China: Stability and Growth - the new year resolutions
Two words sum up China's 2018 economic policy targets: “stability” and “growth”. The aim is to control the momentum of reform so that risks are minimised, with growth continuing to come from consumption and infrastructure investments
The Economic Work Conference was held from 18-20 December 2017. This conference is the foundation of next year's economic policies in China. It is a closed-door event followed by a statement.
Xi's "new era" thoughts get attention, again
Xi’s "new era" thoughts were quoted in the work conference, as to be expected after Xi has consolidated his power in the Party. One of Xi's new era thoughts is to grow the middle class, still the main pillar of economic growth.
Reforms are double-edged swords. They could lead to risks, and growth
The top item at the work conference was to "avoid systemic risks", exactly in line with Xi Jinping’s 19th Congress speech. This looks to be closely linked to the reforms the government has planned for 2018 - aiming to cut corporate overcapacity and to implement financial deleveraging reform, with more regulations to be in place in 2018. These two reforms, especially on financial deleveraging, could trigger risks if not carried out properly. But if successful then China's economy could enjoy another cycle of strong growth.
The chance of systemic risk is low, with reform under micro-management
We believe that any chance of systemic risk is low. Policy makers are highly aware of the risks that financial reforms could bring, and we expect the regulators to implement financial deleveraging carefully and gradually. This is where stability and growth come together.
What does a "prudent neutral monetary policy stance" really mean?
The work conference statement describes the monetary policy stance as "prudent" and "neutral". We do not interpret this as implying a tighter policy stance or indeed the reverse.
These descriptors have been present for most of 2017, and the central bank (PBoC) has raised rates or tightened or loosened liquidity when it needs to. So the description alone is just too general to conclude how tight liquidity might be or whether policy interest rates might be higher, with any hikes at a faster speed.
This vagueness gives the central bank more room for manoeuvre with financial reforms in 2018. Although we forecast three 5bp rate hikes in 2018 by the PBoC, we also do not rule out that the central bank might inject liquidity into the interbank market to lower short-end interest rates when rates are rising faster than PBoC expectations.
Aggressive fiscal spending to achieve pollution reduction in three years
As expected, pollution was an important item on the working conference agenda. We think that having a clear blue sky in three years time means the government needs to invest a lot of money. Reducing pollution will take a long time because the country needs to build up new energy facilities to replace traditional energy sources, the major source of pollutants.
China is still at the investment stage for clean energy. Although usage of clean energy has grown at double-digit rates, the base is lower than traditional energy usage. We expect that there will be significant government spending and PPP on these infrastructure projects, putting pressure on government spending over the coming three years.
Expect even larger state-owned enterprises
The statement envisions that state-owned enterprises will become even larger. This has already been a case with combining a big coal SOE with a big electricity SOE. We expect this model to develop further in 2018. The government also wants to modernise SOE corporate governance, made difficult in that Party members might be on governing boards and so drive businesses towards a pro-national strategy which may not be the most profitable strategy for a corporate.
Download
Download article"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).