Key conference setting course for China’s economic ship

By Benjamin Cavender

From December 18th through the 20th China held major policy setting talks at the Central Economic Work Conference in Beijing.  The conference is extremely important for defining annual goals for economic policy and this is a key event for senior officials from various government bodies to get together to discuss policy strategy and specific policy tools to be used for the next year in steering China's economic ship.  Following this national event provincial leaders then discuss policy implementation at the local level.  

People buy vegetable at a market in Zhengzhou, capital of central China's Henan Province, Sept. 6, 2016.[Photo: Xinhua]

This year's conference was extremely important for China as the country is currently in a strong position economically but will also require significant reforms over the next few years in order to maintain stability, drive sustainable growth, and improve quality of life for China's 1.3 billion residents.  The exact discussion that officials have during the conference is rarely shared but a statement is issued that lays out key themes that the government expects to address over the coming years.  This year's objectives highlight that Xi Jinping and senior officials understand the key problems that China faces and have identified what needs to be done in order to maintain balance in an economy that has continued to prove China bears wrong.

Specifically, the government has highlighted three areas for attention in 2018, reducing poverty and improving the environment, guarding against financial risk, and engaging in further supply side structural reforms.  So, what does this mean in practical terms?  First, it should be noted that China's economy is far more resilient than many outside observers expected and is on pace to manage GDP growth of 6.8 percent for 2017 and likely for 2018 as well.  While the overall resilience of China’s economy is better than expected there are serious problems that China’s senior leaders realize must be addressed.  

China is dealing with an unhealthy level of corporate and government debt, consumer debt is also rising at a faster-than-hoped rate, property prices are putting affordable housing out of reach in many first tier and second tier cities, and the country has not progressed far enough with reforming and modernizing out-of-date industries.  Foreign firms are still not allowed equal access to many key sectors of the economy, there is continuing pressure for capital outflow, and while China has made significant progress in renewable energy the environment remains a big issue.  Additionally, in past years the government was able to drive economic growth through investment in large scale infrastructure projects, but the infrastructure has been built and the return on investment in new projects now makes most unattractive.  

Understanding the risks that China's economy faces I think we will see a continuing shift in policy towards 'quality' economic growth and less emphasis on chasing GDP numbers.  To further strengthen China's economy in 2018 looks for the government to emphasize a few key themes.  

First, we should see more opening of the economy to outside investment.  This is starting now in financial services and the right approach by the government would be to further open up the services sector to investment from international firms.  Chinese companies are strong enough now to compete with international firms on a level playing field.  This would go a long way towards reducing demand for capital outflow.  

Second, we will probably see a continued push towards modernizing China’s manufacturing capabilities with an emphasis on smart manufacturing, use of augmented reality and robotics.  As part of this push expect to see the government allowing more underperforming manufacturing businesses to fail.  In the short term this may cost low wage jobs but in the longer term it will be important for successful structural reforms as the government tries to shift from made in China to designed and made in China.  

Third, consumer credit in China will probably continue to grow but the government will be watching closely and we will probably see a further crackdown on wealth management products and shadow banking.  Again in the short term this may make it difficult for companies to raise money but is a necessary step for regaining control of the debt load carried by China’s state run banks.  

In the end I do not think we will see the government as concerned as in years past in chasing specific GDP growth numbers.  Instead I think we will see success measured in terms of developments in innovation, leadership in development of new industries, and a focus on more sustainable growth as well as improvements to the environment.  While this is all harder to measure than GDP growth of 6% or 7% or 10% it is also what is needed for China to continue to grow the number of white collar and green collar jobs available and position the country for continued stable growth over the next decade.

(Benjamin Cavender is director of China Market Research Group)