May 4, 2021


CHINA: Politburo sees window of opportunity for painful reforms

BY Gabriel Wildau

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The Communist Party’s top decision-making body, the 25-person Politburo, held its quarterly meeting on economy policy on 30 April. Significant shifts in economic policy generally require a decision by the Politburo, so these quarterly meetings are worth watching. While the latest meeting signaled no major shifts, the readout suggests that several ongoing policy campaigns are likely to intensify.

With the economy virtually assured of meeting the government’s conservative GDP growth target of “above 6%” for 2021, the Politburo called for “making good use of the (current) window period with lower growth pressure.” The statement suggests that policies to control debt accumulation will gain force in the coming months. Year-on-year broad credit growth – the best indicator of monetary policy support – peaked for the current policy cycle at 13.7% in October, declined to 12.3% by March, and is expected to fall to 11% by year’s end. This pace of monetary tightening is modest, but with nominal GDP also likely to grow at around 11% this year, China’s domestic-debt/GDP ratio should remain broadly stable in 2021, following a rise of 24 percentage points to 270% of GDP in 2020.

On fiscal policy, the Politburo’s statement reinforces other recent policy signals. The Ministry of Finance issued guidance on 13 April calling for fresh efforts to control the risk from local government borrowing through off-budget financing vehicles (LGFVs). The ministry said that local governments should not rely on LGFVs to finance core government functions and that insolvent LGFVs should be resolved through legal bankruptcies. As previously discussed, the first default by a LGFV has yet to occur, even as defaults by other types of state-owned enterprises have become relatively common. The latest signals suggest that the first LGFV default may finally come this year, though Beijing and/or local governments will still step in with bailouts as necessary to prevent systemic risk.

To be sure, the finance ministry has previously made similar promises to rein in LGFV borrowing and address moral hazard, but policy follow-through has been uneven. Fiscal austerity is politically difficult, and pressure on local governments to support growth with new infrastructure investment has often taken precedence. But the Politburo’s “low growth pressure” and “window of opportunity” message will signal to local officials that risk control is now the higher political priority. Northern China, where growth is weakest and reliance on the state sector is highest, is the most likely location for an LGFV default.

Beyond fiscal and monetary policy, the Politburo also signaled an ongoing focus on anti-monopoly regulation. The State Administration of Market Regulation (SAMR) has already fined Alibaba RMB 18bn (USD 2.8bn) and launched a formal investigation of Meituan. The readout repeated a pledge from the December Politburo meeting to “strengthen and improve regulation of platform economies.” Tencent may be the next shoe to drop, after Reuters reported exclusively on 29 April that SAMR is preparing a fine of at least RMB 10bn.

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