China’s 2015 goal: Staying in business
- Monetary easing and stimulus spending will be “flexible” to support growth
- Upgrading the economy remains the government's key priority
- Expect frequent policy tweaks in what will be a bumpy year for the economy
The message from a policy-setting conference that ended in Beijing yesterday is that keeping the economy afloat will be the government’s key task in 2015. Growth in the coming year is to be kept within a “reasonable range”, and the longer-term goal of upgrading the economy remains a top priority.
The tone of the meeting reflects a subtle but important shift in emphasis. From managing down expectations (with slow being the new normal), the government is now talking up expectations.
Despite the unimpressive title of "Economic Work Conference", this gathering calls the shots on all elements of economic policy and determines the earnings landscape for businesses in 2015.
But the meeting was vague as to where its sees the economy’s next growth engine. It acknowledged that downward pressures on the economy are substantial and indicated that more robust fiscal and monetary measures are in the pipeline. Fiscal policy will be “stronger” and monetary policy more “pragmatic".
As is typical of China’s work meeting decisions, the broader plans for the economy are short on specifics and long on good intentions that cover large swathes of industry.
The plan is to focus on the following:
- urbanisation, consumption and agricultural modernisation
- promoting traditional industries and encouraging mass entrepreneurship
- developing services, communications and new products
- developing new technology, “strategic” new industries and the communications industry
- nurturing new “growth points”
Stimulus policy: prudent but flexible
But the conference has now given its formal stamp of approval to “flexibility” (huo 活 in Chinese) in its execution of fiscal and monetary policy, as we predicted in our preview of the conference on Tuesday.
Fiscal policy is already “pro-active” and the past year has seen the government pump substantial funds into public housing, medical and health undertakings and community projects.
The outlook is for continued stimulus spending in development zones. The conference named the Silk Road Economic Belt, the Beijing-Tianjin-Hebei development and the Yangtze River Economic Belt as key zones.
More monetary easing...
The conference has also effectively given the green light to the Chinese central bank to ease monetary policy in the coming months. The policy label of “prudent” remains, but the approach will now be “flexible”.
This change allows the central bank to embark on monetary easing without the backdoor contortions needed to achieve that result in 2014. More importantly, it allows the regulator to take a more accommodative policy stance without facing the very serious accusation of flouting Party guidelines.
The central bank is not wasting time. With less than three weeks to go in 2014, the street is already buzzing with talk that it has raised the loan target to 10 trillion Chinese yuan ($1.62 trillion). Such numbers have not been publicly disclosed in recent years. In its place are news leaks to the official media which this year had put the loan target at 9.5 trillion yuan.
If market gossip proves true, Chinese banks may be looking at cuts to reserve ratio requirements as early as this weekend to help the new target.
... by whatever name
The term “prudent” in Chinese central bank parlance supposedly describes a neutral monetary policy stance that is neither tight nor loose. But this is what neutral monetary policy has looked like since mid-year:
• Billions of dollars were freed up for bank lending in June when regulators narrowed the definition of loans and relaxed the definition of deposits in calculating the loan-to-deposit ratio requirement (which legally limits the amount banks can lend).
• In what is arguably China’s version of quantitative easing, the central bank injected huge funds into the banking system over the past months. In the second quarter, it provided a state lender with direct credit equivalent to some $163 billion. In September, it launched what it called a “medium-term lending facility” reported to be equivalent to $125 billion in low-cost funds for the big state-owned commercial banks to boost loans growth.
• Mortgage rates were effectively lowered in September for many second-home buyers through an administrative re-classification. This implies a mortgage rate for preferred buyers of 4.59% compared with the weighted-average lending rate of 6.96%.
• Last month the central bank finally took the plunge with an across-the-board cut to benchmark rates, reducing the lending rate by 40 basis points to 5.6% and the one-year deposit rate by 25 bps to 2.75%.
The 25-member Party Politburo, which is the nation’s de facto power centre, said in August that economic development “has to sustain a certain speed, or else many problems will be difficult to solve". The Work Conference is making sure that growth will not fall beyond that “certain speed”.
The GDP target for the year was not made public by the conference, although speculation in the official media is that the government is going for 7.0% in line with broad market consensus.