China policy meeting agreed to support growth of about 6 per cent next year, analysts say

Orange Wang

China is expected to continue modest policy easing next year to maintain an economic growth rate of around 6 per cent, as the government puts economic stability at the top of the agenda, analysts said after a meeting of the Communist Party’s most senior officials.

But Beijing will continue to resist a stimulus of the kind it used after the global financial crisis a decade ago. Instead, it will support a faster pace of innovation and a better quality of growth rather than simply supporting a particular growth rate, analysts said.

This approach was necessary for China to withstand the effects of the trade war with the United States as well as ensure that it was in a strong position to take advantage of the global economy of the future, they said.

The three-day Central Economic Work Conference (CEWC) meeting that involved top leaders including President Xi Jinping, Premier Li Keqiang and Vice-Premier Liu He, set China’s economic policy priorities for next year. An official statement afterwards did not reveal specific economic targets. Those will be officially disclosed in Li’s government work report in March at the “two sessions” meetings of the National People’s Congress and Chinese People’s Political Consultative Conference.

The statement said the leadership would pursue “a reasonable economic growth in terms of quantity” and “keep the economy with a reasonable range” next year.

“The exact meaning of this sentence is to maintain an economic growth rate of around 6 per cent, to reach the perfect completion (of the government’s goals for 2020),” said Zhang Yansheng, chief research fellow at the government-affiliated think tank China Centre for International Economic Exchanges (CCIEE).

Next year is the final year of China’s 13th five-year plan, but also the last year of the long-held commitment to building a “moderately prosperous society” that includes doubling the size of the Chinese economy in the decade to 2020.

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The expectation of the need to achieve that goal sparked a debate before the CEWC about whether the authorities should take the steps required to ensure a 6 per cent growth rate next year amid a long-running economic slowdown, made worse by the trade war.

A cut in the government’s growth target from the 6.0 to 6.5 per cent range this year would be in line with the expectations of most economists, but it would also confirm that the government was willing to allow the economy to slow modestly while it shifted resources to the development of growth drivers.

The CEWC statement on Thursday made it clear that “stability” was the government’s top economic priority for 2020. It noted a number of risks to the economy from global turbulence and called for development of contingency plans to offset their effect.

The question remained, however, of what exact policy steps the government would take to support the economy.

President Xi Jinping was one of the senior Chinese government officials at the Central Economic Work Conference. Photo: Reuters

“These wordings all show bottom-line thinking,” Liang Zhonghua, chief macro analyst at Zhongtai Securities’ research institute, wrote in a note.

Liang said he expected the central bank would continue to cut its main interest rates next year, as well as reducing the amount of reserves that banks were required to hold with the central bank, thereby releasing funds available to banks for lending.

His view was echoed by economists from the Bank of America Merrill Lynch, who believed the CEWC signalled a slight shift towards gradual policy easing to offset stronger growth headwinds next year.

“It will take at least three to four months for this development to take place,” they wrote in a note.

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Next year, policymakers will also allow some selective easing of restrictions on property investment, long a major driver of growth which has slowed noticeably in the past year, Bank of America Merrill Lynch said.

The CEWC suggested greater tolerance for an easing of monetary policy than before, which lessened the need to continue deleveraging to reduce debt and risky lending, shifting its priority to the bottom of its three key policy campaigns from the top and calling for continued flexibility in monetary policy.

The statement did not mention inflation, which economists from Goldman Sachs thought implied that a soaring consumer price index, in large part a result of pork scarcity, could be less of a constraint on monetary policy easing.

But China remained unlikely to engage in another round of economic stimulus, given the risks of rising debt levels, property bubbles and potential capital outflows that resulted after 2008. An increase in these risks would undermine Beijing’s overriding purpose of maintaining social stability, analysts said.

They agreed with reports that a “phase one” trade deal had been agreed between China and the US which, if it came to fruition, would significantly diminish the need for urgent contingency measures.

“There is no surprise that a phase one trade deal was reached … the US wanted it so badly, particularly farm purchases [by China],” Zhang said.

“But the second phase [of trade negotiations] will be very difficult as it will involve the rollback of US tariffs in exchange for Chinese structural reforms. The gap on these issues between the two sides is very large,” he added.

In contrast to last year, the Chinese leadership has put implementing “a new development philosophy” high on its list for next year, with an emphasis on improving innovation, economic balance, environmental protection and a further opening of the economy to foreign companies.

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Pushing technological innovation would be at the heart of economic policy in 2020, Zhang said. The government would support an increase in spending on research and development in provinces that lagged behind economically as part of the effort move from high growth to higher quality, sustainable growth.

Zhu Zhenxin, chief researcher with the Rushi Financial Research Institute, agreed that the meeting highlighted the importance of developing core technologies and take advantage of the potential for domestic consumption, which will become the main means of China withstanding the impact of the trade war and continuing to improve its place in the global economy.

“We should harness the scientific research strength of the whole country, just as we did in developing nuclear weapons,” he wrote in a note.

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