The Central Economic Work Conference, held in Beijing in mid-December, set the tone for economic development in 2017. Some new messages from this policy conference merit close examination.
The meeting set the tone -- seeking progress while maintaining stability. This is the first time that “seeking progress while maintaining stability” was upgraded to an unprecedentedly high status, that is, from a methodology for economic work to an important principle for governance.
For this principle, “stability” is the theme and the objective. To be specific, stability means that the economic performance will be steady, the fiscal policy “more proactive and effective” to serve the supply-side structural reform, the monetary policy “prudent and neutral”, taxes and administrative fees further reduced, money supply and credit size kept at an appropriate level, and interest rates and exchange rates relatively stable.
“Progress” is reflected by the expansion of the supply-side structural reform to agriculture, rejuvenation of the real economy and the creation of a long-term mechanism for maintaining stable and healthy development of the property market. It means that breakthroughs should be made in the reforms of such important sectors as State-owned enterprises, finance, taxation and elderly care services.
Based on the overall tone, this writer believes that China’s economic growth rate in 2017 will be lower compared against 2016, probably between 6.5% and 6.6%, and that the country’s economy has yet to bottom out. In the coming few years, the GDP growth is expected to range between 6% and 7%, with short-term fluctuations highly probable.
Policymakers have concluded to continue with the tasks of cutting industrial overcapacity, bringing down housing inventory, reducing leverage levels, lowering corporate costs and improving weak economic links in 2017. The key to cutting overcapacity is to eliminate the “zombie enterprises”. The country used to rely on administrative tools to cut overcapacity, but in the future, it must gradually adopt and adapt to the market and legal approaches in reducing overcapacity. No doubt, if the government provides some financial support, it will be of tremendous help for the enterprises in the resettlement and reemployment of laid-off workers, but this is just a temporary or transitional measure and it could not be considered a cure to the enterprises’ chronic problem of a lack of the self-sustaining power. Therefore, in the process of cutting overcapacity, the priority for the government is to formulate and enforce standards relating to environmental protection, energy consumption, safety and quality, and let the market to play its role in the process, where reorganization and bankruptcy will be applied.
Deleveraging is mainly to lower the leverage levels of State-owned enterprises. One of the important approaches to deleverage is the debt-for-equity swap. This plan, however, is not designed to help the enterprises dodge their debts, but to better protect the interests of creditors. Under the scheme, strategic investors will be brought in to improve the enterprises’ equity structure and governance, to improve te enterprises’ own “blood-making” capability，and to stimulate and enhance their self-development capacity and their innovative vigor.
At present, the leverage level of State-owned enterprises is generally high, and should be lowered by five to 10 percentage points in the next few years. Of course, the leveraging levels among enterprises in different industries and different regions could vary remarkably.
Apart from the debt-for-equity swap plan, another important means for deleveraging is to develop the equity investment market so as to help enterprises raise fund directly from the market.
A “proactive and effective” fiscal policy has been proposed. This is the first time that the word “effective” is used to define the fiscal policy. By effective, it means the policy should be more targeted, and should serve the supply-side structural reform, with priorities on lowering corporate costs and improving weak economic links.
A proactive and effective fiscal policy implies, by no means, any unrestricted rise in deficits. In my opinion, the annual rate of fiscal deficit should not exceed 3% of the GDP. With an economy big and growing like that of China, a 3% deficit today could mean a much, much bigger debt size in absolute value compared with a similar percentage of deficit in the past years.
While emphasizing an increase in fiscal expenditure, we should pay more attention to how to attract and guide social capital into the fields with direct bearing on people’s livelihood, including the public-private partnership that is widely encouraged.
A prudent and neutral monetary policy is now in place. Zhou Xiaochuan, the governor of the People’s Bank of China or the central bank, characterized the monetary policy into five broad categories -- loose, tight, neutral, moderately tight and moderately loose. The prudent and neutral monetary policy set at the meeting fits the third category. It is predicted that the growth rate in M2 supply in 2017 will range between 11% and 13%.
The meeting said the monetary policy should “adapt to the new changes in the methods of money supply”. This deserves our special attention, because it means that against the backdrop of a depreciating renminbi and capital outflows, the central bank will resort to cuts in reserve requirement ratios and open market operations as the main methods for money supply in 2017.
By prudent, it means that money supply, credit size, interest rates and exchange rates should all be maintained at an appropriate level and be relatively stable, and big fluctuations should be avoided. To maintain stable exchange rates, we should peg the renminbi to a basket of currencies. In 2016, the renminbi depreciated significantly against the US dollar and likely the depreciating trend is to continue in 2017. However it is highly unlikely for the renminbi to weaken below the threshold of 7.3 yuan to one dollar.
The dollar index has already risen above 103, but it is unlikely that the renminbi will keep weakening against the dollar. A rising dollar may also fluctuate. When Donald Trump takes office, it is believed that he would adopt an expansionary fiscal policy and a contractionary monetary policy. As a result, the United States may see a surge in both fiscal deficit and current account deficit, which may lead a depreciation in the dollar.
Languages such as “houses are built to be inhabited, not for speculation” are pretty clear in the document released after the economic conference. For the property industry, the government has called for the creation of basic institutional systems and long-term mechanism that both accommodate China’s national conditions and comply with market rules.
Growth in investment in real estate in 2016 was expected to be around 6%, and a growth rate of 4% to 5% is anticipated for 2017. Such a growth is high enough to maintain some stability in the sector, and would not lead to big fluctuations.
With the deepening of the supply-side reform for agriculture and the new type of urbanization, farmers’ income will rise, making it a reality that more and more farmers will be financially capable of buying houses in towns and cities.