China is willing to redouble its support for the economy in the face of the threat of tariffs

Chinese leaders met this week to outline economic policy for next yearoutlining plans to increase public spending and relax Beijing’s monetary policy to encourage more investment and consumer spending.

The ruling Communist Party leaders concluded their two-day Central Economic Work Conference on Thursday with praise for President Xi Jinping’s guidance and a promise to “enrich and perfect the political toolbox.” and defuse the risks facing the world’s second largest economy. One of the main challenges is: President-elect Donald Trump’s threats to dramatically increase tariffs on imports from China once he takes office. Below we reflect the priorities outlined in this week’s meetings in Beijing and its possible implications.

Focus on the fundamentals

According to analysts, the general plans of the Central Economic Work Conference and an earlier meeting of the 24-member Politburo, are more a recapitulation of current policy than ambitious new initiatives.

Growth in the Chinese economy has been somewhat slower than the target of “around 5%” set by leaders for this year, as the prolonged crisis in the real estate sector has hindered business activity. Weak housing prices and job losses during the COVID-19 pandemic have left many Chinese unable or unwilling to spend as much as they did in the past. This has caused the supply of many goods to exceed demand, causing prices to fall or, at least, to remain stable.

At the beginning of the year, the Chinese government launched a series of initiatives, including the payment of subsidies when people give up old appliances and vehicles to buy new onesexpanding access to affordable housing and reducing interest rates to make mortgages more affordable.

According to a readout from the official Xinhua news agency, political leaders agreed this week to put “a greater emphasis on guaranteeing and improving the well-being of the population and provide people with a growing sense of fulfillment, happiness and security.

This includes policies to prevent people from falling back into poverty, providing a stronger healthcare system and expanding care for older peoplehe pointed out. It could also include subsidies to families to encourage them to have more children, now that population rates are declining.

Who pays and how?

Political leaders pledged to raise China’s deficit, long limited to 3% of its GDP, and to do more to encourage consumer spending by equalizing salary increases at the pace of economic growth. To do this, the Chinese government will issue more special very long-term bonds, state media reported, without giving any dollar amount.

Domestically, China can afford it. Its national debt, in relation to GDP, is around 68%, compared to 250% for Japan and 120% for the United States. At the local level, huge debts remain a problemand many Chinese workers are paid nothing or very little. Municipal and regional governments are deeply in debt after their tax revenues fell due to the housing crisis and the pandemic, while spending continued to rise. According to analysts, the details about the increase in spending they could emerge later, possibly during the national legislative session in March.

Easier credit for investment and home purchase

Earlier this week, the Politburo approved plans to implement monetary policies “moderately lax”, rather than the “prudent” stance that had prevailed over the past decade. The last time the Asian giant adopted this approach was in the period 2008-2010, when the Central Bank aggressively relaxed credit as an antidote to the shocks of the global financial crisis, said Tao Wang, an expert Chinese economist at UBS.

Earlier this year, the People’s Bank of China began cutting interest rates and the mandatory reserves that banks must keep on depositand is expected to cut them even more in the coming months, indicated Wang. The cheaper credit would facilitate the financing of home purchases and other investments, since the Central Bank plays an increasingly important role in helping to maintain market stability and boost the economy.

Expectations of lower interest rates have driven up bond prices. But in general, investors who were waiting for more details of the planned policies, They seemed disappointed with the outcome of the meetings maintained throughout the week. On Friday, the Shanghai Composite index fell 2%, while Hong Kong’s Hang Seng sank 2.1%.

Cautious approach as China awaits Trump’s second term

Xi Jinping’s longer-term project to build a modern, innovative and high-quality economy remains the framework for China’s future directionas leaders fine-tune policy details waiting to see what Donald Trump does once he takes office.

As the United States and other trading partners have imposed increasingly strict controls on China’s access to advanced technologysuch as the latest computer chips and the tools and materials to make them, Beijing has retaliated with its own targeted measures.

Economists affirm that Chinese leaders are reserving stronger measures to support the economy, which grows at a reasonably fast rate despite his chronic weakness, waiting to see what happens.

ADVERTISING

“Chinese authorities have stuck in a more reactionary policy stance, as the uncertainty of US tariff plans makes it difficult for political leaders are still committed“Yep Jun Rong, market advisor at IG, said in a report. “There may still be room for positive surprises, but much will depend on upcoming policy developments.”