Published September 9 2021
Since President Xi Jinping took office in 2012, Chinese authorities have developed their own economic glossary.
We’ve had the “three critical battles”, “supply-side reform”, “structural deleveraging”, “dual circulation strategy” and more recently, “common prosperity” and “cross-cyclical adjustments”.
This is in line with the Party’s convention of having leaders adapt Marxism to the Chinese context and refrain from embracing ‘western economics’ totally.
Government officials and state-owned enterprises are making sure the terminology is integrated with their policy formulation. This was seen in a number of official statements in late August around foreign trade, credit expansion and income distribution.
In ANZ Research’s view, this rhetoric signals a significant shift in economic policy towards resource reallocation, as China’s leaders acknowledge the constraints of a looming economic slowdown.
Over the past few decades, less-affluent segments of China enjoyed robust income growth due to the rapid expansion of the manufacturing and service industries. As both sectors are growing slowly now, policymakers must search for ways to keep quality-of-life measures improving.
Since Deng Xiaoping opened up the economy a few decades ago, a slight tilt towards capitalism has caused substantial income inequality. Xi wants to avert this trend.
In more recent years, smaller businesses and workers have borne the brunt of the fallout from the US-China trade war and COVID-19 pandemic, as evidenced in their persistently lower PMI. As China’s growth momentum continues to slow, the negative impact will hit the less affluent segments proportionately harder as well.
The new growth regime will impact China’s plans to boost consumption under the flagship strategy of ‘domestic circulation’. As less-affluent households have a higher marginal propensity to consume, it means slower income growth in this category will cause a bigger drag on consumption growth.
The rationale behind “common prosperity” is to support long-term consumption, although this policy direction is perceived to hinder income growth and wealth accumulation of the rich.
It’s clear Xi’s economic view advocates boosting the ‘real sector’. He is strongly against the idea of ‘financialisation’. Shortly after the State Council launched the reflation strategy at end-2015 to boost the economy, People’s Daily published an anonymous article in 2016 which criticised credit-driven growth and articulated the need for the government’s deleveraging campaign. The 14th Five Year Plan (2021-2025) also called for a strong manufacturing sector, in contrast with the previous stance of increasing the services sector’s contribution to GDP growth.
A low interest rate environment favours asset-holders and property owners, intensifying the problem of wealth inequality. A recent paper by Greenwald et al (2021) highlighted the close relationship between financial wealth inequality and long-term real interest rates in post-war US.
Economists have also associated this issue with the rise of populism in the west. Social stability is obviously a top priority for China’s leaders. To achieve the goal of “common prosperity”, the government has been reluctant to expand the People’s Bank of China balance sheet and cut the policy interest rate.
China’s business cycles used to have strong correlations with the property sector, as well as being very sensitive to the credit cycle. In the past, the government was concerned about the impact of property tightening on economic growth.
By contrast, the government is maintaining a tough stance on property in the current cycle. Home prices and credit impulse have thus decoupled. This also suggests the likely economic slowdown in the coming months (ANZ Research expects GDP growth of 4.1 per cent in the fourth quarter) will not be a priority for the government.
China’s monetary policy will be focused on supporting structural reforms and not only counter-cyclical management. The cross-cyclical adjustment approach is now interpreted by government officials as an attempt to focus on long-term growth.
Conventional counter-cyclical measures, such as interest rate cuts, are not preferred. Liquidity support from the authorities will likely come attached with specific conditions that are compatible with existing structural reforms. One example is the PBoC’s announcement of planned rate cuts to support rural development and provide poverty relief.
Deng’s policy built a business environment favourable for large corporations. The move towards “common prosperity” is consistent with the recent antitrust push.
Policymakers will focus their efforts on reforming the so-called “Three Big Mountains” of unaffordable education, healthcare and housing that have been weighing on the common people. The government wants to curb the increasing price pressures facing the consumer segment rather than general producer price deflation.
As the goal of “common prosperity” implies a redistribution of resources and policy support, the authorities will likely steer the portfolio of financial institutions with an aim to benefit specific segments, notably small and medium-sized enterprises.
Meanwhile, macroprudential measures will still be used to mitigate systemic risks in order to ensure cross-cyclical stability ahead of important events such as the Winter Olympics in Beijing in February and the 20th Party Congress in October 2022.
Raymond Yeung is Chief Economist, Greater China at ANZ
This story is an edited excerpt from an ANZ Research report. You can read the original report here: ‘Xiconomics’ and China’s interest rates, August 31, 2021.
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