Central Economic Work Conference’s readout suggests more business-friendly policies and fewer regulatory squeezes are on the way
By WILLIAM PESEK
As China reopens the world’s No 2 economy, the biggest winner could be a beleaguered private sector that’s had a rough few years under President Xi Jinping.
Since 2019, the Chinese leader has been carrying out an assertive crackdown on financial risk in the property market. In 2020, the Communist Party stomped on internet platform companies to remind tech founders who’s boss.
And, of course, Xi’s “zero-Covid” lockdowns have driven economic growth to 30-year lows, causing many foreign investors to pivot elsewhere.
Now, Xi’s team suggests a variety of business-friendly policies will take the lead in efforts to boost both gross domestic product (GDP) and investor confidence. This renewed focus on supporting the private sector emerged from a two-day Central Economic Work Conference that concluded on December 16.
The top-line impression from the confab among economists is that Team Xi is likely to target GDP growth of 5% or higher. Far more important, though, is this comment that government mouthpiece People’s Daily attributed to Xi: “I have always supported private enterprises and I have also worked in places where the private economy is relatively developed.”
In a front-page analysis, the official party newspaper argues Xi’s observation telegraphs a whole of government, pro-business pivot driven from the very top. It was significant, too, that top party officials in eastern Zhejiang province dropped by the headquarters of Alibaba Group Holding. There, they reportedly encouraged China’s best-known company to up its global competitiveness.
Eurasia Group analyst Lauren Gloudeman finds great significance in the fact that the statements from the Central Economic Work Conference were muted of mention of Xi’s “common prosperity” gambit. So, too, were the conference’s calls for “improving society’s psychological expectations” and “boosting confidence in development.”
Gloudeman concludes that “confidence-boosting measures will include instructing local leaders to ‘solve problems’ for the private sector, recommitting to market-oriented state-owned enterprises reform, and proactively expanding imports of advanced tech, important equipment, and energy resources.”
It’s also significant to Gloudeman that the group “expressed unusually strong support for attracting foreign capital and pledged to provide the greatest degree of convenience for foreign businesspeople to come to China.” This means that, at a minimum, “Beijing will further relax international travel restrictions,” she says.
Odds are there will be plenty of stimulus to come, both on the fiscal side and from the People’s Bank of China. But economist Wang Tao at UBS detects a different strategy in the making. “We believe this means continued proactive fiscal policy, but with less additional fiscal stimulus than in 2022.”
Written between the lines in bold font is that Xi’s team is prioritizing quality growth over quantity. “There are strong signs of China returning to pragmatism, following a difficult year of fighting the virus,” says Qi Wang, founder of MegaTrust Investment.
It’s clear, he adds, that Xi’s inner circle just “raised the importance of private sectors in economic growth, including the real estate to Internet industries.”
Case in point: UBS reckons that infrastructure investment in 2023 will be about half the 2022 amount — increasing about 5-6% versus 12% this year. Overall, UBS says, Beijing’s fiscal deficit will increase by less than 0.5% of GDP relative to more than 3.5% in 2022.
In the place of same-old, same-old fiscal pump-priming, Team Xi is signaling that the emphasis will be on freeing and growing a private sector that Xi has spent recent years reining in. Along with expanding foreign firms’ market access, Xi’s reform team suggests that China’s internet giants will once again move to the economy’s center stage.
The strategy harkens back to 2014 when Jack Ma’s Alibaba captivated the globe with history’s biggest-ever initial public offering, New York Stock Exchange listing that signaled China Inc’s arrival as a global tech behemoth.
However, by late 2020, six years after Alibaba’s IPO, Xi’s inner circle had grown suspicious of mainland tech billionaires. In November 2020, Xi’s party scrapped a planned IPO by Ant Group, Ma’s fintech giant, which would have been the world’s biggest ever at over $37 billion.
Its cancellation started a domino effect that hit Baidu, ByteDance, DiDi Global, JD.com, Tencent and a who’s-who of tech juggernauts.
The crackdown disrupted China’s private sector for the worse and sent trillions of dollars of capital fleeing Asia’s biggest economy. Hence the wisdom now, with China’s Covid-wracked economy stumbling out of 2022, of reprioritizing Big Tech as the top driver of job creation, economic development and global competition.
In December 2021, the Central Economic Work Conference warned of “wild growth” in the internet sector and favored ever-increasing supervision. A year on, it’s clear Xi is leaning into not just faster, but also healthier, GDP growth in 2023.
Analyst Freda Duan at Altimeter Capital notes that “China’s policy setting is an open book. Given its top-down nature, you basically get free investment advice from the Central Economic Work Conference,” which “is super insightful as it sets the tone for where the economy is heading.” For example, she says, “policies around ‘platform enterprises’ took a U-turn over the past 2 years.”
Zichen Wang, an analyst who publishes the Pekingnology, adds that “amid the wide perception that China has been favoring the state sector at the cost of the private sector in recent years, the [Central Economic Work Conference] readout dedicates one entire paragraph to saying China stands firm behind the development of the private economy.”
Analyst Andrew Fennell at Fitch Ratings notes that a key reason why China’s “credit strengths are being gradually eroded” is partly because of the “increased frequency of abrupt policy shifts or policy-induced disruptions in public health and enterprise regulation that have contributed to heightened economic uncertainty and called into question the stability of the business environment.”
As Xi changes tack, many global investors will be giving China a fresh, new look.
Getting back toward 5% growth will necessitate bold action by the PBOC, particularly by targeting small private-sector businesses. “The magnitude of monetary policy will not be smaller than this year, and it can be stepped up if needed,” Liu Guoqiang, deputy PBOC governor, said over the weekend.
One reason is that the international scene is darkening, led by fears of a US recession in the months ahead. The toll taken by global inflation and fallout from the US Federal Reserve’s aggressive rate hikes continues to intensify.
The IPO market, for example, is suffering its worst drought since the 2008-2009 global financial crisis. So far this year, only about $207 billion has been raised, a nearly 70% drop from 2021. A grim US market eclipsed more active IPO scenes in China and the Middle East.
For Hong Kong’s main stock market, China’s Covid reopening could hardly be better timed. The city’s IPO market is suffering through its worst year since the late 2000s. The same goes for bourses in New York and Tokyo.
China’s zero-Covid U-turn also has economists around the globe rethinking their 2023 forecasts. But figuring out the China growth question is easier said than done. The Asian Development Bank, for example, sees the region growing an average 4.6% in 2023 from 4.2% this year.
ADB chief economist Albert Park notes that monetary tightening by central banks globally, the ongoing Russia-Ukraine war and uncertainty about how China might react to an explosion of new Covid cases make the year ahead unusually tricky to predict.
“Asia and the Pacific will continue to recover, but worsening global conditions mean that the region’s momentum is losing some steam as we head into the new year,” Park explains.
“Governments will need to work together more closely to overcome the lingering challenges of Covid-19, combat the effects of high food and energy prices—especially on the poor and vulnerable—and ensure a sustainable, inclusive economic recovery.”
Another wildcard is how China’s recovery will affect global inflation, even as many investors bet the peak has already been reached.
“US producer prices could get a fillip from China reopening its economy and stimulating its property sector,” says economist Tan Kai Xian at Gavekal Research. “Such a Chinese recovery could also boost US consumer prices, but in a less direct way since weakening domestic demand will be a bigger factor.”
At the same time, Tan adds, “if a US recession duly hits in 2023 and unemployment rises, the demand destruction effect could push US consumer inflation below the Federal Reserve’s 2% target.”
Yet it’s clear that, along with conventional stimulus, Xi’s inner circle plans to take its foot off the neck of private enterprise. Analysts say it’s high time Xi prioritized the development of a vibrant and disruptive private sector to retake the lead in driving Chinese GDP, a pivot that appears to be underway.
Follow William Pesek on Twitter at @WilliamPesek