Setting the growth agenda
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E-mail China Daily, December 26, 2017
Setting economic policy has always been a tightrope walk for policymakers in China and 2018 seems to be no different. That said, the key objectives for most of this year was rebalancing the country's economic structure and fending off potential credit risks－and this will probably continue for the most of next year.
By the end of November, the growth rate of China's broad money supply, or M2, stood at 9.1 percent, much less than the yearly target of "about 12 percent", dropping from 11.3 percent in 2016 and 13.3 percent in 2015, according to the People's Bank of China, the central bank.
A broad look at 2018 reveals that fiscal and monetary policies would be the crucial tools for Chinese authorities to achieve high-quality economic development, while checking debt growth at the local government level and in the financial sector will be the top priorities.
On a broader basis, the overall development blueprint would hinge largely on the fiscal policy remaining "proactive" and the monetary policy remaining "prudent and neutral" next year with an eye on "better serving the real economy". According to the deliberations at the recent annual Central Economic Work Conference, these would also be the yardsticks for evaluating the policy effects.
Apart from prudent economic policies, curbing money supply would also be another key objective for policymakers. China is likely to set the slowest single-digit M2 growth target in history next year, in an effort to control the "master valve" of total money supply, primarily to crimp the nerve center of rising debt and the trigger of asset bubbles. That, in a nutshell, was also the key message handed out by economists after this year's annual Central Economic Work Conference.
On the one hand, overall broad money supply remains tighter than ever before, while on the other hand, liquidity is aplenty for the sectors in need.
Starting January 2018, the Chinese central bank will "conditionally" cut the cash amount that needs to be set aside as reserves, or the required reserve ratio, by financial institutions that have issued loans to support small- and micro-sized enterprises, startups and agriculture. The reduction would, however, depend on the total amount of loans extended, with an overall objective of releasing some 5 billion yuan ($760 million) into the financial markets.
Though there has been an improvement in overall profitability this year, Chinese enterprises, especially small-and micro-sized ones, were in greater need of loans during the October-December period, indicated by an index of 62.2 percent, up from 61.4 percent in the third quarter, according to a survey by the PBOC. It also indicated their expectations of faster business expansion next year. Meanwhile, demand for loans from the non-manufacturing sector rose to 60.2 percent during the same period, up 0.4 percentage points from the previous quarter.
Most of the bankers who participated in the survey expect monetary policy to be "slightly easing" or "moderate" in the first quarter of 2018, indicated by an index of 43 percent, compared with 41.6 percent in the last quarter of this year.
In terms of fiscal policy, tax cuts and reduction of the government's administrative fees will continue next year to support innovative industries and poverty reduction, according to officials from the Ministry of Finance.
The Central Economic Work Conference, which concluded last week, stressed high-quality development and forestalling risks as the major theme of China's economic policies next year.
To serve the real economy is the basis for the financial sector's development, with an overall objective of high-quality growth, it said. This would require a larger proportion of direct financing, including raising funds via bonds and stocks rather than just bank loans, said Yi Gang, vice-governor of the PBOC at a forum during the weekend.
A key objective of next year's monetary policy would be to maintain "reasonable growth" of money supply, credit and total social financing－a broad measure of credit and liquidity in the economy including off-balance-sheet financing, required by the conference.
"Reasonable" means the incremental amount should satisfy demands from the real economy, without excessive supply to fuel asset bubbles especially in the "shadow banking" and real estate sectors, according to economists.
By the end of November this year, the country's total social financing was up by 12.5 percent from a year earlier, compared with 12.8 percent rise at the end of last year. Yuan-denominated outstanding loans rose 13.3 percent by November, slightly slower than the 13.5 percent at the end of 2016, according to data from the PBOC.
The gauge of broad money supply, M2, retreated to an unprecedented single-digit growth since May and hit a record-low of 8.8 percent in October, according to official data.
Chinese entrepreneurs have also in general expressed stronger confidence about the economy in the fourth quarter compared with last year, according to PBOC data.
Stable economic growth expectations have also strengthened the value of yuan this year, and the currency has appreciated against the US dollar by nearly 5 percent. Stronger yuan has shifted the capital outflows since the second half of 2015 to inflows and boosted foreign exchange reserves from a record-low of $2.998 trillion in January to $3.119 trillion in November.
To prevent financial risks, however, "deleveraging" has become one of the government's top priorities in advancing supply-side structural reforms. The fifth National Financial Work Conference in July clarified that the financial sector should support the development of real economy and to strengthen regulatory oversight aimed at preventing systemic financial risks.
It also determined to set up the Financial Stability Development Committee led by the State Council, or the country's Cabinet, to enhance financial regulatory coordination.
For the fiscal policy, to crack down on illegal or irregular borrowing by local governments, or the so-called "implicit debt" mainly raised by the local governments' financing vehicles, is also a key measure to prevent systemic risks, said Yang Weimin, deputy head of the Office of the Central Leading Group on Financial and Economic Affairs.
The finance ministry announced its resolve to further investigate provincial level governments' fund-raising procedures in the coming months, after the country's incremental local government debt stood at 16.8 trillion yuan by the end of October.
It is essentially one of the key steps for economic rebalancing for an economy less driven by investment, and the deleveraging measures include the debt-to-equity swap program and the closure of "zombie" State-owned enterprises, said Song Yu, chief China economist with Beijing Gao Hua Securities Co Ltd.
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