Reading between the lines of CEWC Report

This week Beijing Channel attended a meeting with two veteran economic analysts who spoke on background on their take on the Central Economic Work Conference. One of the economists works in a state-run think tank and authorized Beijing Channel to publish his reading.

Below are the main points of the expert. What’s said does not necessarily reflect the views of the Chinese government, Xinhua, or this newsletter.

1. The CEWC readout did not offer as strong a stimulus as the market had expected, or wanted, but that is a purposeful response. It is the view of policymakers that the Chinese economy is facing systemic shifts and needs deep reforms, therefore maintaining austere-leaning policy would help facilitate the reforms, as various economic departments would feel more pressured to cooperate with reform demands. If the central government goes on a spending spree, while feasible, it will only allow different players to become complacent and fall back to their old ways. Furthermore, the central government fears that injecting too much easy money into regional governments or companies may run the risk of being viewed as rewarding irresponsible behavior and setting a bad example for others. The bailout of several major U.S. investment banks after the 2008 market crash is something Beijing does not want to repeat.

2. The measured response also shows that Beijing is not particularly worried about the status quo of the economy or feels pressured to roll out more dramatic policies for the market.

3. There’s an expectation that the external environment will worsen for China down the road, which may put further strain on the Chinese economy, so it’s better to reserve some policies for down the road.

4. About peak China, an idea that has significantly influenced if not dominated the Western discourse on China, the expert says it is nothing more than a fusion of “China collapse theory” and “China threat theory”. Part of the "Peak China" theory advocates argue that China will be posing a bigger threat to the world as its economy faces stagnation because it will seek to divert its domestic troubles overseas. However, the expert says Beijing is focused on solving China’s problems at home and is not seeking to export conflict to ease domestic pressure. MIT’s M. Taylor Fravel made a similar argument in a Sept. piece in the Foreign Affairs.

5. About “establish the new before abolishing the old” (先立后破), Beijing has realized that some of the policies to limit conventional industries came down too fast and tough, and in the future would better balance between fostering new industries and limiting conventional industries. But industries such as the real estate sector should be clear-eyed that the central government still aims to moderate its role in the economy, and it’s unlikely that they return to the good old days. It’s true that due to hardships in the real estate sector in the past year, the government supported more loans for real estate companies to get by, but the loans are given to allow the companies to finish and deliver projects, not to spur big expansions.

6. Regarding balancing security and growth, some outside analysts may have underestimated the risk China is facing, leading to them being unable to understand why China has devoted so much resource to shoring up security.

7. About strengthening the consistency of macroeconomic policy orientation (增强宏观政策取向一致性), it’s a continuation of policies installed during Covid that evaluates whether government policies, either economic or non-economic (such as the tutoring ban and environmental protection inspections) conform with the priority of the central government. Beijing realized in H2 2021 that well-intended policies may cumulate and yield unintended consequences. Han Wenxiu, a senior official of the Central Committee for Financial and Economic Affairs, warned of the “fallacy of composition” in an interview.

To avoid recreating the scenario, in practice government agencies now need to internally evaluate regulatory documents (规范性文件), and then submit them to the NDRC for a final review.

*Note: There is public information to support this. In August the NDRC held a joint press conference and in answering the last question, the NDRC official said

为此，发展改革委将会同有关方面，紧紧围绕高质量发展这个首要任务和构建新发展格局这个战略任务，坚持问题导向、强化统筹协调，打好宏观政策组合拳，重点做好三个“加强”。

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二是加强与宏观政策取向一致性评估。在各部门制发政策文件前，对政策文件内容和出台时机等开展与宏观政策取向一致性评估，推动各部门强化政策协调和工作协同，密切配合、同向发力、形成合力，防止出现“合成谬误”问题，维护好稳定可预期的宏观政策环境。

To this end, the Development and Reform Commission will work with the relevant parties, carefuly implement the primary task of high-quality development and the construction of a new development pattern of this strategic task, adhering to the problem-oriented, strengthened coordination, and create an effective combination of macro-policy. Our work will have three focuses.

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The second is to strengthen the assessment of consistency with macro policy orientation. Prior to the issuance of policy documents by various ministries, assess the consistency of the content of regulatory documents and the timing of their issuance with macroeconomic policy orientation to promote the strengthening of policy coordination and synergy of work among various ministries, so as to prevent the problem of "fallacy of composition" by closely coordinating and exerting the same force in the same direction, and to maintain a stable and predictable macroeconomic policy environment.

8. About why it’s taking too long for policies rolled out by Beijing to land. Reform is difficult and requires great will and skill to implement. Local governments stick to their old ways for various reasons, it could be because they dismiss certain policies as impractical, it’s politically safer to not implement changes, because of political inertia, or they feel a new policy is not in their interest.

9. On businesses leaving China. Some industries leaving China is a natural process, what we need to keep an eye out for is if key parts of supply chains are leaving the country. So far that is not observed but it happens it should be cause for more alarm.