(Bloomberg) — Investors watching China’s policy signals in recent weeks can find clues about the economy’s long-term goals in a series of articles published by top officials this month.
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He Lifeng, the likely incoming czar of the economy, central bank governor Yi Gang and others outlined economic priorities for the next five years in articles to expand on President Xi Jinping’s report to the Communist Party congress last month.
He, who is seen as a possible successor to Liu He, said upgrading the “supply side” of the economy is a key goal and stressed the importance of building secure and reliable supply chains. His comments were broadly in line with Liu’s, although he opened his op-ed by emphasizing economic growth as the party’s “top task,” in line with analysts’ expectations that it would focus more on growth.
The latest hint that he will take on the role of the country’s top economic official came this week when he took Liu’s usual place in a delegation of Chinese officials accompanying Xi to meet his US counterpart Joe Biden at the Group of 20 meeting in Bali, Indonesia. He, who currently heads the country’s economic planning department, was promoted to the 24-member Politburo of the Communist Party last month, while Liu left that group.
Other key officials warned against overly loose monetary and fiscal policy and fewer bailouts for ailing state-owned companies. Most of the officials — except Him — are expected to step down from their posts in the coming months after stepping down as party leaders in October, although they could remain influential in political circles.
Here’s a look at some of the highlights from the articles:
He, a longtime ally of Xi, said combining expanding domestic demand with supply-side reforms is the country’s top economic priority. To achieve this, consumer spending needs to “strengthen,” but investment spending is key to “improving China’s supply structure,” he wrote, possibly referring to the need to build more advanced manufacturing facilities and infrastructure.
Second on He’s list of priorities is improving “total factor productivity,” referring to increases in output explained by factors such as technological improvement rather than the addition of more labor or more infrastructure.
In a clear nod to US technology sanctions, he said his third priority was ensuring the security of China’s industrial supply chains. The “resilience” of supply chains should have a “more prominent place” in economic planning, he added.
He hinted at reforms that would allow those migrating from the countryside to the cities to enjoy better public services. He also vowed to promote a market-oriented environment where “state-owned enterprises dare to work, private enterprises dare to operate, and foreign enterprises dare to invest.”
Liu emphasized the fundamental role of supply in driving demand in the economy, saying the main constraint on growth going forward is insufficient supply to meet demand for high-quality goods and services. “To some extent supply creates demand,” he wrote.
Liu also warned of “profound changes” in global industrial chains and efforts by other countries to block China’s growth. Such developments require efforts to boost domestic demand, which can keep the economy going even in “extreme situations,” he wrote.
Liu wrote that sustaining economic growth for a “long period of time” is necessary for China to achieve its long-term goals. However, he warned against excessive incentives – domestic demand should be driven by “investments that have reasonable returns” or “income-driven consumption”. Fiscal and monetary policies must be appropriate and precise, he said.
The governor of the People’s Bank of China reiterated his opposition to zero or negative interest rates, saying China’s “normal” monetary policy since the start of the pandemic has led to a stable yuan and controlled inflation.
Yi warned that central bank financing of fiscal spending would lead to hyperinflation. Episodes of runaway inflation in the 1980s and 1990s led China’s leadership to establish the principle that the PBOC cannot finance the fiscal deficit in order to preserve a stable currency, he said.
Yi said there was still work to be done to reduce financial risks and stressed that work needed to be done to ensure that shareholders of financial institutions bear the consequences of any bankruptcy or restructuring, rather than waiting for a government bailout to avoid “moral hazard.” Yi also criticized insufficient financial regulation and coordination among regulators, calling for improvement.
Guo, party chief of the PBOC, who also heads the banking and insurance regulator, issued a strong warning about the financial risks facing China from aggressive monetary policy in developed countries, over-indebted property developers, “hidden » off-balance sheet of local governments- Operation of debt and online platforms in the financial sector.
He vowed to prevent a rapid increase in the economy’s overall debt ratio and to implement “normalized” regulations for the financial activities of Internet companies. China should strengthen the leadership of local party officials in their regional financial institutions and establish a risk resolution mechanism mainly led by local authorities, he wrote.
The finance minister reiterated his vow to scrap the government’s expectation of bailouts of failed local government funding vehicles, which local governments have used to raise money from their official balance sheets. This would be a big shock to China’s financial system, as an LGFV has never officially gone bankrupt.
He also called on China to build a system where all local government debt can be managed and regulated under the same standards, apparently in reference to replacing off-balance sheet debt with official debt.
–With help from Fran Wang.
(Updates on possible employee retirement in the fifth paragraph.)
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