China’s top leaders will likely signal a more pragmatic approach toward Covid controls at a key upcoming meeting while putting more focus on boosting economic growth, economists say.
The 24-member Politburo, the Communist Party’s top decision-making body, usually convenes in early December every year to set broad guidelines for economic policy for the coming year. The plans are then fleshed out at the Central Economic Work Conference, which often follows within a week of the Politburo meeting.
Policy objectives, including a target for gross domestic product, are then published in March at the annual legislative meeting.
Top of mind for investors is how officials will balance the Covid Zero strategy against the need for economic growth. With Beijing now signaling a decisive shift away from its zero-tolerance approach to combating Covid infections, economists say China desperately needs more monetary and fiscal stimulus to support the recovery into next year.
In a sign of shifting priorities, People’s Bank of China’s Governor Yi Gang said on Friday the central bank’s focus is now on growth, adding a “pretty accommodative” monetary policy is maintained to help the economy recover and create jobs.
“We expect that the policy stance will remain pro-growth in 2023, especially in the first half of the year,” said Carlos Casanova, senior economist for Asia at Union Bancaire Privee UBP SA in Hong Kong.
It’s only the second time the new Politburo is meeting -- and the first one that will be focused on the economy -- since President Xi Jinping secured a precedent-breaking third term in power in October.
Here’s a look at the key policy signals economists expect from the meeting:
Covid Pragmatism
The Politburo will likely adopt language that signals a more targeted approach toward combating Covid infections, in line with the government’s recent steps to reduce the impact of virus curbs on economic activity and the lives of people.
Officials have started preparing the population for more outbreaks and a potential exit from Covid Zero. Beijing city, for example, will allow some infected people to isolate at home, Bloomberg News reported. Manufacturing hub Guangzhou replaced lockdowns in some districts with more targeted restrictions.
Markets will be zooming in on any changes in the Politburo’s statement regarding the Covid strategy. Since April, the Politburo’s language has been consistent in highlighting three objectives of “putting the people and their lives first, preventing imported cases and a domestic rebound, and dynamic Covid Zero.”
Sun Chunlan, the outgoing vice premier who has steered China’s Covid policy, dropped reference to those three goals in a speech this week, a further sign the government was slowly shifting its stance on virus controls.
Another objective put forward by the Politburo in previous statements, and frequently adopted by officials since, is for China to “efficiently coordinate Covid control and economic development.” Putting the economy ahead of Covid controls in the statement would be an important shift that signals greater emphasis on growth next year.
Even so, the party’s leadership is unlikely to signal an exit from Covid Zero just yet.
“We do not expect the authorities to pivot entirely until the second quarter of 2023 given low vaccination rates,” said Casanova. It will take time for the country to achieve sufficiently high vaccination rates among the elderly, he said.
Growth Focus
With growth expected to weaken to just 3.3% this year -- the slowest pace since the 1970s excluding 2020’s pandemic slump -- officials are likely to signal stronger efforts to boost the economy.
“The language will prioritize economic growth more than it did the last couple of years,” said Arthur Budaghyan, chief strategist for China investment strategy and emerging markets strategy at BCA Research Inc. “Economic conditions are worsening, and policymakers’ pain point is being reached.”
Several prominent government-linked economists have recently urged the government to shift its focus back to promoting growth. They advised authorities to set an economic growth target for 2023 between 4.5% and 5%, though the official goal won’t be revealed until March next year. The median estimate in a Bloomberg survey of analysts is for the economy to grow 4.9% next year.
The Poliburo said in December last year that China will “focus on stabilizing macroeconomic conditions” and ensure the economy is running within “a reasonable range.” Frequent and widespread Covid outbreaks since then have disrupted the government’s plans, leading to actual GDP growth coming in much weaker than the official target of around 5.5%.
Policy Stimulus
Fiscal and monetary policies will likely stay supportive next year, but a key question for economists is how aggressive that stimulus would be.
“It will be quite challenging for China to achieve 5% economic growth if fiscal policy is not very expansionary next year,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd.
Local governments face a huge funding gap this year due to a slump in revenue from land sales and a surge in spending on Covid controls, like lockdowns and testing. The broad fiscal deficit in the first 10 months of this year was nearly triple the amount in the same period last year.
The government didn’t sell special sovereign bonds this year, falling short of some market expectations. Markets will be looking for clues on whether bond issuance will be stepped up aggressively next year, Zhang said, although the Politburo meeting is unlikely to provide such details.
Another key area to watch is whether officials will emphasize their long-term commitment to contain debt and housing excesses, according to BCA’s Budaghyan. This will determine “how long-lasting the stimulus will be” and how soon officials will roll back the stimulus once the economy recovers at some point next year, he said.
Property Easing
Officials may indicate a more supportive stance toward the housing sector, which is in its worst downturn in modern history. The government has already introduced a series of measures in recent weeks to help ease a liquidity crisis among property developers. Those include a 16-point rescue plan, a decision to lift some multi-year restrictions on stock sales by developers, as well as at least 1.28 trillion yuan ($179 billion) in big state banks’ pledged financing support to developers.
Iris Pang, chief economist for Greater China at ING Groep NV, said the government may want to wait to see the impact of the existing policies before taking further action. She expects officials to keep their language on the housing sector similar to what was said at the previous economic-themed meeting in July.
©2022 Bloomberg L.P.
