China Targets ‘Reasonable’ Monetary Policy as Economy Recovers

China said it will implement “reasonable” monetary policy next year and ensure fiscal plans are “sustainable,” signaling it will limit its stimulus measures as the economy continues to recover.

The comments were published by state media Friday after the Communist Party’s annual Central Economic Work Conference. The ruling party uses the event to set its policy framework for the coming year, with analysts expecting a renewed focus in 2021 on slowing the pace of debt growth and insulating the economy from tensions with the U.S.​

China Targets ‘Reasonable’ Monetary Policy as Economy Recovers

The language around monetary and fiscal policy was a change from earlier guidance, indicating a more measured approach to stimulus in 2021 after this year’s boost. At the same time, authorities vowed there wouldn’t be a quick reversal as the economy’s rebound “is not yet solid.”

China should “maintain necessary support” for the recovery, “make policy operations more precise and effective” and “make no sharp turn,” the conference decided.

The ruling party is expected to flesh out details of its policies and publish more precise targets when the National People’s Congress meets, usually in March.

New StancePrevious Stance
Monetary policy“Prudent monetary policy should be flexible, targeted, reasonable and appropriate”“Prudent monetary policy should be more flexible, appropriate, precise and targeted” (from 3Q central bank report)
Fiscal policy“Improve the quality and effectiveness of proactive fiscal policy, which should be more sustainable”“Pursue a more proactive and impactful fiscal policy” (from government work report in May)

China is the only major economy expected to grow this year, thanks to its effective control of the coronavirus and fiscal and monetary stimulus. The recovery so far has relied on surging property and state-led infrastructure investment, with private-sector manufacturing investment and household consumption lagging behind last year’s levels.

Goldman Sachs Group Inc. economists, led by Zhennan Li, see the fiscal deficit target returning to 3% of gross domestic product from 3.6% this year and credit growth slowing.

“Although cyclical policy would normalize next year from this year’s significant expansionary stance, we believe the likelihood of a “policy cliff” is low and the government would be mindful of the timing and magnitude of exit/reduction of policy support,” they said.

Debt Ratio

With the growth forecast to accelerate to more than 8% in 2021 from 2% this year, Beijing is turning its focus once again on reducing risks in the economy as debt soars.

The government will aim to “keep the macro-leverage ratio basically stable” next year, according to state media. Authorities will also seek to slow the growth in money supply and aggregate financing to match the expansion of nominal economic growth, which should keep the ratio of debt to gross domestic product about the same level as now.

Houze Song, a research fellow at the Paulson Institute, said the latest policy signal from the economic work conference is “growth negative.”

“Local government debt is back to the top of Beijing’s agenda,” he said. “Since local expenditure accounts for the majority of fiscal support, fiscal consolidation at local level will be a significant drag on growth next year.”

Beijing’s aim to increase technological self-sufficiency following tensions with Washington was clear from the statement, with increasing “strategic scientific and technological strength” listed as next year’s most important economic task. That was followed by increasing “independent control” over supply chains, particularly for key technologies where “choke points” exist.

Other highlights from the statement:

  • Strengthen the capacity of the state’s strategic technology, improve self-reliance and control over industrial and supply chains
  • Expand domestic demand, including by improving social security policies
  • Continue “reform and opening” policies, such as improving intellectual property protections, and the environment for businesses
  • Increase anti-monopoly work
  • Actively consider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a preferential trade pact
  • Develop an action plan for peaking carbon emissions before 2030, supporting regions with the right conditions to peak earlier
  • Maintain the “basic stability” of the yuan exchange rate at a “reasonable” level

©2020 Bloomberg L.P.

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