The full membership of the Communist Party of China (CPC), including all ministers and provincial leaders, just concluded a meeting of the Central Economic Work Conference at the Jingxi Hotel in Beijing that was personally presided over by President Xi Jinping and Premier Li Keqiang.
With so much at stake for the Chinese economy, the meeting lasted a full four days, as opposed to the traditional three day conclave. And at its conclusion the CEWC went out of its way to deliver a message intended to reassure that Beijing can and will deliver on its social and economic targets for 2015.
More importantly, it also set targets intended to send a positive signal to the world and global markets that China’s economy will stay within a reasonable and solid growth range in 2016, even as it balances its goals of long term restructuring with economic growth.
*** Xi is said to have stressed that 2016, as the first year of the 13th Five-Year Program, will be setting the stage as the crucial year for “deep reform and opening,” making it all the more critical Beijing ensures economic growth that is both “stable and healthy.” And as per Xi’s suggestion, the conference apparently agreed to try to maintain an ambitious 7% growth rate for 2016, even as the formal floor of the target will most likely be set at “no less than” 6.5% (see SGH 12/10/15, “China: More Eases and Shifting FX Policy”). ***
*** Sources from four different economic agencies on the sidelines of the meeting also indicate they expect this to mean the People’s Bank of China will continue to develop and lean on its monetary policy instruments of Re-lending, Pledged Supplementary Lending (PSL), and the Standing Lending Facility (SLF) for additional stimulus. They furthermore expect interest rates could be cut by 25 or 50 basis points in one or two steps, with bank reserve ratios slashed by 250 to 300 basis points in five or six steps, through the course of 2016. ***
*** The conference’s goals also include tackling a supply glut and overcapacity in the housing and industrial sectors, and they are said to have agreed to lower China’s 2016 formal industrial output target from 8% to 6% growth. That, among other policies, may have a significant impact eventually in the easing of some Chinese exports such as of steel, cement, or refined oil products that have been driving down prices across the broader global commodity market complex. ***
The Official Goals
Against the backdrop of international concerns over the pace of Chinese growth next year, President Xi emphasized at the CEWC meeting that even as the government strategic priority is on rebalancing the economy, its macroeconomic policies will remain focused on more forceful fiscal and more flexible monetary policy to ensure a stable growth rate for 2016 that will allow Beijing to continue on its path of structural reform.
The government has set and will continue to put employment, income growth, and the environment as its top three priorities.
Beijing will push “supply side structural reforms” to encourage investment and job creation, while supporting a rise in the living standards of China’s lower and moderate income population. At the same time Xi stressed the importance of bolstering economic growth even while upgrading the “consumption structure” of the economy.
Specifically, the supply side reforms will focus on boosting urbanization, reducing the enormous overbuilding in the housing market and inventory, tackling industrial overcapacity, lowering corporate costs, and continuing pro-consumption economic policies. The conference also reiterated efforts to realize “urbanization, industrialization, informatization, and agricultural modernization.”
The continued efforts at structural reforms nevertheless mean the policy focus should be on measures that will ensure sustainable growth and not just “short term demand management.”
Those measures will include capacity consolidation, encouraging innovation, cutting tax rates, and lowering borrowing costs and easing administrative restrictions on private firms.
And to offset the effects of over-building and these consolidation measures as much as possible, Xi stressed the need for the government to accelerate household registration reform in order to help people relocate to cities and towns, and in the process drive home sales and boost the consumption of consumer durable goods.
Setting Formal Targets
At Xi’s suggestion the conference agreed the goal for GDP growth in 2016 should be kept at 7% even though the formal floor will more likely be set at 6.5%, and as we have written before expectations more realistically are that growth if managed properly may end up somewhere between those two figures.
Indeed, that it is so politically important to hit that first year broad growth target is perhaps the strongest reason to assume China will not see a serious faltering in growth and aggregate demand next year.
The conference therefore also stressed that monetary policy should focus on the maintenance of stability – perhaps the most important goal of all for government economic policy.
The PBoC has been tasked with the goal of expanding the amount of social financing needed to maintain a moderate increase in loan issuance for 2016. The leadership stressed that monetary policy will need to be more flexible in order to provide for a steady economic rebound and avoid financial systemic risk while fostering the appropriate conditions for structural reforms for next year.
The conference furthermore set the total fiscal revenue target for 2016 at 16.65 trillion Yuan, up 1.22 trillion from 2015’s target of 15.43 trillion CNY.
They also vowed to tackle a supply glut and industrial overcapacity that has presented a major challenge to economic growth.
It set the 2016 industrial output growth rate target at 6%, a full two percentage points lower than the overly ambitious 8% target for 2015. Expectations are that the actual industrial growth rate may end up closer to 6.5%. But it may be enough of a lower target to dampen down the volumes of output for exports like steel, cement, aluminum, or refined diesel oil products.
The conference and economic leadership also pledged to stimulate the process of urbanization next year, including through an increase in allowances for migrant workers to become permanent urban residents.
That policy is intended not only to stimulate a new round of infrastructure investment in small cities and towns, but in the process to also cut the existing oversupply of housing inventory and boost growth and retail activity in local economies.
While the conference approved all the major economic targets proposed by the Central Financial Leading Group, these will still need to be formalized at the upcoming Fourth Session of the National People’s Congress, and adjusted if need be to reflect any changes in China’s economic conditions that may occur in the interim. That meeting is slated for March of 2016.