China macro:Comments on Central Economic Work Conference

The Central Economic Work Conference (CEWC) concluded today. The pressrelease sends conflicting messages. It reiterates the importance of maintainingstability, which suggests the growth target will stay at 6.5%. Meanwhile it alsoindicates that fiscal policy stance will not be as supportive as in 2017, andsuggests that containing financial risks ranks at the top of policy priorities. Wemaintain our view that growth will slow in H1 given the tight policy stance, andthe government will loosen policy in Q2. Detailed comments are as follows.

    1: Growth target likely stays at 6.5%. The CEWC press releases do not disclosethe growth target. This is usually released on March 5, the first day of theNational People’s Congress. The tone of the press release today suggests thegovernment is unlikely to lower the growth target, as it reiterates the importanceof maintaining stability, the same statement as in the 2017 press release.

    2: Fiscal support to weaken. The press release states “proactive fiscal policystays unchanged” but we think this refers to the central government fiscal deficitstaying at 3% of GDP. What is new in this press release is the statement to“effectively strengthen local government debt management”. As we discussedin our recent report here, local government debt is growing fast, and its qualityis worsening. The central government will likely tighten control over localgovernment debt. We expect this will result in lower growth of total governmentspending to 5% in 2018 from 13% in 2017 (see our annual report here).

    3: Three policy priorities in 2018-2020: financial deleveraging, poverty reduction,environmental protection. The government reiterates the importance ofcontaining financial risks. While the press release states that monetary policystance should stay prudent and neutral, the focus on financial deleveraging willlikely lead to a tighter environment.

    4: Support the SOEs to become stronger and larger. This statement was not inthe 2016 CEWC press release, but it showed up in President Xi’s speech at the19th Party Congress.

    5: Property market policy is vague. The press release focuses on developing therental market, which is unlikely to resolve the current problem in the propertymarket. Other than the rental market, there is no details on what policies thegovernment intends to promote to achieve “long term sustainable and healthyproperty market”. The issue of property tax was not mentioned.