Chief China Strategist
Summary: At the annual Central Economic Work Conference held last week, the Chinese leadership emphasized policy priorities as being economic stability and high quality of development. Fiscal and monetary policies will be rolled out to support growth but will be measured. Industrial policies are aimed at promoting development as well as national security and focus on addressing the weak links and bottlenecks of the country’s supply chain. The most notable positive development from the meeting is a shift to a conciliatory stance towards the private sector and a pledge to support internet platform companies.
The Chinese Communist Party held its annual Central Economic Work Conference (CEWC) on Dec 15 and 16 to formulate China’s macroeconomic policy frameworks for 2023. The most important new message sent from the readout of the CEWC is a shift to a more conciliatory stance towards the private sector and in particular the internet platform companies. The CEWC removes last year’s “preventing the disorderly growth and expansion of capital” from its readout this year and instead says the authorities will “support the development of the private sector and private enterprises” and pledges “support to platform enterprises in leading development, creating employment, shining in competing globally”. It goes on to call for thorough implementation of the legal and institutional equal treatment of private enterprises and state-owned enterprises and protection of the rights of private enterprises and entrepreneurs according to the law. The CEWC instructs ranks and files of the Communist Party to provide assistance to private enterprises in resolving issues.
On Sunday, two days after the conclusion of the CEWC, the Party Secretary of the Zhejiang province, who came to the office this month, paid a visit to Alibaba’s campus. He was the most senior-ranked official to visit the e-commerce giant since the Chinese authorities started cracking down on the allegedly monopolistic power of Alibaba ad some other Chinese internet giants.
The CEWC prioritizes the stimulation of domestic consumption at the top position in its plan to expand aggregate demand. It pledges to roll out more fiscal policies to increase the income of the rural population and support household consumption spending on the improvement in housing conditions, new energy vehicles, and elderly care services.
The crux of industrial policy is to speed up technological innovation to address deficiencies and bottlenecks in key industrial supply chains. It reiterates the importance to develop energy and mineral resources and increase food production. On the new economy front, the CEWC highlights the focus on new energy, artificial intelligence, biomanufacturing, green technology, and quantum computing. Industrial policies are positioned as an instrument to address development as well as national security considerations.
The CEWC places the discussion of supporting the property sector within the section of “effectively resolving significant economic and financial risks” and frames the policy discussion in that context. It puts the rhetoric of “housing is for living in, not for speculation”, which was missing in the statement from the recent Politburo meeting, back to the readout of the CEWC this time. The focus of the supportive measures to the property sector is to pre-emptively prevent systemic risks in the financial sector and local government debt crises. The CEWC insists on cleaning up and prohibiting increases in housing inventories.
While the shift in the stance to be more private sector-friendly is pro-growth in essence, the CEWC emphasizes that growth must be of high quality and the overarching focus for 2023 was on macroeconomic adjustment and stability. Development must be in adherence to the new development paradigm that aims at the transformation to a high-value-added economy. Fiscal policies will be “proactive” and monetary policies will be “steady, forceful, and targeted”. At the same time, policies must be steady and give utmost importance to stability. In other words, while both fiscal and monetary policies will be expansionary, they will likely be measured.
The CEWC pledges to “do its best to achieve the economic development goals from 2023”. It refrains from using the more committal words of “must” or “shall” and signals that the achievement of economic development goals will be on a best-effort basis. GDP growth rate is not the most important consideration for 2023. In the taxonomy of dialectic that is at the core of the communist methodology, the primary contradictions highlighted at the CEWC are pandemic control and economic development, quality and quantity in economic development, supply-side reform and aggregate demand management, and domestic circulation and international circulation. It is the aim of the Chinese leadership to navigate and strike a balance among each pair of these contradictions.
Investors may find the lack of commitment to more and larger-scale stimulus policies underwhelming and even disappointing. Nonetheless, the shift to a conciliatory stance towards the private sector and not reiterating the traffic-light approach to regulate the technology sector will contribute to economic growth as well as reduce risk premiums for investing in Chinese stocks. On balance, the outcome from the CEWC tends to be positive for investing in China.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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