Enodo QuickTake
- Annual economic work conference concludes without specific guidance
- Xi's departure for Vietnam mid-conference highlights his geopolitical priorities
- Renewed calls for investment but little concrete to address debt overhang
China's annual Central Economic Work Conference has concluded with a nod to the need to balance development with security, but few concrete solutions to address the nation's heavy level of debt. It declared that economic work will be the central task for 2024.
Yet, Xi Jinping's decision to break with tradition and leave the 2-day event after his opening speech to visit Vietnam suggests that the supreme leader will continue to prioritise national security over growth.
His prioritisation of the trip to Hanoi may indicate that now with his preferred and trusted team in place, he can take a backseat on economic decision making. But the fact that the conference provided little fresh insight into how the government will attempt to manage the economy away from Japan-style deflation argues against this interpretation.
The readout repeated a key phrase from last week's Politburo meeting of "promoting stability through progress" suggesting the authorities understand that they must get growth going in order to maintain social stability. There was a nod to the need for better balance between development and security, with risks – real estate, local debt and unspecified issues facing ‘small and medium-sized financial institutions’ – outlined in a brief paragraph.
But actions speak louder than words, so our assessment is that the focus on economic development is just a tactical pause in Xi's relentless pursuit of his geopolitical and ideological goals.
Even more disappointing was the fallback on investment stimulus in order to fuel a ‘virtuous cycle’ of promotion between consumption and investment.
China’s economy has floundered as debt-deflation, decoupling and depressed “animal spirits” have combined to present the sternest test for its development model since Beijing started opening and reform more than 40 years ago. Years of overinvestment have now pushed the return on credit to an all-time low, so it is difficult to see how renewed investment could feed into a consumer boom.
Instead, China is only likely to see its excess debt problem deepen. Its non-financial, non-government debt as a share of GDP is already above that of Japan at the peak of its excess-debt period and continues to rise. It is clear, as we have discussed in the past few months, that the central government will need to pick up the tab and underwrite the massive local government and real estate debt clean-up that is needed.
Details on how the debt workout will happen, whether there will be haircuts and how China's fiscal system will be reformed remain scarce.
Moreover, the authorities seem focused on what they perceive as targeted measures – be it direct support for the property market or providing yet more incentives for consumption of big-ticket items – but which, in our view, belie just how little macro space they have to manoeuvre in.
So a bigbang stimulus is certainly not on the cards. But neither are the reforms – such as ending household financial repression and boosting their income from assets and/or finding a workable mechanism to get banks to lend to private firms – necessary to buoy depressed consumers and private entrepreneurs in order to elevate the economy on a sustainable growth path.
Conclusion
China's economic issues are vast and the government's ability to resolve them by fiat is limited. The Central Economic Work Conference produced little to change this assessment.
Beijing is clearly focused on getting growth going next year but is short on viable solutions. Stable, long-term growth remains a distant goal and the country remains on a perilous road of debt-deflation.