Amid economic headwinds, policymakers emphasize stability and signal more policy support

Updated: Jan 20


The just published economic data for Q4 2021 complete a picture of a relatively resilient Chinese economy amid various challenges. As early as December, Beijing’s economic policymakers had already taken stock of 2021 and charted the course for a politically important 2022, highlighting the need to “stick to making progress while ensuring stability.”

Assessment

  • China’s Q4 economic data show real GDP growth at 4%, leaving the 2021 annual real GDP growth at 8.1% (nom. 12.6%). This shows that while growth momentum has slowed down markedly after a robust H1 (rebound effect), the economy is not far from the size it would have achieved had the pre-pandemic growth rate continued.

  • During the December politburo meeting and the annually held Central Economic Work Conference (CEWC; 中央经济工作会议) between Dec 8 – 10 last year, policymakers in Beijing pointed to major headwinds approaching the world’s second largest economy.

  • While the official readout of the CEWC, which was chaired by president Xi Jinping, highlights the economic resilience in an important 2021, it is also not short of reality-checks: among pandemic related challenges, geopolitical turbulences and recent property defaults, it points to three domestic economic pressures – namely demand contraction, supply shock and weakening expectations – as well as an external environment that has become “complicated, severe and uncertain”, all foreboding a slowdown in economic recovery.

  • Han Wenxiu, the Deputy Director of the Office of the Central Financial and Economic Commission, the country’s top economic policymaking body, emphasized in an essay that “stability is the most important keyword of the CEWC”, and that it is “not only an economic, but also a political issue”. This illustrates how politically important 2022 is for Xi – the year he wants to be re-elected as CCP General Secretary and absolutely wants to keep economic progress as a key source of legitimacy of his continued rule.

  • Against this backdrop, more fiscal policy support in the short term is to be expected, e.g. with front-loaded infrastructure investments or support for SMEs. On the other hand, monetary support is expected to remain prudent after a reserve requirement ratio (RRR) reduction in December 2021, also in light of Beijing’s concerns of a still highly leveraged economy.

  • Policies to improve the efficiency of markets, such as fair competition and anti-monopoly regulations, will see further strengthening. At the same time, and in light of last year’s regulatory storm also in the name of common prosperity, the official readout of the CEWC tries to make the point that “we must first make the "cake" bigger and better through the common struggle of the whole nation, and then cut and divide the "cake" well through reasonable institutional arrangements”, something president Xi echoed in his virtual speech at the WEF on Monday, trying to assuage concerns that redistribution trumps growth.

  • In the same vein, the readout as well as Han Wenxiu’s essay both make clear that capital is “an active part of the means of production”, while “traffic lights” are needed to “control its negative effects”. Han emphasized that “curbing the disorderly expansion of capital is not about not wanting capital, but about orderly development of capital”.

Implications

  • Stronger economic headwinds with possible further pandemic induced supply chain interruptions make a strict zero-Covid policy increasingly difficult to defend.

  • While short-term policies will stimulate infrastructure projects to some extent, further banking on state-led fixed asset investments to boost growth would go counter Xi’s Dual Circulation policy which stresses less focus on infrastructure investments, and more on social policy expenditures and domestic consumption.

  • Beijing’s unchanged rhetoric on opening up and improving the business environment is laudable, but efficiency gains in administrative dealings cannot – even in the mid-term – compensate if level-playing issues persist.

  • All in all, economic development remains the paramount priority for Beijing, both to strengthen domestic resilience, provide sufficient employment and improve productivity, while keeping a conducive external environment to allow access to technology and resources.

Xinhua: Official Readout of the Central Economic Work Conference (CEWC) (in CN)

Outlook Weekly: 中央财经委员会办公室分管日常工作的副主任韩文秀:稳定宏观经济不仅是经济问题,更是政治问题 (essay by Han Wenxiu)