conference in Beijing largely focused on the heavily leveraged property and equity markets, rather than chasing headline growth figures. A line in the conference statement that “housing is for living, not for speculation” is telling. China needs to reduce leverage in these markets because too many purchasers are heavily committed. External shocks could put pressure on the country’s fragile financial system.

The economy is facing growing headwinds, including volatility generated by curbs on the housing market and weaker growth in industrial output. Most important as China weathers the risks over the next two or three years is to push for reforms that address overcapacity and rising debt among local governments and state-owned enterprises. The long-term challenge is to find new drivers of growth, involving a shift from relying on SOEs to tapping the power of the private sector.

Hong Kong, too, needs to prepare for a tightening in credit conditions as Beijing’s policies have an impact across the border. Mainland authorities have foreshadowed strictly limiting credit for property speculation. Economists say that if prices continue to soar, possible measures include new curbs on down-payment financing and requirements for second mortgages. Total long-term housing loans accounted for an unsustainable 72 per cent of all new lending last month.

The challenge to economic management and reform is in synch with the cycle of the mainland’s state planning. The 13th five-year plan soon enters year two, when a leadership reshuffle and decisions intended to shape the course of the economy will be endorsed at the party ‘s 19th national congress late in the year. The concurrence is an opportunity not to be wasted.