The annual Central Economic Work Conference, which sets out China's economic policy framework for the next year, started on Saturday (5 December) and concluded today with the release of a statement summarising the government's policy stance for 2010. As expected, the meeting reaffirmed an expansive policy stance and called for continued expansion of domestic demand.

Easy Monetary Cycle to Be Continued, with Inflation Control on Agenda

The meeting's concluding statement announced that the expansive fiscal policy and moderately easy monetary policy will be maintained into next year, although the government needs to adjust the strength, pace, and focus of such policies. As expected, the meeting has again raised the issue of inflation, saying that the country shall balance the relationship between achieving stable economic growth and managing inflationary expectations. The Chinese government adopted a "proactive fiscal policy and moderately easy monetary policy" at the conference in December last year, when the country's economy was thrown into a tailspin by the global financial crisis. Recently, expectations had been rising that the government might neutralise the easy monetary policy next year after the State Council raised concerns about "inflationary expectation" in a meeting during October—the first time such fears have been voiced since the easing cycle started last year.

Fiscal support next year will focus on efforts improving social welfare, rural development, energy conservation, small- and medium-sized enterprises, household consumption, and less-developed regions, according to a government statement released following the meeting. As for the monetary policy, the government will maintain "the continuity and stability of the monetary policy" while making it more "flexible and targeted" based on changing circumstances. Money-supply growth will be controlled at a reasonable pace based on changing circumstances in the domestic and global economies, while greater lending support will be given to weak links in the country's economy, as well as strategic emerging industries and the (inter-regional) transfer of industrial operations. Financing needs of key infrastructure and industrial projects shall be ensured, while lending will be restricted to energy-intensive and high-emission industries as well as industries with serious overcapacity.

Readjusting the Economic Structure

The conference has called for continued efforts in the adjustment of economic structure, emphasising the need to bolster domestic demand with a focus on the domestic consumer market, urbanisation, and optimisation of the country's industrial structure. To achieve such goals, the government has pledged income-distribution reforms, and to continue the rural-subsidies programme for home appliance and automobile purchases in rural households, as well as the home appliance and car trade-in programmes in the cities. As for the real estate sector, according to the conference statement the government will increase housing supply, and support individuals' purchase of housing for their own use, although it was not mentioned whether tax incentives for housing sales will be maintained. To facilitate urbanisation, the government has promised more liberal household registry (hukou) policies in small- and medium-sized cities, and has pledged greater employment and residency support for residents transferred from rural areas into urban areas.

As for industrial-structure adjustment, the government has called for the development of strategic emerging industries, such as biotechnology, new energy, and environmental protection. Greater policy and fiscal support shall be given to such industries to help China "nurture new growth points", according to the statement. Another focus will be on cutting capacity in industries with serious overcapacity, as well as trials of "low-carbon" economies.

Outlook and Implications

That China will maintain an easy monetary cycle was well-expected, after the Chinese Communist Party's politburo held a meeting more than one week ago in which the top leadership affirmed that the government will stick to its proactive fiscal policy and moderately easy monetary policy into next year, setting the tone for the economic conference. The Chinese government will have to perform a major balancing act next year, as it tries to stabilise growth while containing risks associated with the liquidity bubble spurred by the ultra-easy monetary policy. Outstanding loans at the end of September stood at above 122% of projected GDP for 2009, far exceeding the previous historical high of 117% of GDP in 2003, while China's loans/GDP ratio has typically hovered around 100% in the last ten years. This liquidity bubble has helped induce rapid investment growth, which has begun to seriously affect China's overcapacity problem. Nevertheless, an outright exit from the easing cycle is out of the question for the government at this moment due to the overarching importance of growth, even though the country's economic recovery is well on track and the Chinese economy is set to achieve growth above the targeted 8%. Instead, the government is expected to conduct targeted tightening focusing on certain sectors, mainly in the form of window guidance for bank lending as well as tighter controls on land allocation and stricter reviews of industrial projects, to tackle the liquidity and overcapacity problem. Such a process has in fact already started, after bank lending fell off a cliff from the second half of this year, and a string of orders to cut capacity were issued targeting the steel, cement, plate glass, and other sectors displaying serious overcapacity.

In terms of specific stimulus measures, the statement has made it quite clear that the automobile and home-appliance purchasing subsidies will be maintained. As for the housing stimulus policy, the government's stance looks much more neutral, reflecting the policy bind facing the government in terms of balancing the need to maintain the high growth of the real estate sector with concerns about the asset market bubble. Such ambiguities are expected to be clarified soon, with a string of specific policy announcements to be made following today's meeting.

Global Insight (Reino Unido)