China’s economic decision-making

120102China’s economic decision-making.docx

Prudent and proactive

China unveils its economic policy for 2012, sort of

Dec 17th 2011 | BEIJING AND HONG KONG | from the print edition

AT A ceremony on December 11th to mark the anniversary of China’s admission to the World Trade Organisation a decade ago, President Hu Jintao commemorated “a new historical stage” in the country’s opening up. The next day he and fellow leaders retreated to an army-run guesthouse for a secretive three-day meeting to decide how to run China’s economy in 2012. Their gnomic conclusion: to maintain a “prudent monetary policy” and a “proactive fiscal policy” in the face of an “extremely grim and complicated” global outlook.

The annual Central Economic Work Conference (CEWC) sets the tone for China’s economic policymaking for the next 12 months. Attended by members of the ruling Politburo, government ministers, provincial chiefs, military leaders and heads of banks and other big state-owned companies, secrecy is the watchword. No dates are officially announced in advance, nor even the location (although it is an open secret that it takes place at the heavily guarded Jingxi guesthouse in western Beijing, the Communist Party’s favourite spot for large closed-door gatherings).

This year’s conference, which ended on December 14th, seemed more worried about growth than about price pressures. Inflation is now receding (consumer prices rose by 4.2% in the year to November, after peaking at 6.5% in the summer); and dollar inflows are also slowing, removing one source of extra liquidity. That has allowed the government to cut the amount it tells banks to keep as reserves. Most economists expect it to carry on cutting in the year ahead. Nonetheless, the CEWC chose to describe its monetary policy with the same word (“prudent”) it used last year, when fighting inflation was the priority. It suggests the leaders will cut cautiously.

The Politburo (whose 25 members, amazingly, do not include the ministers responsible for finance and commerce) also struck a hawkish note on the eve of the conference, promising to remain “unswerving” in its campaign against property-market speculation. That sent Shanghai’s stockmarket index down to its lowest level since March 2009 (see chart), with property developers suffering especially.

 

Despite the scale of the meetings, little detail of the discussions is revealed to the public beyond a bland description of the main points. For a more detailed explanation, ordinary Chinese have to wait until the country’s rubber-stamp legislature, the National People’s Congress (NPC), meets in March. The NPC will also reveal the official growth target for the year. In 2011 and the six previous years, it was 8%, a figure China’s economy typically overshoots by two percentage points or more. But 8% would be more of a stretch in 2012. Nomura, a bank, forecasts growth of only 7.9%.

To meet their 8% growth target in the extremely grim year of 2009, China’s leaders invited local governments to indulge every pet project, and encouraged the banks to finance them. Nothing in this year’s statement suggests they will resort to anything so dramatic. Their “proactive” fiscal policy will instead cut taxes on small firms and service industries, as well as increase spending on public services.

For a rare glimpse into conference proceedings, those without invitations can turn to China’s former prime minister, Zhu Rongji, who retired in 2003. A series of his speeches published in September includes several delivered at CEWCs. In one, he warned that if growth were to slump, “immediate chaos” would follow. And Mr Zhu also revealed something about the venue itself. He described the Jingxi guesthouse as “resplendent and magnificent”, even as he castigated local officials for building edifices of similar glamour. At these meetings, China’s leaders are always caught between their worries about growth and their fears of excess. That’s no secret.