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China Congress sets future direction

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The 19th Congress of the Chinese Communist Party (CCP) concluded this week . Economically there is a clear indication where China is heading in the next five years. Environmental issues and sharing prosperity have become centre stage to any economic developments. As some commentators have already pointed out that economic growth might slip to comply with environmental, social, and cultural agendas.

President Xi Jinping spent a considerable amount of time in his speech addressing environmental issues and this is unprecedented. This is a clear indication that there will be no letting go of strict environmental compliance requirements for companies in China.

The government expects wages to continue to rise, further confirming that the leaders want to steer away from a growth-at-all-cost approach.

It is unlikely that the present leadership will resolve China’s key structural problems, that is, state interference in the economy and a lack of political will to pursue a more liberal and open economy.

According to Julian Evans-Pritchard at Capital Economics it remains to be seen to what degree the new leadership can help nudge policy in the direction that is desperately needed — toward less state interference in the economy.

 

The economic program favoured by the leadership focused on maintaining a strong state with firm control over any financial or social risks. A shift in this economic course should not be expected.

 

Leading economic commentators point out that:

 

  • The formalization of a framework twin pillar — monetary policy and macro-prudential regulations — during the Congress may give the central bank additional regulatory power in the coming year.
  • Firstly the policy focus on debt sustainability is real, and will play a role in policy deliberations on many fronts. Secondly, the policy approach is reform-oriented and gradualist, and not a monetary shock therapy.
  • Green initiatives are now a key element of economic growth, and have become an increasingly critical consideration in most policy discussions.
  • It allows the leadership to turn its focus from solely the pace of China’s economic growth to the quality and sustainability of it.
  • We continue to expect the leadership to become more focused on easing China’s massive income inequality, severe environment pollution, and housing bubble and surging leverage, as well as further deepening of the structural reforms.
  • Policy makers will continue with capacity cuts and leverage control efforts made to date, leading to slower but more self-sustaining growth while reducing risk of a financial shock.
  • Omission of a clear growth target and evolving language signal a shift in focus from production expansion (growth target) to balanced development.
  • No change in policy direction, but execution could be stronger.

 

Source: Bloomberg, Capital Economics, Morgan Stanley, Mizuho Securities Asia.

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