“What changes are apparent in next year’s economic work from the Central Economic Work Conference?”
The Central Economic Work Conference was held in Beijing from December 11th to 12th, analyzing the current economic situation profoundly and laying out a systematic plan for the economic work in 2024. By the end of 2022, most institutions and investors had recognized the complexity of economic recovery in 2023, but few foresaw the price weakness that emerged in mid-2023. Undoubtedly, this was largely associated with the residual risks in the real estate sector still in the process of being resolved. Every word in this Central Economic Work Conference reflects a caring attitude toward economic growth, aiming to actively promote it, boost confidence, raise morale, and improve the price weakness. The economic growth target is expected to be further enhanced on the basis of 2023, with government initiatives set to bolster social confidence.
Two significant policy directions emerged from this conference. Firstly, the proposal of “matching the scale of social financing and monetary supply with the expected targets of economic growth and price levels.” Incorporating the target of price levels into the monetary policy objective signifies a substantial modification to the central bank’s monetary policy goals in recent years, likely to persist for a considerable period. This indicates higher expectations from the central authority regarding the future trajectory of price levels. Secondly, the proposition of “including non-economic policies in the assessment of macro policy orientation” reflects the centrality of economic work, aligning ideological propaganda, entertainment development, and societal trends towards unified economic objectives.
The conference pointed out that the overall tone for next year’s economic work will be “seeking progress while maintaining stability, promoting stability through progress, addressing issues in a timely manner.” Since the Central Political Bureau meeting highlighted the triple pressures facing China’s economy, the overarching principle for economic work has been to maintain stability while seeking progress. After a year of economic adjustments, it can be said that the most severe situation regarding imports and exports has passed. Currently, the primary concern lies with the relatively serious issues related to real estate-related debts, which have hindered the overall economic recovery process. Under the evolution of real estate-related debts, economic data has shown distinct pulse-like characteristics. When fiscal and monetary policies are implemented, economic data can turn upwards, but this positive effect tends to last only for one to two months.
Building on the foundational principle of seeking progress while maintaining stability, the conference introduced the concept of “promoting stability through progress, addressing issues in a timely manner,” setting higher requirements for next year’s economic growth speed. It is anticipated that next year’s economic growth target will be around 5%. If the economic growth in 2023 can achieve the 5% goal, compared to the average growth rate of about 4% over the two years in 2022, the 5% growth target in 2024 demands further progress based on the 2023 foundation.
From the demand side, stabilizing the growth rate of social consumption is the first priority, which may require significant efforts. The conference stated, “We should focus on expanding domestic demand to create a virtuous cycle of mutual promotion between consumption and investment.” Expanding domestic demand has long been the focus of economic reform. The current challenge lies in deciding whether to stimulate through widespread measures or to prioritize promoting consumption through public service investments. The conference emphasized the direction of mutual promotion between consumption and investment, indicating that future focal points would likely include ensuring investments in affordable housing, equalizing investments in education, healthcare, and elderly welfare facilities. It also highlighted the need to cultivate and bolster new types of consumption while stabilizing and expanding traditional consumption. Leveraging the amplifying effects of government investments and refining investment and financing mechanisms were outlined as the strategies from four perspectives—expansion, stability, driving force, and improvement—to deploy consumption and investment work. Next year, efforts to promote digital and green consumption will be intensified. More supportive policies are expected for the promotion of new energy vehicles, driving large-scale equipment updates and trade-ins for consumer goods. Additionally, new types of infrastructure such as charging stations, data centers, and hydrogen energy facilities will continue to accelerate, while energy conservation, emission reduction, and carbon reduction will steadily progress.
“First establish, then break” sets the overall tone for structural reforms in the economy next year. The pace of adjustments and clearance of traditional production capacities might slow down. For instance, restructuring and mergers in the smelting industry may decelerate, and there could be a slowdown in the merger and restructuring of small to medium-sized banks and brokerage firms. Adjustments related to real estate-linked industries might also slow down. Simultaneously, there will be continued emphasis on increased investment in technological innovation, particularly in sectors like general artificial intelligence, connected vehicles, and battery production. Efforts to revitalize state-owned assets and activate historical credit stockpiles will quicken their pace.
In an environment of significant reductions in land transfer fees, local government funds face substantial adjustments in their structure of general public fiscal revenues and expenditures. On one hand, pressures on livelihood expenditures persist; on the other, there is considerable upheaval in the landscape of fiscal revenues. The fiscal system reform, now in its initial stage of transformation, confronts a series of systemic reforms concerning tax bases and rates. However, under the directive of “first establish, then break,” the pace of fiscal system reform might slow down, and marginal tax rates might not adjust rapidly. The conference noted the necessity to plan for a new round of fiscal and taxation system reforms and implement financial system reforms. This qualitative assessment of fiscal and taxation system reforms indicates a delay in tax reforms, reducing the impact of economic uncertainty. Under expenditure pressures, the conference emphasized the need to “persist in doing what can be done and act according to capabilities, effectively guaranteeing and improving people’s livelihoods.” In the short term, there may be an increase in fiscal deficits to cope with the postponed effects of fiscal system reform across periods, potentially increasing the supply of government bonds in the bond market.
Additionally, local governments’ urban investment platforms are expected to continue to exist for a period, with the institutional reform of these entities being delayed.
The conference highlighted that next year’s fiscal and monetary environment calls for “moderately enhanced proactive fiscal policies that focus on quality and efficiency improvements, while maintaining appropriately flexible and prudent monetary policies that are precise and effective.” The overall policy orientation of proactive fiscal policies and prudent monetary policies remains unchanged. Policies such as the front-loading of special-purpose bonds in recent years, additional fiscal budgets within the year, reserve requirement ratio reductions, interest rate cuts, and strengthened credit support for real estate enterprises will continue. Policy tools will be employed in response to economic developments. The recent policy toolbox has gradually been opened, and the trend of intensifying measures will persist. The repeated emphasis on “moderately” at the margins indicates a further acceleration based on 2023, suggesting that in the first half of next year, fiscal budget support for investments and a more actively coordinated liquidity injection through monetary policy will occur. Amid the backdrop of significant issuances of special refinancing bonds and an additional trillion in fiscal budget bonds in the fourth quarter of this year, the first quarter of 2024 will be a crucial period for the implementation of the physical workload from the trillion-yuan special national bonds. The phrase “moderately enhanced” indicates that based on this foundation, the quota for special-purpose bonds will be proactively deployed in anticipation of a significant concentrated commencement of infrastructure projects, boosting economic confidence at the start of the year. The conference also noted the reasonable expansion of the scope for local government special-purpose bonds to be used as capital, enhancing flexibility in their utilization, expanding the self-financing project pool, possibly supporting more livelihood projects and new infrastructure construction, thereby generating more long-term societal benefits. On the foundation of special-purpose bonds, it is expected that the first quarter will also see a concentrated issuance period for financial refinancing bonds to alleviate the balance sheet challenges faced by small to medium-sized banks.
In the fourth quarter of 2023, monetary policy did not take measures to reduce reserve requirements, and there was a relatively high amount of short-term liquidity injection through MLF. Going into the first quarter of the coming year, there’s a high probability that the monetary policy will continue to rely on MLF for liquidity injection. Long-term fund injections might be limited, which could maintain strong long-term bond yields. Real estate prices remain a major factor in the monetary environment. With the slow progress in clearing real estate debts, it’s challenging for monetary policy to be “precise and effective.” The first and second quarters are critical for assessing the pace of real estate investment. Under low base conditions, stabilizing the pace of real estate investment is crucial. Price restrictions on real estate sales are gradually being lifted, making related price adjustments more flexible. The supply-demand balance in the real estate sector might experience some adjustments in the first half of next year. The crux of real estate funding lies in sales; smooth sales receipts encourage residents to leverage up for properties at corresponding prices, thereby fueling positive credit cycles. Structural monetary policies can guide supply-side structural reforms through differential rate policies, creating operational space without solely relying on central bank base money injections. The conference emphasized the continual and effective prevention and resolution of risks in key areas. There’s a comprehensive approach to resolve risks related to real estate, local government debts, and small and medium-sized financial institutions, coupled with a stringent crackdown on illegal financial activities, to staunchly maintain the bottom line of preventing systemic risks. Central consideration of risks in real estate, local government debts, and small and medium-sized financial institutions necessitates higher liquidity arrangement demands in monetary policy. Providing liquidity support solely to one aspect at the expense of others should be avoided. Particularly, liquidity support for private real estate enterprises requires special consideration.
The conference notably stressed the need to enhance the consistency of macroeconomic policy orientation, strengthen economic propaganda and public opinion guidance, significantly elevating the objectives of confidence-boosting work. This emphasis is relatively rare in the content of Central Political Bureau meetings. Looking at the latest economic pulse progress, the quantity of corporate and enterprise bond issuances remains insufficient. With CPI operating at a low level and struggling to stabilize, insufficient confidence among enterprises and residents poses a significant headwind to credit expansion. The crux of macroeconomic regulation still lies in whether credit can stabilize smoothly while maintaining its expanding trend. Even through increasing the issuance of national bonds or expanding the central government deficit to bolster macroeconomic regulation, without growth in credit demand from enterprises and residents, credit stabilization becomes difficult, making it challenging to implement the strategy of promoting stability through progress. It’s expected that next year will see more publicity of achievements and discussions on the vast growth potential in the future to boost confidence. Upholding the notion of a bright future for the Chinese economy will be the central theme across various sectors.