On December 16, China concluded the Central Economic Work Conference (CEWC). Often referred to as the country’s highest-level discussion on economic prospects, political agendas and government priorities, the conference looks at issues in 2022 and charts China’s course in 2023.
Last year, many Chinese cities suffered from harsh lockdowns due to COVID-19, causing tremendous economic pain. But like huge waves of protests took to the streets, the country lifted restrictions in the hope of easing the bereavement. The CEWC is one of the few post-protest meetings held at the Politburo Standing Committee (PSC) level. It is essential to digest the messages to understand how the central government is going to maneuver under this sophisticated U-turn scenario next year. There are three main conclusions.
First, China’s economy is under great downward pressure. The government pointed out that the basis for China’s economic rejuvenation was not durable. The weak outlook for the national economy, as explicitly recognized by the CEWC, is compounded by reduced demand and the fragility of the country’s supply chains. The culprit is the central government’s previous insistence on the extremely strict zero-COVID policy. This caused the total closure of Carry off China’s economic and manufacturing frontier, in the spring of 2022. Shenzhen, the country’s technology hub, also received the same fatal blow. The strict COVID-19 rules not only affected people’s lives, but also affected the country’s financial and commodity markets and even the global supply chain.
Although Li Qiang (then Shanghai Party Secretary) received credit for his heavy-handed management of the city and fired to the PSC after the XX Party Congress, the Central Economic Work Conference recognized the damage of the endless blockades. At CEWC, the CCP stressed the importance of getting the economy back on track. The first step is to restore consumer confidence by improving spaces and creating new sources of consumption. Another related strategy is a comprehensive income package that benefits both urban and rural residents. The hope is that as consumer goods, raw materials and assets are smoothly sold and realized, the country can restore domestic consumption and improve its GDP. Furthermore, a benign business environment will again attract foreign direct investment, which is another milestone the government has pledged to achieve by 2023.
Second, while Beijing is hell-bent on propping up growth, it is willing to take a cautious approach. The CEWC statement affirmed that China would pursue proactive fiscal policy and prudent monetary policy. In this document, however, there are some points that invite reflection. For example, in addressing the link between demand and supply, the statement emphasized that the supply (ie products) must be of high quality, which then results in effective demand/consumption. Economic growth, on the other hand, needs to be efficient in quality and reasonable in quantity. Finally, monetary policy must be precise and forceful, maintaining ample liquidity.
The rhetoric suggests that, unlike the policy of COVID-19, China’s economic policy will not take a U-turn; the government is not going to drastically increase stimulus efforts. The central focus, by contrast, is “high quality” growth and “efficiency.” There are three reasons for this. First, due to draconian control policies, China has slowly drained its savings account, without consistent, high-quality production. The government lacks sufficient capital to expand the economy rapidly.
Second, China’s dovish attitude echoes its growing awareness of financial risks. From the point of view of policymakers, speculators could exploit massive stimulus in areas like fintech, the stock market, real estate, and banking. Therefore, stricter supervision and a interventionist approach they are essential.
And third, as Beijing chooses to “live with the virus,” the government needs to coordinate epidemic prevention and economic development. COVID-19 infections are growing exponentially these days, after the long-awaited relaxation of ties. A concern for the fragmented economy while turning a blind eye to the exacerbation of the country’s infection problem is likely to generate a political backlash.
The final conclusion of the CEWC is that the deleveraging of the real estate industry has become one of the biggest concerns for the central leadership of the CCP. What makes CEWC 2022 unique is that the statement devoted an entire paragraph to addressing the maddening real estate bubbles found in China. In addition to old platitudes such as “houses are for living, not for speculating,” the statement says that the government seeks a stable development of the real estate industry and a reduction in hidden financial risks among top-tier real estate companies.
The change in political priority is not without foundation. In 2021, the Evergrande Group, one of the country’s real estate giants, became deeply indebted. The angst soon spread to a variety of fields, including the real estate market and even China’s soccer league (Evergrande is the sponsor of former Asian champion Guangzhou Football Club).
Beijing has felt a growing fear that the financial system would collapse without intervention, but the way to solve the problem is complicated. The central government will step in and bail out developers only if their refinancing plan is well founded, according to the statement. However, it is believed that too rapid or excessive credit injection runs counter to the general idea of companies borrowing less, strengthening their balance sheets, and reducing inventories. Balancing sustainable growth in the property market with cooling apartment prices remains a formidable barrier for China in the long term.
Given the city lockdowns, the 20th Party Congress, the dissent calling for Xi Jinping’s resignation, and the death of former Party Secretary General Jiang Zemin, 2022 was a tumultuous, if not difficult, year for the Communist Party. China has navigated treacherous and murky waters, now choosing to embrace the pandemic despite rising infections. It remains to be seen how Beijing will manage the economic recovery in 2023.