China’s 2021 Central Economic Work Conference (CEWC) was held last week at the Jingxi Hotel in Beijing. While a communique was issued on Friday night, the meetings continued through Sunday, including sessions on Saturday and on Sunday morning personally chaired by President Xi Jinping.
The objective of the CEWC meetings was to review China’s “economic work” in 2021, analyze the current economic situation, and arrange the 2022 “economic work.” Members of the Communist Party of China (CPC) Central Committee and all ministers and provincial leaders were in attendance, and sources believe it may have been the most important CEWC held by Xi Jinping since he became general secretary of the CPCCC in 2012.
The Driving Economic Policy Message
Most importantly, as we expected, the CEWC communique flagged downside pressures in unusually stark terms, set the achievement of stability as its top economic priority for 2022, and called for the front loading of stimulus into the first quarter of next year (see SGH 12/8/21, “China: Monetary Stimulus, and Boeing Politics”).
From what we understand, there was some back and forth among participants over the adoption of a 5.0% GDP target for next year, with most participants concerned about showing such a considerable economic deceleration from this year, while others felt 5.5% would be setting an unattainable goal.
For now, next year’s GDP target is being officially thought of as somewhere between 5.0% and 5.5%, and if the economic situation in the first two months is “not ideal,” Premier Li Keqiang can then announce the 2022 target at 5.0% at the “Two Sessions,” or conversely raise it to 5.5% if the economy turns out better than expected.
For all practical purposes, that discussion is however moot, as Beijing is pulling out the stops to even hit a 5.0% number, stimulus that will come on the monetary, credit, and fiscal fronts.
On the monetary front, the stimulus will likely come in two phases. From when the most recent Reserve Requirement Ratio cut takes effect on December 15 to the Spring Festival on February 1, there will be an injection of more liquidity into the markets through the ramping up of re-lending to banks, including through a recently introduced decarbonization supportive tool. Another RRR cut will probably come then in February, although some officials think an interest rate cut may be less likely.
For perspective on magnitude and the room for stimulus, the CEWC meeting set the CPI target for 2022 at 3.0%, the same as for 2021, but predicted inflation would rise in a more modest way, from 0.9% in 2021 to 2.2% in 2022. And so, officials believe inflation will pose no major constraints on monetary policy.
On the credit front, the CEWC pledged to stabilize credit growth, keeping total social financing growth broadly in line with nominal GDP growth.
That means next year’s credit target will be basically the same as this year, or slightly increased. That too will be front loaded — new loans are expected to reach about 20 trillion yuan in 2022, with the first quarter likely to be close to 8 trillion yuan, up about 300 billion yuan from 7.7 trillion over the same period last year.
On the fiscal side, the CEWC called for a more proactive, while prudent, policy to prop up a slowing economy, and called on local governments at all levels and relevant departments of the State Council to “assume responsibility” for stabilizing the economy and to take the initiatives that are conducive to economic stability.
With an eye on the property markets, Beijing has already initiated a turn in its trend toward reining in local government risk and issuance to encouraging expansion.
On the currency front, there is a broad sense that the main risks posed to the economy are through flagging domestic demand, while trade and exports have been recovering and holding up well. So there has been a good deal of official tolerance for appreciation of the Renminbi and for its “two-way trading.”
But there are limits to that tolerance, as we flagged in a first significant warning shot over excessive currency strength from officials two weeks ago (see SGH 11/30/21, “China: A Warning on the Currency”). In a bid to tame the rising yuan, China’s PBoC then announced on December 9 that it would be raising the deposit requirement for banks on foreign exchange from 7% to 9%, concurrent with its RRR cut.
Looking ahead, Beijing expects a hiking US interest rate environment juxtaposed with an easing bias at home will also help alleviate, and eventually reverse, some of those currency pressures. But they also point to much of the appreciation pressure coming from their own state condoned strategic drive to invoice trade increasingly away from dollars, and into the yuan.
High Tech, the Industrial Chain, and Payment Systems
Finally, as to the weekend sessions after the release of the CEWC communique, those focused mainly on two topics, high tech, and the industrial chain.
Committing to long term technology development and dominance ambitions, the session also cited the need for China to further consolidate and improve its manufacturing system and industrial chain, which should be the most complete and powerful industrial chain in the world, with China as “a core, radiating to ASEAN member states.”
The meeting also stressed that China’s Cross-Border Interbank Payment System (CIPS) needed to be further strengthened and used more widely, to ensure that China can quickly abandon the SWIFT payments network and use its own payment system should US-China relations deteriorate further.