China hints at pro-business push, smaller fiscal boost in 2023

BEIJING - China’s top leaders say they will focus on boosting the economy next year, hinting at business-friendly policies and further support for the property market, while likely scaling back fiscal stimulus.

After three years of strict zero-Covid restrictions,

a crackdown on financial risk in the property market

and targeting excessive growth of Internet platform companies, President Xi Jinping now appears to be loosening the reins. 

At a two-day Central Economic Work Conference that wrapped up last Friday, Mr Xi and other senior officials pledged to revive consumption and support the private sector, a marked shift from recent years.

Economists said the signals are clear that the focus in 2023 is on boosting gross domestic product (GDP), with policymakers likely to target growth of 5 per cent or higher. 

This task will be a challenging one, though, given that China is expected to face a

surge in Covid-19 infections in the coming months

after virus controls were hastily abandoned, and consumer and business confidence remain at near record-low levels.

Officials said they will implement favourable policy to encourage private enterprises to grow and broaden market access for foreign firms. Singling out Internet platform firms, the officials said they will support the companies in playing a leading role in economic development, creating jobs and competing in the international market.

The language on platform companies was much more positive than what was used during last year’s meeting, when leaders emphasised supervision of the industry and curbing its “wild growth”.

“The biggest change this year seems to be the increased focus on improving the business environment for foreign and private companies, especially the Internet platform companies,” said Mr Adam Wolfe, an economist at Absolute Strategy Research. “That could help restore confidence and boost investment in light manufacturing and the service sector.”

Officials took a stronger pro-growth stance at the meeting than in recent years, stating that the amount of economic expansion is important. Topping the list of priorities for 2023 was expanding domestic demand. 

In particular, officials said consumer spending and employment growth should both be given a “more prominent position”. Incomes of urban and rural residents will be increased “through multiple channels” to expand spending in better housing, new energy cars and elderly care, they said.

Consumer spending has been a weak spot for the economy during the pandemic and economists expect a rebound in 2023 as Covid-19 restrictions end and infections subside. This is likely to drive growth next year to 5 per cent or above, from an estimated 3 per cent this year. 

While promising active fiscal policy, officials shunned phrases such as “front-loading” infrastructure investment and “new tax cuts”, which were highlighted during last year’s meeting.

For 2023, officials said the focus of fiscal policy will remain to support growth, while also pledging to maintain a “necessary” magnitude of public spending, ensure fiscal sustainability and keep local government debt risks in check. 

“We think this means a continued proactive fiscal policy, but likely with a smaller additional fiscal stimulus than 2022,” UBS economists wrote in a note. 

China’s budget deficit soared to all-time-high levels in 2022 and local government debt burdens have become unsustainable because of sliding tax and land revenue and higher spending on Covid-19 controls. The central government boosted transfer payments to local governments and turned to unconventional income sources such as central bank profits to increase revenue.

The UBS economists expect infrastructure investment to grow by 5 per cent to 6 per cent next year, slowing from an estimate of more than 12 per cent in 2022. The broad fiscal deficit may rise by less than 0.5 percentage point of GDP, much smaller than this year’s increase of more than 3.5 percentage points, they forecast.

The fiscal limits mean that monetary policy may remain relatively loose given that the government is keen to expand domestic demand and the economic recovery remains fragile.

This could mean further monetary easing, such as interest rate cuts, and a push to get banks to boost loans, especially to small businesses. Officials said liquidity will remain “reasonably ample” and that they will aim to expand credit at a similar pace to nominal GDP growth.

Comments from Mr Liu Guoqiang, deputy governor of the People’s Bank of China, appeared to confirm the accommodative stance at the weekend. He said the “magnitude of monetary policy will not be smaller than this year”, and it could be stepped up if needed, unless growth and inflation exceeded expectations, according to a report in the local media.

The official slogan that “housing is for living, not for speculation” was repeated – a phrase used in previous years to signal efforts to make the economy less reliant on property as a source of growth.

Yet there were clear signs of a softening of tone, with officials pledging to support consumer demand for “better housing”, ensure “stable growth” in the sector and meet the financing needs of property companies. 

Citic Securities said the language around the property market signalled that the stance had “completely shifted to support and care-taking”.  

“We think the government’s determination to put a floor to the property market slump is unquestionable,” Citic analysts wrote in a report. “Policies will likely be eased further until the market shows signs of stabilisation and recovery.”

Senior officials have recently switched rhetoric on the property market. Vice-Premier Liu He told a foreign business delegation last week that the property market was a pillar of the economy and new measures were being considered to improve the financial condition of the sector and boost confidence. BLOOMBERG