China: Politburo Braces for Slowdown

Published on December 9, 2019

The tone and tenor of China’s upcoming Central Economic Work Conference (CEWC), a closely watched event where Beijing outlines its economic goals and priorities for the next year, was set last week at two top-level meetings, both presided over directly by President Xi Jinping.

The first meeting was held on Wednesday, December 4, where President Xi led a symposium in Zhongnanhai that, from what we understand, was attended by eight non-Communist Party member personages, and by two attendees without party affiliation.

At that meeting, Premier Li Keqiang reviewed the year-end 2019 economic situation and introduced the Communist Party of China (CPC) Central Committee’s current thinking around the economic goals and targets for 2020, soliciting advice from participants in the process.

The second meeting was held on Friday, December 6, also at Zhongnanhai. At that meeting President Xi, acting as General Secretary of the CPC Central Committee, briefed his fellow Politburo members on the economy, and on the prospects for 2020.

The 2019 CEWC meeting, where targets will be formalized, will be held around the middle of December, at the Jingxi Hotel in Beijing.

Lowered Targets

** At Wednesday’s symposium, Premier Li flagged what is widely suspected already – that the central government is considering lowering its 2020 economic GDP growth target from the current 6.0%-6.5% range. Of the ten non-CPC personages who offered suggestions, eight thought a target of around 6.0% would be appropriate for 2020, while two suggested a full half point drop to a target of 5.5%-6.0%.

** Premier Li then directly ascribed some of the slowdown to the effects of the trade war with the US, citing trade tensions “initiated by the US” and subsequent “economic decoupling” for having accelerated processes already negatively affecting the global industrial, supply, and value chains.

** After hearing input from Premier Li and the participants, President Xi shifted the focus to the medium-term, noting that China’s economy will reach over 100 trillion yuan ($14.2 trillion) in 2019. As such, Xi said it was natural to expect some degree of slowdown, and noted, as he often does, that Beijing should focus more on the quality of growth than on a fixed growth rate, so long as it continues to stimulate domestic consumption and activity, while accelerating the pace of the opening of China’s economy to the world.

** Following on that point, Xi conceded that the top priority of the central government would not be in keeping economic growth above 6.0% in 2020, and that even “if” GDP were to slip below 6.0%, that would be fine so long as the growth rate, employment, and CPI were basically stable.

** Finally, Xi concluded that of all of Beijing’s top economic priorities, the most important will be to help businesses, since, if businesses are doing well, growth will stabilize, and jobs will follow.

We cannot help but note this rather interesting evolution of “Socialism with Chinese Characteristics.”

Tepid Responses

** In the second, Politburo meeting, Premier Li laid out some key economic policy objectives to his fellow CPC members. Most, from what it seems, continue to appear cautious in nature, implicitly accepting the risk of trying to maintain an unsustainable 6%-plus growth rate at all costs.

** Fiscal policy, Li said, should be “more positive and targeted,” which in practice means the fiscal deficit should be allowed to reach or “just exceed” 3% of GDP for 2020. The focus will continue to be on more tax cuts and fee reductions than on spending, and not just on the production side, but also to stimulate consumption and a better distribution of income. Having said that, Li also repeated Beijing’s resistance to “flood-like” stimulus, including on large investment projects.

** Monetary policy will likely remain equally cautious, with the central government guiding the PBOC to implement a “prudent” monetary policy next year while carrying out “anticipatory adjustments and fine-tuning.” Monetary policy aimed at “countercyclical adjustments” should, as in 2019, continue to focus on increasing the availability of credit.

** And even while the central government tightens regulations on the banking sector’s risk management, it will also provide “rational targeted liquidity” to commercial banks to improve their willingness and capacity to extend loans.

On a final note, sources in Beijing believe trade tensions with the US will remain a major source of uncertainty for China’s economy in 2020 and maintain that the central government has prepared for a potential deterioration of the situation, even as both sides continue to work towards a Phase One trade agreement.

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