Investors can be forgiven for feeling whiplash. This month’s Central Economic Work Conference in China -- an annual meeting that sets the tone for the coming year -- has concluded on a tone of pro-growth pragmatism that stands in marked contrast to the ruling Communist party’s strident political messaging.

The meeting, held December 15-16 in Beijing, concluded with a litany of familiar problems. It offered familiar solutions, too: boosting domestic demand and consumer spending; prudently loosening credit to save the real-estate sector and rescue local governments from the brink of bankruptcy; and seeking more foreign direct investment by reassuring the international community that China’s open-door policy remains open.

“We must insist that development is the top priority” for the party’s governance and for improving the economy, the readout from the conference stated bluntly.

All this would have been normal over much of the past fifteen years, but it’s startling today. At the 20th Party Congress in October, when Xi Jinping was confirmed in a third term at the head of the party, the economic message was far more strident. Xi struck a pose of defiance against sanctions and boycotts imposed by the US and its allies, claiming that China’s 1.4 billion-person market could generate all the growth the country needed.

The emphasis then was on autarkist “internal circulation” rather than “international circulation,” which implies closer integration with the international marketplace. Development, Xi emphasized then, must be compatible with the goals of national security.

What has changed? The message, or the moment? Both, it seems.

The economic work conference was held as the difficulty of extricating China from its zero-Covid policies became apparent to all, and after the world watched Chinese citizens take to the streets last month. It is trying to shore up the economy until more positive momentum is reached in the spring.

The reassuring readout reflects the new Covid reality in China. Current projections suggest a winter of illness and death while the disease becomes endemic in China as it is in the rest of the world, followed by a spring in which consumption and spending could begin to return to normal.

Covid Chaos

Evidence is mounting that the Xi administration has not made adequate provisions for its U-turn on its stringent zero-Covid policy. It did away with lockdowns and daily nucleic acid tests, but demonstrated little preparation in terms of public education or basic medicinal supplies. 

The sudden and abrupt reopening is causing widespread confusion, and despite the efforts of the propaganda machine fear has emptied the streets of China's big cities. 

Although the health authorities stopped publishing national incidence rates a few days ago, major cities including Beijing and Shanghai have witnessed surges of infection. Hardest hit are senior citizens who have packed all the hospitals in the capital. Videos circulating in China’s social media say at least 10,000 new cases are hitting Beijing. 

There are also morbid pictures of corpses piling up in mortuaries. The dozen-odd incinerators in Beijing are working on a 24-hour basis because of the long queues. At the same time, just a few days after Beijing’s announcement of a U-turn in its Covid policy earlier this month, drugstores in practically all Chinese cities have run out of ordinary anti-fever medicines such as Tylenol. 

So far, none of the Politburo and Politburo Standing Committee members elected at the 20^th Party Congress last October has made any public statements to reassure the public. 

No explanation has been made as to why the Xi Jinping leadership decided on this drastic about-face. The administration apparently made little effort, during its two years of zero-Covid policy, to prepare for a reopening by providing basic medicines or waging a more effective and thorough campaign to vaccinate Chinese over 60 years of age.

Beijing must be hoping that the less virulent Omicron goes though the population quickly. If they bet right, China will experience the equivalent of an unusually large flu epidemic, given that the broader population has some basic level of vaccination, and hospitals have built out new wings to prepare. If they bet wrong, they risk the kind of anger and public protest already seen in Shanghai last spring, and across major cities in November.

So far, so-called “White paper” protests have re-appeared in Shanghai and a few other cities. Interns serving in hospitals in at least a dozen cities have also held demonstrations because they are not issued with N95 masks and other basic protective gear. The protestors complain that they don’t have effective medicines to treat stricken patients. These doctors-in-training say that they have not been paid extra, despite working some 20 hours a day.

The prestige and authority of the CCP authorities is suffering.  But if the worst is over within the next few months, then China can return to a pre-pandemic normal by the middle of next year.

Getting down to work

The December work conference is usually an occasion for rolling up the sleeves and getting down to business. Readouts tend to be relatively free of jargon, and relatively frank about the challenges the participants have identified. Despite Xi’s confident tone in October, China needs global capital, and China’s leaders know it. They are aware that US sanctions, rising costs, plus disruptions caused by zero-Covid measures, have made foreign companies re-think their investment in the “world’s factory”.

The message of the economic work conference jells with the "open-door reassurance" that Xi Jinping gave during meetings with European, American, ASEAN and Gulf state leaders in the weeks after the Party Congress. Business people in about a dozen Chinese cities have reportedly chartered planes to the US, the UK, Europe, Japan and South Korea to persuade old customers to resume placing orders in manufacturing hubs in the Yangtze and Pearl River deltas.

While Beijing renews its commitment to welcoming foreign capital, it also stressed protecting and nurturing non-state capital, after a decade of policies under Xi that favored the state-owned sector over private businesses.

The work conference’s prescriptions seem designed to tide China through to the spring.

To boost consumer spending, which is presented as equally important as government injections into the infrastructure and property sectors, the work conference called for buttressing consumer confidence by improving medical and social welfare. It also called for improving employment, particularly among young people, and encouraging spending particularly in the areas of "an improved real-estate sector, new-energy vehicles, and services for the elderly." 

This is far from a potent mix to revive China's downbeat consumers.

More state financial help was pledged to over-leveraged property giants so that unfinished flats can be completed, and consumer confidence in the housing market restored. “We must effectively provide guidance to investment by the whole society through government injections and policy encouragements,” the readout said. But the readout continued to stress that "houses are for living in, not for speculation", reinforcing a continued negative wealth effect as falling house prices are unlikely to bottom out just yet.

The government also signaled a moratorium to excessive interference in the businesses of Internet companies and platform conglomerates. This could spell a truce in the party-state’s efforts to dominate Big Tech companies Alibaba, Tencent and Didi Chuxing.

Finally, the work conference vowed to maintain financial stability and to protect the value of the yuan. However, given the same meeting’s commitment to save real-estate developers and to buttress consumer confidence, China is likely to push forward a relatively loose monetary policy. This could increase the interest rate differential with the US,  contributing to more capital leaving China.

Li Keqiang’s swan song

Politics are never far from the surface in China, and the work conference was no exception. It came at an odd moment in China’s leadership transition. At the 20th Party Congress in October, Xi Jinping secured a third term and stacked the top of the party with his men, scoring a clean sweep against rival candidates including those backed by outgoing premier Li Keqiang and his China Youth League contingent.

Although Xi holds all the power in the party and the military, technically the reins of the Chinese state remain in Li’s hands until March, when he steps down as premier. The language of the readout from this work conference, including statements like “We must comprehensively deepen reform and opening up, greatly raise the confidence of the market, and organically integrate the implementation of expanding internal demand with deepening supply-side structural reforms,” sounds much like other documents produced during Li’s decade in office.

The work conference, therefore, may reflect Li’s current preferences as much as Xi’s future policies. 

It is notable that most of the new members of the Politburo Standing Committee appeared at the meeting. However, He Lifeng, a confident of Xi’s many years ago in Xiamen and a likely candidate for vice premier in charge of Finance, did not. His absence begs the question of how permanent the announced policies will be, once the new team takes over in March.

Xi's team

Xi's third term will be the first in which Xi and his allies truly control the economics portfolio. During the previous two terms, the State Council -- which traditionally oversees the economy -- was in the hands of a rival, premier Li. Meanwhile, Xi's man, Liu He, oversaw plans for revitalizing state-owned industry and buttressing China against the threats posed by the trade war. That led to a disorienting tug of war over policy.

The official readout from the work conference emphasized that a “new team” is running the economy and that this new leadership corps is not afraid to ring in the new. 

In March, men loyal to Xi are likely to take the top economics portfolios, including both the premiership and oversight of China's powerful planning agencies. Li Qiang, the likely premier, has risen in Xi's shadow for decades; the candidate for vice premier, He Lifeng, cut his teeth as a leading official in the Special Economic Zone in the southern port city of Xiamen, when Xi was a vice mayor in that city. 

Both have reputations for being competent but inward-facing, and committed to the idea that the party should control the commanding heights of the economy.

Officials in finance and banking silos are more likely to have received training in the West than those who rose through the planning apparatus, and more likely to share a Western outlook on how to use financial levers to manage and guide an economy. During Xi's first and second terms, many banking officials were believed to have patronage ties to Wang Qishan, himself a protege of the 1990s reformist premier Zhu Rongji.

These patronage ties within the finance and banking sectors persist even into the third term, but may not be as tight as before. Moreover, some of the candidates for top office in this area are less outward-facing than their predecessors. In any event, with Xi’s men calling the shots on the economy, top banking and finance officials would fall in line, and direct resources to state-owned companies and high-tech sectors designed as priorities by Xi.

Conclusion

The Central Economic Work Conference readout has given hope to those who believe that the policies of Xi’s first two terms were an anomaly, and China will soon resume its path towards reforming and liberalizing the economy.

Enodo Economics believes that apparent concessions to international concerns are tactical, designed to keep investors confidence up as China prepares for a challenging winter. 

Rather than change in direction, the readout from the economic work conference marks a tactical retreat.

We believe that the strident, inward-facing tone of the Party Congress, not the mollifying tone of the work conference, reflects the broad trend of PRC policy. Concessions in the face of temporary difficulty do not constitute a true change of heart. Fundamentally, the Great Decoupling is still underway.