China’s annual Central Economic Work Conference (CEWC), where the economic priorities and policy frameworks for the coming year are laid out, concluded on December 18. The CEWC is widely acknowledged as the country’s highest-level meeting on the domestic economy and its financial and banking sectors. It is essential to digest the statement released by the party to examine the achievements made so far and to predict the country’s economic trajectory in 2021, particularly given that 2020 was an unprecedentedly tumultuous year.
This year’s CEWC set the theme and proposed eight tasks for 2021. This article concentrates on three core points.
First, the economic outlook is uncertain and the central government will scale down stimulus policies. Early this year, the COVID-19 pandemic triggered a severe political trust crisis both domestically and internationally, but China managed to contain the disease effectively, earning itself a propaganda victory as well as more time to wrestle with the sharp economic downturn. Later, at this year’s National People’s Congress, Premier Li Keqiang put forward a stream of expansionary economic policies, which eventually turned out to be fruitful. According to Reuters, China has outpaced other major economies in terms of GDP growth this year.
But China is conservative with respect to this outstanding “test paper” and the economic outlook, as evidenced by the seemingly pessimistic projections at the CEWC. Policymakers once again abandoned a numerical growth target, recognized the perseverance of uncertainties, and admitted the country would be enduring a variety of risks next year. Over the coming quarters, however, the Communist Party is to take a cautious approach to stimulus efforts, so a bold stock market bull run as happened in July seems unlikely. To downplay both fiscal and credit easing given policymakers’ mounting concerns over government debt and leveraging in the financial industry, Beijing expects to underdeliver in its efforts in 2021 with regard to promising sufficient liquidity. This is also proved by the Politburo’s progressive weakening of tone regarding the implementation of policies (“intensify the efforts” at the March 27 Politburo meeting, “more efforts” at the April 17 Politburo meeting, “ensure effectiveness” at the July 30 Politburo meeting). Nevertheless, such policy tightening is believed to be gradual and steady, as the top policy panel pledged to “make no U-turn.”
Second, China called for demand-side reform. At the 2015 CEWC, President Xi Jinping announced supply-side reform, and soon it became one of the overarching economic agendas of his term. Supply-side reform puts overcapacity problem at the center because Beijing has realized that its economic model is untenable. The outpouring investments not only place enormous financial burden on local governments but also exceed actual demand.
This year’s CEWC proposed a new focus on demand-side reform. While the central government is not about to unleash a wave of loose monetary policies next year, it suggests consumption is of central importance to the revitalization of the economy. Beijing’s policy shift to domestic demand reminds people of the global financial crisis in 2008, during which time then-Premier Wen Jiabao stressed the importance of promoting consumption. What is different from the rhetoric back then is that China now emphasizes the sustainability and quality of the demand side. At the 2020 CEWC, Beijing vowed to create more job opportunities, optimize income distribution, and expand the middle class. It continued taking a tough stance on “land financing” (tudi caizheng), commonly referred to a situation where some local governments and real estate developers conspire to gain profits from land proceeds, thus creating a false perception of GDP growth. For the party, domestic consumption is no longer an isolated agenda; it is coupled with people’s welfare.
At the same time, the government noted that demand-side reform should form a practical basis for supply-side reform (“demand guides supply,” as Xinhua put it). That being said, Beijing agrees that the overproduction problem has been far from fully resolved, and expects supply and actual domestic demand to be well matched in the future.
Last but not least, this year’s CEWC is marked by draconian enforcement of financial regulation. As Xi stepped into power, China took concrete steps to open up its financial market, probably due to the growing dissatisfaction of foreign investors. Unquestionably, China has an attractive market, but it is immature and is no stranger to speculation and regulatory capture. For instance, in April, China-based company Luckin Coffee was found to have inflated its sales in 2019 in order to “falsely appear to achieve rapid growth.” The new Holding Foreign Companies Accountable Act in the United States is assumed to be specifically focused on China.
The Luckin Coffee scandal embarrassed Beijing, since it lost another bargaining chip to Washington in the U.S.-China trade talks. As a result, at the CEWC, the government declared it would tighten efforts in the governance of financial institutions and listed companies, and crack down on all kinds of debt evasion.
In addition to deleveraging, China also started targeting monopolies to keep capital in check. Prior to the CEWC, China’s State Administration for Market Regulation levied fines against Alibaba and Tencent, two Chinese internet giants. Later, Beijing reaffirmed its determination to prevent the “disorderly expansion of capital” at the CEWC. To the party, large technology companies stifle competition and China’s economy, while small ones might seek financing from non-transparent channels (i.e. shadow banking) to expand operations in order to reap the “policy benefits.” (The government promised to create a favorable environment for the technology companies at the CEWC). The unchecked prosperity of the fintech industry will deal a severe blow to Beijing’s deleveraging campaign.
To conclude, in 2020, China has made vast strides toward economic revival and the opening-up of financial markets. The pandemic, however, continues on. COVID-19 has posed challenges to the whole world, and China needs to adjust to the “new normal.” How Beijing manages post-pandemic economic recovery awaits to be seen and analyzed by China watchers.
Chutian Zhou has a multidisciplinary background in journalism, finance, political science and data analysis. He is a graduate of the University of California, San Diego, and earned his second Master’s degree from Columbia University with a focus on quantitative social science. He is now based in New York City working as a data analyst.