China to set economic plans amid shift from Covid Zero policy to growth

China’s abrupt ending of its Covid Zero policy injects more uncertainty into an already fragile economy, raising the prospect of looser fiscal and monetary policy and more easing in the property market to bolster growth. 
 

That’s the view from economists, who expect President Xi Jinping and his officials to flesh out policy objectives for the coming year at the Central Economic Work Conference taking place this week. A target for next year’s growth will also likely be discussed, although it won’t be disclosed until March, during the annual legislative meeting.  

The Communist Party’s new Politburo, stacked with Xi’s allies after he secured a third term in power in October, last week set the tone of the economic conference by making a decisive shift toward propping up growth. Officials must now try to reverse some of the damage done to the economy from three years of stringent Covid controls and the worst downturn in the property market in modern history, which have battered consumer and business confidence.

This year’s CEWC “will provide the first real signal of what the leadership envisions for economic policy after the end of Covid Zero,” said Christopher Beddor, deputy China research director with Gavekal Dragonomics. “It’s probably going to mark the start of a new chapter in economic policy making.”

The annual economic conference will likely begin on Thursday and is set to include members of the Politburo, provincial governors, and heads of government agencies and financial institutions. The meeting is usually three days long, with a readout published in state media at the end. 

On Thursday, the government will also release monthly economic data for November, which is expected to show a deeper contraction in retail sales and a notable slowdown in industrial production amid the latest Covid wave.  

Here’s a look at some of the major issues likely to be discussed at the economic work conference:

GDP Target
 

Senior officials have been debating a growth target of around 5% for next year, with some of them arguing that a relatively high goal will help local governments shift their focus away from Covid controls to boosting growth. Others are concerned the objective could be too ambitious.

Economists surveyed by Bloomberg predict gross domestic product will expand 4.9% next year, although a surge in Covid cases makes the outlook uncertain. 

With the economy expected to grow just 3.2% this year — the slowest pace since the 1970s barring the pandemic slump in 2020 — policymakers are under pressure to stimulate growth next year in order to achieve longer-term objectives.

Xi’s goal of raising the nation’s per-capita GDP to the level of a medium-developed country by 2035 would require annual growth rates at 5% or higher through 2030, according to Yang Weimin, a senior economic official at the Chinese People’s Political Consultative Conference, the top political advisory body.

Monetary and Fiscal Policy
 

The Politburo said last week it will seek an active fiscal policy next year and implement a prudent monetary policy that’s “targeted and forceful.” 

Analysts in China have been calling on the central government to expand its official fiscal deficit and sell more general bonds to spur growth and reduce the debt burden of local authorities. 

Goldman Sachs Group Inc. estimates China will raise the narrow fiscal deficit to 3.2% of GDP in 2023 from 2.8% this year, and allow local governments to sell 4 trillion yuan of new special bonds, slightly lower than this year’s actual issuance.

Monetary easing will also likely come through structural tools such as re-lending for vulnerable sectors of the economy, rather than broad policy rate cuts, Goldman’s economists said. That’s because growth should recover next year and inflation may pick up while Covid controls are loosened.

Property Easing
 

The Politburo statement didn’t mention the property sector, which some analysts have taken as a sign that more easing may be coming.  

Bloomberg reported last week that officials are considering playing down the significance of its stance that “housing is for living, not for speculation,” language that’s consistently been used over the years to show the government’s determination to curb debt and home prices. Beijing aims to reverse the downward trend in property industry and resume normal operation of the industry, according to people familiar with the discussions.

Any reference to the sector, change in wording, or even omission from the statement to be released after the CEWC would be key to gauge policymakers’ stance on the embattled industry.

“I expect to hear the CEWC stress support for home demand,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics. “This would provide cover for additional local easing measures such as partly rolling back purchase restrictions in large cities and mortgage easing.”

The property market is in its worst downturn in modern history following the government’s crackdown on speculation and debt risks. The slump showed little signs of easing in November, with home sales continuing to plunge despite a spate of rescue measures recently. 

Market Confidence
 

The Politburo made a rare pledge to “significantly boost market confidence,” igniting hopes that more business-friendly and pro-growth measures will be introduced. Confidence among businesses, consumers and economists have all hit record lows recently.

The Politburo said last week officials will be emboldened to get things done and local governments will be encouraged to “break through.” The rarely used phrases may drive local officials to compete to achieve faster economic growth in their regions, with GDP possibly becoming part of their performance assessments again, Morgan Stanley economists including Robin Xing wrote in a note. 

The Politburo also revived the so-called “two unwaverings” slogan — a pledge to “unwaveringly” support both public and private companies. The phrase, which hasn’t been mentioned in the Politburo statement since October 2018, has in the past signaled more support for private firms.