Rewrite of China’s economic glossary
We had the “three critical battles”, “supply reform“,” Structural deleveraging “,” dual circulation strategy “and more recently” common prosperity “and” intercyclical adjustments “.
“A slight inclination towards capitalism has caused significant income inequalities [in China]. Xi Jinping wants to avoid this trend.
This is in line with the Party’s convention that leaders adapt Marxism to the Chinese context and refrain from fully embracing “Western economics.”
Government officials and public enterprises ensure that terminology is incorporated into their policy formulation. This was seen in a number of official statements at the end of August regarding foreign trade, credit expansion and income distribution.
According to ANZ Research, this rhetoric signals a significant shift in economic policy towards a reallocation of resources, as Chinese leaders recognize the constraints of an impending economic downturn.
Over the past decades, China’s poorer segments have experienced robust income growth due to the rapid expansion of manufacturing and service industries. Since both sectors are currently growing slowly, policymakers need to look for ways to continue improving quality of life measures.
Since Deng Xiaoping opened up the economy decades ago, a slight tilt towards capitalism has caused significant income inequality. Xi wants to avoid this trend.
In recent years, small businesses and workers have been the most affected by US-Chinese trade war and the COVID-19 pandemic, as evidenced by their ever-lower Purchasing Managers Index (PMI). As China’s growth momentum continues to slow, the negative impact will also hit the less wealthy segments proportionately.
The new growth regime will impact China’s plans to boost consumption as part of the flagship strategy of “domestic circulation”. Since less well-off households have a higher marginal propensity to consume, this means that slower income growth in this category will weigh more heavily on consumption growth.
The raison d’être of “common prosperity” is to support long-term consumption, although this political orientation is seen as an obstacle to income growth and wealth accumulation by the rich.
It is clear that Xi’s economic perspective advocates stimulating the “real sector”. He is strongly opposed to the idea of “financialization”. Shortly after the launch by the Council of State of the recovery strategy at the end of 2015 to revive the economy, the People’s Daily published an anonymous article that criticized credit-driven growth and explained the need for the government’s deleveraging campaign. The 14th Five-Year Plan (2021-2025) also called for a strong manufacturing sector, unlike the previous position of increasing the service sector’s contribution to gross domestic product (GDP) growth.
A low interest rate environment favors asset holders and landowners, compounding the problem of wealth inequality. A recent article by Greenwald et al (2021) highlighted the close relationship between financial wealth inequality and real long-term interest rates in the postwar United States.
Economists have also associated this issue with the rise of populism in the West. Social stability is obviously a top priority for Chinese leaders. To achieve the goal of “common prosperity”, the government has been reluctant to expand the balance sheet of the People’s Bank of China (PBoC) and reduce the key interest rate.
Terms & Conditions
Chinese economic cycles were previously strongly correlated with the real estate sector, while being very sensitive to the credit cycle. In the past, the government worried about the impact of the housing crunch on economic growth.
In contrast, the government maintains a firm stance on real estate in the current cycle. Housing prices and the credit impulse have thus decoupled. It also suggests that the likely economic slowdown over the next few months (ANZ Research predicts 4.1% GDP growth in the fourth quarter) will not be a priority for the government.
China’s monetary policy will focus on supporting structural reforms and not just on countercyclical management. The inter-cyclical adjustment approach is now interpreted by government officials as an attempt to focus on long-term growth.
Traditional countercyclical measures, such as interest rate cuts, are not favored. The authorities’ liquidity assistance is likely to come with specific conditions compatible with existing structural reforms. One example is the announcement by the PBoC of rate cuts planned to support rural development and alleviate poverty.
Deng’s policy has created a favorable business environment for large companies. The move towards “common prosperity” is consistent with the recent anti-trust push.
Policymakers will focus their efforts on reforming the “three great mountains” of unaffordable education, health care and housing that burden ordinary people. The government wants to curb the increasing price pressures facing the consumer segment rather than general producer price deflation.
Since the goal of “common prosperity” involves a reallocation of resources and political support, the authorities are likely to lead the portfolio of financial institutions with the aim of benefiting specific segments, including small and medium-sized enterprises.
Meanwhile, macroprudential measures will still be used to mitigate systemic risks to ensure cross-cyclical stability ahead of important events such as the Beijing Winter Olympics in February and the 20th Party Congress in October 2022.
Raymond Yeung is Chief Economist, Greater China at ANZ
This article originally appeared on ANZ Institutional website