KEY CALLOUTS FROM CHINA’S CENTRAL ECONOMIC WORKS CONFERENCE: EXPECT MORE OF THE SAME

Takeaway: The objectives introduced in China’s Central Economic Work Conference are in line with previous POLICY objectives and our outlook for China.

SUMMARY BULLETS:

 

  • The confluence of the POLICY objectives per the latest Central Economic Work Conference are in full support of our long-held core thesis on the Chinese economy – specifically that Chinese real GDP growth is no longer going to outperform CCP targets by 200-400bps; rather, Chinese GROWTH will come in sustainably slower at +7-8% per annum (the CCP target for 2013 is +7.5%).
  • We’ve been in print confirming that Chinese GROWTH is no longer decelerating, but that any economic improvement over the intermediate-to-long term will be rather marginal and certainly nowhere near the area code of China’s trailing 5-10 year peak GROWTH rates.
  • In light of this positive, but decidedly subdued outlook for the Chinese economy, we continue to hold bearish TAIL-duration biases on worldwide mining-related capex and international raw materials prices. Plainly stated, the slope of Chinese demand for raw materials is likely to remain flat-to-negative for the foreseeable future as China accelerates its economic rebalancing by siphoning marginal GDP dollars towards consumption in lieu of fixed capital formation.
  • Sure, Chinese policymakers do indeed have a unique opportunity to accelerate urbanization and promote capital markets reform in order to sustain GROWTH, but sustaining GROWTH < demonstrably accelerating GROWTH. Don’t get ahead of your ski tips on this one!

 

Over the weekend, Chinese policymakers held their annual Central Economic Work Conference, which is used to finalize the country’s strategic macroeconomic objectives for the upcoming year. Below, we list what we thought were the key highlights of the largely uneventful event (per the State-owned Xinhua New Agency’s translation of the resulting statement):

 

  • The key points from the conference include transforming the growth pattern through expanding domestic demand, eliminating imbalances in development through structural adjustments and achieving sustainable and stable social progress through reforms in key sectors. Leaders vowed to target “sustained and healthy development” as they maintain a “prudent” monetary policy and “proactive” fiscal stance.
  • There was no mention of seeking “relatively fast” growth, a policy in place since 2006. It marks the first time that quality and efficiency, rather than speed, are center-staged in China's economic growth.
  • New growth points should be created in domestic consumption, which will serve as both a strong pulling power and foundation for the sustained and healthy development of the country's economy.
  • China will actively and steadily push forward urbanization next year, with a focus on improving quality of the efforts.
  • China has reiterated its firm stance regarding property market controls and vowed to keep tightening measures in place, including bans on third-home purchases and property tax trials that have been introduced since 2010.
  • China vowed to continue to protect foreign investors' rights and interests and their intellectual property rights.
  • While encouraging and providing better guidance to private investors, the government will increase public investment on infrastructure projects that will not cause repetitive construction but set foundations for long-term development and benefit people's well-being.

 

All told, the confluence of the aforementioned POLICY objectives are in full support of our long-held core thesis on the Chinese economy – specifically that Chinese real GDP growth is no longer going to outperform CCP targets by 200-400bps; rather, Chinese GROWTH will come in sustainably slower at +7-8% per annum (the CCP target for 2013 is +7.5%).

 

Most importantly, the government’s resolve to maintain property market curbs amid a continuation of “prudent monetary policy” and “proactive fiscal policy” confirms our view that Chinese policymakers have no interest in reflating their credit-based economic bubble – which has been identified by them as the key contributor to heightened levels of social unrest. To that tune, it’s important to note that China’s Gini coefficient (a common measure of income inequality) ripped to 0.61 in the most recent year the data was available (2010); per China’s Survey and Research Center for China Household Finance, that level is 50% higher than a risk levels for social unrest. Mass incidents, including strikes, riots and other disturbances, doubled to at least 180,000 in 2010 from 2006 levels per Tsinghua University.

 

As repeatedly stressed in outgoing CCP General Secretary Hu Jintao’s transition speech, those atop the CCP brass are keenly aware of the political risks the Party faces from social discontent, so it’s prudent for investors to maintain muted expectations with regards to Chinese POLICY going forward. We’ve been in print confirming that Chinese GROWTH is no longer decelerating, but that any economic improvement over the intermediate-to-long term will be rather marginal and certainly nowhere near the area code of China’s trailing 5-10 year peak GROWTH rates.

 

In light of this positive, but decidedly subdued outlook for the Chinese economy, we continue to hold bearish TAIL-duration biases on worldwide mining-related capex and international raw materials prices. Plainly stated, the slope of Chinese demand for raw materials is likely to remain flat-to-negative for the foreseeable future as China accelerates its economic rebalancing by siphoning marginal GDP dollars towards consumption in lieu of fixed capital formation. For more of our thoughts here, please refer to the following notes:

 

CHINESE GROWTH: STICKING TO THE [CENTRAL] PLAN (7/13);

PONDERING CHINESE GROWTH PART II (7/17);

EARLY LOOK: River Baptisms (10/4);

HOPE VS. REALITY IN THE CHINESE PROPERTY MARKET (10/4); and

HU SPEAKS; IS ANYONE LISTENING?: NOTES FROM CHINA’S 18TH PARTY CONGRESS (11/8).

 

Sure, Chinese policymakers do indeed have a unique opportunity to accelerate urbanization and promote capital markets reform in order to sustain GROWTH, but sustaining GROWTH < demonstrably accelerating GROWTH. Don’t get ahead of your ski tips on this one because China will not be lining up to bail out the global economy (see: 2009-10’s CNY4 TRILLION stimulus package and CNY17.5 TRILLION credit expansion) this time around!

 

Darius Dale

Senior Analyst


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