Year-end leadership forum to flag hawkish policy shift - Capital Economics
China Economics

Year-end leadership forum to flag hawkish policy shift

China Economics Weekly
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China’s leadership will gather in the coming days for the annual Central Economic Work Conference. With the economy now back on track, we think discussions will focus on the recent surge in debt levels and the withdrawal of COVID-19 stimulus measures. A more hawkish policy stance won’t derail China’s recovery overnight. But we do expect it to become a growing headwind by the second half of next year.

CEWC to discuss withdrawal of COVID stimulus

China’s leadership will gather in the coming days for the Central Economic Work Conference (CEWC), an annual meeting that sets the economic targets and policy priorities for the coming year. The discussions are private but a communique is usually published once the gathering concludes.

In previous years, much of the focus has been on the annual GDP growth target. Although this is not made public until the National People’s Congress in March, it is often leaked to the media shortly after the CEWC. This time the precise level of the target matters less than usual since favourable base effects from the COVID-19 downturn means that any target around the usual level will easily be met. The key question, in our view, is whether there will be a growth target at all. The leadership set a precedent this year by not publishing an annual growth target for the first time in decades. That was a response to the unusual shock from COVID-19 but it also provides an opportunity to move away from these targets in future.

Admittedly, with President Xi talking in terms of doubling GDP between now and 2035, and the NDRC reportedly considering a 5% growth target for the upcoming Five-Year Plan, we already know that numeric goals will remain a feature of medium-term economic planning. But a shift away from attempting to dictate year-to-year growth rates would give policymakers more flexibility in achieving those medium-term goals and reduce pressure on the statistics bureau to massage the GDP figures.

Besides offering clues about the future of annual GDP targets, the key takeaway from the CEWC is likely to be that policymakers are turning more hawkish. The post-meeting communique typically frames plans for monetary and fiscal policy using vague boilerplate terms that often offer little insight – for eight of the past ten years, monetary policy has simply been described as “prudent”. Occasionally though, changes in tone do flag forthcoming shifts. In December 2016, the description of the monetary stance changed from “prudent” to the slightly more hawkish “prudent and neutral”. Two months later the PBOC began hiking its policy rates. We expect a similar shift in language at this year’s CEWC, followed by PBOC rate hikes in Q1.

A change in language on fiscal policy seems less likely – it has been billed as “proactive” every year since the Global Financial Crisis. But we think there may still be some hints from the CEWC of a coming tightening in fiscal policy. In particular, we anticipate a lower budget deficit target which, like those for GDP, is often leaked following the CEWC.

In addition to the usual discussion of growth and monetary & fiscal settings, the CEWC communique also lays out broader policy priorities. What’s included (and what’s not) often provides clues to the outlook. Last year, the communique struck a more dovish tone, putting less emphasis on the government’s deleveraging campaign, which had been weighing on lending and growth. In contrast, we think financial risks will be back at the top of the agenda this year given that debt levels have jumped due to the stimulus response to COVID-19 and growth is now less of an immediate concern.

Renewed official efforts to pare back the widespread implicit state guarantees that distort credit pricing and encourage risky lending are already apparent in the bond market, where defaults have jumped recently. This is starting to weigh on credit growth, a key leading indicator of economic activity, which slowed for the first time in a year last month. This is unlikely to derail the near-term recovery since shifts in credit typically impact economic activity with a lag of around six months. But the withdrawal of policy support is likely to start weighing on growth during the second half of next year.

The week ahead

Data due on Tuesday are likely to point to a further acceleration in economic activity last month.


Data Previews

Activity & Spending (Nov.) Tue. 15th Nov.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

Industrial Production (% y/y)

10.00

(+6.9%)

(+7.0%)

(+7.1%)

Fixed Asset Investment (ytd % y/y)

10.00

(+1.8%)

(+2.6%)

(+2.7%)

Retail Sales (% y/y)

10.00

(+4.3%)

(+5.0%)

(+5.0%)

Activity goes from strength to strength

China’s economy continued to improve across all fronts in October. Most signs suggest that this continued in November.

Industrial output likely accelerated further last month. The average of the official and Caixin manufacturing PMIs rose to a near decade high in November. (See Chart 1.) What’s more, trade data pointed to continued strength in both domestic and foreign demand.

Fixed investment probably continued to gain momentum too. Strong exports are prompting faster capital spending among manufacturers. And the renewed uptick in the construction PMI suggests that infrastructure and property investment growth remained accelerated last month.

Meanwhile, we think retail sales growth continued to strengthen. Upbeat signals from the latest services PMIs and a pick-up in cinema ticket sales suggest that consumer spending continued to improve.

Chart 1: Purchasing Manager Indices (PMIs)

Sources: WIND, Markit, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (China)

Previous*

Median*

CE Forecasts*

Mon 14th

Chn

Home Prices (70 Cities, Nov.)

(09.30)

(+0.2%)

Tue 15th

Chn

Industrial Production (Nov.)

(10.00)

(+6.9%)

(+7.0%)

(+7.1%)

Chn

Retail Sales (Nov.)

(10.00)

(+4.3%)

(+5.0%)

(+5.0%)

Chn

Fixed Asset Investment (Nov., ytd y/y)

(10.00)

(+1.8%)

(+2.6%)

(+2.7%)

Chn

Property Investment (Nov., ytd y/y)

(10.00)

(+6.3%)

(+6.9%)

(+6.5%)

Chn

Surveyed Unemployment Rate (Nov.)

(10.00)

5.3%

5.2%

5.2%

Thu 17th

HK

Unemployment Rate (Nov.)

(16.30)

6.4%

6.6%

6.5%

Fri 18th

Chn

Foreign Exchange Net Settlement and Receipts (Nov.)

+101.5bn

Also expected during this period:

10th – 18th

Chn

Foreign Direct Investment (Nov., RMB)

(+18.3%)

TBC

Chn

Vehicle sales (Nov.)

TBC

Chn

CBRC Data on Fin. Inst. (Assets, Earnings, NPL, Nov.)

TBC

Chn

Job Openings to Job Seekers Ratio (Q3)

TBC

Chn

PBOC Depository Corp. Survey (Nov.)

TBC

Chn

PBOC Balance Sheet Data (Nov.)

TBC

Chn

Government Revenue and Expenditure (Nov.)

Selected future data releases and events:

Mon 21st

Chn

1-Year Loan Prime Rate

HK

Consumer Prices (Nov.)

Fri 25th

Chn

Current Account Balance – Final (Dec.)

Also expected during this period:

TBC

Chn

CBRC Data on Assets and Liabilities of Financial Institutions (Nov.)

TBC

Chn

Trade – Detailed Breakdown (Nov.)

Main Economic & Market Forecasts

%q/q annualised (%y/y), unless stated

Latest

Q4 2020

Q1 2021

Q2 2021

Q3 2021

2019

2020f

2021f

2022f

Official GDP

(+4.9)*

(+7.0)

(+20.0)

(+9.5)

(+7.5)

(+6.1)

(+2.5)

(+10.0)

(+4.5)

GDP (CE CAP-derived estimates)

(+5.1)*

(+7.6)

(+29.0)

(+10.5)

(+5.4)

(+4.0)

(+0.5)

(+10.0)

(+3.5)

Consumer Prices

(-0.5)**

(+0.0)

(+0.6)

(+1.3)

(+1.3)

(+2.9)

(+2.5)

(+1.5)

(+2.0)

Producer Prices

(-1.5)**

(-0.5)

(+1.0)

(+2.5)

(+2.5)

(-0.3)

(-1.5)

(+2.0)

(+1.0)

Broad Credit (AFRE)

(+13.6)**

(+13.5)

(+13.0)

(+12.0)

(+11.0)

(+10.7)

(+13.5)

(+10.0)

(+8.0)

Exports (US$)

(+21.1)**

(+13.0)

(+12.5)

(+7.5)

(-1.0)

(+0.5)

(+3.0)

(+4.5)

(+4.0)

Imports (US$)

(+4.5)**

(+3.0)

(+11.0)

(+16.0)

(+9.0)

(-2.8)

(-1.5)

(+10.5)

(+5.5)

RMB/$

6.54

6.50

6.40

6.30

6.20

6.97

6.50

6.20

6.20

7-day PBOC reverse repo %

2.20

2.20

2.30

2.40

2.50

2.50

2.20

2.50

2.50

1-year Loan Prime Rate (LPR) %

3.85

3.85

3.95

4.05

4.15

4.15

3.85

4.15

4.15

1-year MLF Rate %

2.95

2.95

3.05

3.15

3.25

3.25

2.95

3.25

3.25

10-year Government Bond Yield %

3.29

3.30

3.30

3.20

3.00

3.14

3.30

2.80

2.60

RRR (major banks) %

12.5

12.5

12.5

12.5

12.5

13.0

12.5

12.5

12.0

CSI 300 Index

4,941

5,100

5,250

5,400

5,700

4,097

5,100

5,700

6,200

Hong Kong GDP

(-3.4)*

(+1.0)

(+9.5)

(+11.5)

(+9.6)

(-1.4)

(-5.0)

(+9.0)

(+3.5)

Hang Seng Index

26,411

27,000

28,050

29,125

30,175

28,184

27,000

31,250

35,000

Sources: Bloomberg, CEIC, Capital Economics *Q3; **Nov.; End of period


Julian Evans-Pritchard, Senior China Economist, julian.evans-pritchard@capitaleconomics.com
Sheana Yue, Assistant Economist, sheana.yue@capitaleconomics.com