Chinese decision-makers struggle with conflicting policy goals

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/31

Reaching an official 6.5 % growth target, slowing the rising tide of indebtedness and moving forward with structural reforms needed for sustainable growth are part of an economic policy package that is hardly possible to carry out without a compromise on some of targets. The difficulties were apparent at last month’s meeting of the Communist Party Politburo, as top decision-makers debated over the economic outlook and policy challenges for the rest of the year. The official statement mentioned pressures for lower growth and raised demands on more proactive fiscal policies, as well the need for “prudent” monetary policy to sustain the current pace of economic growth. The release also stressed accurate targeting of credit to assure development of the real economy. Prominent mention went to problems arising from industrial overcapacity and debt, implying serious reform of large state-owned enterprises is needed. The politburo sees the current strong trend to urbanisation of China’s population as a partial solution to existing problems. The leaders at the meeting defended the need for a stable yuan exchange rate and noted the need to prevent financial market bubbles. To dampen rising costs, China’s leaders expressed willingness to lower taxes and allow greater labour market flexibility.

The general phrasing of meeting findings and lack of distinct economic policy priorities and clarity of action suggest that China’s leaders themselves are not unanimous on how to proceed. Differences over the economic policy framework emerged in May, when a member of China’s senior leadership anonymously criticised debt-financed stimulus and failure at implementing needed reforms. Differences over policy were subsequently seen, for example, in last month’s statement by a People’s Bank of China representative calling for stimulus through fiscal policy rather than monetary policy. This week the influential National Development and Reform Commission (NDRC) demanded additional monetary stimulus through lower interest rates and bank reserve requirements in order to halt the current slowdown in investment.

Some observers, however, believe the politburo meeting has improved the position of decision-makers who question debt-financed stimulus measures and push the reform agenda. There is also a sense, however, that tough reforms of state-owned enterprises, which could impede short-term economic growth, are unlikely to be implemented before the 19th National Communist Party Congress in autumn 2017, when major personnel changes will occur.

China’s economic conditions have remained stable this summer. According to the Purchasing Managers’ Indices (PMI), problems in heavy industry worsened in July, while small firms saw distinct improvements in their activity.  Both the official PMI index and the private Caixin/Markit PMI registered service-sector growth in July.

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