MNI: China To Pursue Moderate Policy Support In 2024

China will implement more moderate and targeted fiscal and monetary policy in 2024 as it aims to maintain GDP at 5%, while limiting risk and cultivating new drivers of high-quality growth, policy advisors told MNI.

Authorities will likely set next year’s GDP target, which they will reveal in March, at about 5% – a difficult task considering the high-base effect, said Zong Liang, chief researcher at Bank of China. Policymakers, however, need a high target to boost weak sentiment, he added.

GDP between 2020-2022 averaged 4.5%, below policymakers' expectations, while the economy will likely grow by about 5.3% in 2023, beating the 5% target, Zong added. Authorities will keep macro fiscal and monetary policies accommodative in 2024, he argued, noting the latest Central Economic Work Conference (CEWC) had set a pro-growth tone.

China’s annual CEWC held this week outlined the country’s 2024 policy plans, calling for more high-quality growth and coordinated policies to boost domestic demand, reduce risks, and aid key sectors.(MNI BRIEF: China To Stress High-quality Growth Over Stimulus-CEWC)

But an advisor to the central government told MNI the focus on high-quality growth would limit appetite for large stimulus, particularly amid the unsustainable growth of debt and energy consumption. The conference made it clear the economy will continue to recover and the fundamental trend of improvement over the long term “remains unchanged,” discounting the need for further major stimulus, the advisor noted.

However, authorities will enhance policy coordination and effectiveness as they pursue "under-implemented" policies, while the central government will shoulder more debt to improve household, business and local-government balance sheets, he said.

FISCAL DEFICIT

The advisor predicted authorities will set next year’s fiscal deficit/GDP ratio at 3-3.5%, lower than the current 3.8%. The government will use about CNY500 billion next year of the additional funds raised via treasures issued in October, while CNY1.5 trillion of refinancing bonds will help deal with local-government debt, he noted.

He said 2024’s local-government special-bond quota will likely remain unchanged at CNY3.8 trillion, despite market expectations of about CNY4 trillion. The bond’s use as investment-project equity will expand, however, which will leverage more capital into infrastructure, the advisor explained.

The CEWC called on authorities to enact sustainable, “appropriately forceful” and effective fiscal policy in 2024.

An advisor to fiscal authorities noted lower levels of government, such as counties and cities, will have their functions simplified with local infrastructure – including major projects – handed over to provincial governments to boost investment driven by the CEWC's unexpected call for further fiscal and taxation reform.

MONETARY EASING

The CEWC highlighted the importance of precise and effective monetary policy and the need to maintain total social financing and M2 growth in line with the GDP and inflation target.

The advisor said room exists for the use of broad easing tools, such as policy-rate and reserve requirement ratio cuts, but the central bank will likely focus on its targeted facilities to support weak and key sectors, such as property, green growth, high-tech and local-government debt. (MNI: PBOC To Offer More Targeted Tools, Expand Balance Sheet)

The People’s Bank of China will also maintain ample liquidity to coordinate government-debt issuance and strengthen the effective use of outstanding loans, while moderately increasing new credit, he said. About CNY28.7 trillion of repaid loans in 2022 were recycled, compared with CNY29.7 trillion of total outstanding loans and CNY21.3 trillion of new paper that year, he noted. The central bank will guide the repaid loans into sectors it wants to support, a significant new undertaking, he argued.

The PBOC will also tackle deflation, which will require further deposit interest-rate cuts and lower loan rates, the fiscal advisor said, warning the situation may last for some time.

Wang Xiaolu, senior fellow at the National Economic Research Institute, told MNI inflation remains tepid despite M2 holding higher than the normal GDP expansion as monetary and fiscal policies target investment. This has led to overcapacity and restrained price rises in downstream industry. Therefore, the focus of macro policy must change, Wang added.