19 November 2019

Blueprint charts Beijing’s mission to find economic golden mean

Expectations going into the Central Economic Work Conference this month were not high. But the annual meeting that brings China’s top policymakers together to discuss economic direction contained at least two surprises, both of which offer clues to the thinking of the policy minds.

First is the decision to make containment of local government debt one of the country’s six major tasks for next year. It’s the first time debt issue has been given such priority. The position is in line with Premier Li Keqiang’s efforts since taking office to deleverage the economy.

The previous administration saw local debt, coupled with easy credit, as a shortcut to continued growth whenever the Chinese economy slowed. But the new administration has its own ideas.

Local debt has become a major worry for the economy, not just because the amount has soared close to the danger zone but also because using government debt to spur growth distorts the market, undermines efficiencies and gives rise to corruption.

The central government embarked on a national audit of local government debt a few months ago, the second such assessment since 2010, to get a clear picture of the borrowing mountain. Given that Beijing has removed GDP growth from official performance evaluations and added debt controls to the assessment criteria, it is clear the focus has shifted from the speed to the health of economic growth.

Second, there was no mention of property market controls in the statement released after the meeting. This may indicate that policymakers have realized that curbing real estate prices is a mission impossible if the market demand is clearly there.

China’s leaders have rarely vowed to control property prices since taking office in March. Judging from the central government’s actions, one thing is almost certain: it will focus on taxation and public housing projects to the steer the property market. These actions include designating a single agency, the Ministry of Land and Resources, to register real estate across the country; speeding up public housing reform and construction; and mulling expansions of property tax pilot schemes. They suggest that Beijing won’t intervene in the market and that home purchase restrictions will not be heightened, but may be maintained.

The government appears to be looking for a balance between growth and reform, and between roles of the government and the market. Striking that balance is not easy, something policymakers confronted in the second quarter when they reached a turning point. Previously, they had been confident that China could easily withstand an economic slowdown to 7 percent, or even lower. But when GDP growth slowed to 7.5 percent, the annual target, policymakers pulled back slightly from the active reformist stance it adopted in its initial days of office.

Fears over unemployment prompted the government to initiate what some people called a mini-stimulus package, which included speeding up railway construction. Premier Li Keqiang reportedly told an internal meeting that employment would face unbearable challenges if economic growth fell below 7.2 percent.

So it’s no wonder that the 7 percent figure has not been uttered since the end of the second quarter.
Entering the new year, the government’s effort to seek what Li called a “golden mean” between GDP growth and reform will continue.

It is very likely that the government will stick to 7.5 percent as the annual growth target. But since restructuring and reform have been put higher on agenda, Beijing may be more tolerant of a short-term economic slowdown deeper than 7.5 percent if the labor market proves resilient.

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The writer is an economic commentator. He writes mostly on business issues in Greater China.