China’s Top Officials Give Hint on Party’s Economic Strategy

(Bloomberg) — Investors whipsawed by China’s policy signals in recent weeks can find clues about the economy’s long-term objectives in a series of articles published by top officials this month.

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He Lifeng, the likely incoming economy czar, central bank Governor Yi Gang, and others, outlined economic priorities over the next five years in the articles to expand on President Xi Jinping’s report to the Communist Party congress last month.

He, tipped as a possible successor to Liu He, said upgrading the “supply side” of the economy is a key goal, and stressed the importance of building secure and reliable supply chains. His comments were broadly in agreement with Liu, although he opened his article by emphasizing economic development as the party’s “top task,” consistent with analyst expectations that he will be more growth-focused.

The latest hint that He will take the role of the nation’s top economic official came this week when He took Liu’s usual place in a delegation of Chinese officials accompanying Xi to meet his US counterpart Joe Biden at the Group of 20 meeting in Bali, Indonesia. He, who is currently head of the nation’s economic planning department, was promoted into the Communist Party’s 24-member Politburo last month, while Liu exited that group.

Other key officials warned against excessively loose monetary and fiscal policy, and for fewer bail-outs for struggling state-owned companies. Most of the officials — except He — are expected to step down from their posts in coming months after exiting the party’s leadership ranks in October, although they could remain influential in policy circles.

Here’s a look at some of the highlights from the articles:

He Lifeng

He, a longtime Xi associate, said combining the expansion of domestic demand with supply-side reforms is the country’s top economic priority. To achieve that, consumer spending needs to be “strengthened” but investment spending is key to “improve China’s supply structure,” he wrote, likely referring to the need to build more advanced manufacturing facilities and infrastructure.

Second on He’s list of priorities is improving “total factor productivity,” referring to increases in output that are explained by factors like technological improvement rather than the addition of more labor or more infrastructure.

In a clear nod to US technology sanctions, He said his third priority was ensuring the security of China’s industrial supply cha ins. The “resilience” of supply chains should have a “more important position” in economic planning, he added.

He hinted at reforms that would allow those migrating from the countryside to cities to enjoy better public services. He also vowed to foster a market-oriented environment where “state-owned enterprises dare to work, private enterprises dare to venture, and foreign enterprises dare to invest.”

Liu He

Liu stressed the fundamental role of supply in driving demand in the economy, saying the main restriction to growth going forward is insufficient supply to meet demand for high-quality goods and services. “To a certain extent supply creates demand,” he wrote.

Liu also warned against “profound shifts” in global industrial chains and other countries’ attempt to obstruct China’s development. Such developments call for efforts to foster domestic demand, which can keep the economy operating even in “extreme situations,” he wrote.

Liu wrote that maintaining economic growth for “an extended period of time” is necessary for China to achieve its long-term goals. But he warned against excessive stimulus — domestic demand must be driven by “investments that have reasonable returns” or “consumption that’s based on income.” Fiscal and monetary policies need to be appropriate and precise, he said.

Yi Gang

The People’s Bank of China’s governor reaffirmed his opposition toward zero or negative interest rates, saying China’s “normal” monetary policy since the pandemic started has led to a stable yuan and controlled inflation.

Yi warned that the central bank’s financing of fiscal spending will lead to hyperinflation. Episodes of rampant inflation in the 1980s and 1990s led China’s leadership to establish the principle that the PBOC can’t fund fiscal deficit in order to safeguard a stable currency, he said.

Yi said there was still work to do in reducing financial risks, and stressed that work needs to be done to ensure shareholders of financial institutions will shoulder the consequences of any bankruptcy or restructuring, instead of waiting for a state bailout in order to avoid “moral hazard.” Yi also criticized insufficient financial regulation and coordination among regulators, urging improvement.

Guo Shuqing

Guo, party chief of the PBOC who’s also head of the banking and insurance regulator, sounded a strong warning over financial risks facing China due to aggressive monetary policy tightening in developed countries, highly indebted property developers, local governments’ “hidden” off balance-sheet debt and internet platforms’ operation in the financial sector.

He vowed to prevent the economy’s overall debt ratio from climbing rapidly, and conduct “normalized” regulation over the financial business of internet companies. China must strengthen local party officials’ leadership in their regional financial institutions, and build a risk resolving mechanism led mainly by local authorities, he wrote.

Liu Kun

The finance minister repeated a vow to break the expectation of government bailouts of failing local government financing vehicles, which local governments have used to raise money off their official balance sheets. That would be a major shock to China’s financial system as an LGFV has never formally defaulted.

He also called on China to build a system where all local government debt can be managed and regulated with the same standards, apparently a reference to replacing off balance sheet debt with official debt.

–With assistance from Fran Wang.

(Updates with possible retirement of officials in fifth paragraph.)

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