'Steady as she goes' on China's recovery path

Editor's note: Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for Chinese mainland media for more than a decade. Guppy appears regularly on CNBC Asia and is known as "The Chart Man." He is a national board member of the Australia China Business Council. The article reflects the author's opinions and not necessarily the views of CGTN.

"Steady as she goes" and a toast of yifanfengshun or "favorable winds throughout the voyage" are the primary messages emerging from the annual Central Economic Work Conference that wound up on December 18. It's a message unique to China and a result of China's effective handling of the COVID-19 pandemic. Alone among world economies, China has seen a sustainable V-shaped economic rebound. Unlike other economies, the financial market index is an accurate reflection of genuine economic activity.

The fiscal measures adopted to assist recovery were the correct response. Unlike the global financial crisis in 2008, this was not the time for a large scale infrastructure stimulus. China quickly recognized that the problem presented by COVID-19 was not a collapse of demand and contraction of credit but an inability to satisfy demand due to quarantine restrictions. Business survival depended upon fiscal measures such as tax deferrals and reducing operating costs during the hibernation period.

China faced a range of domestic economic challenges coming out from hibernation, including growing local government debt and uneven economic recovery from the coronavirus. Despite the disruptions of 2020, China has achieved notable progress in targeted poverty reduction, the effective prevention and control of financial risks, and general improvement of the environment.

In recent years, a proactive fiscal policy stance has permitted central government deficits of around 3 percent of GDP and tolerated larger debt burdens accumulated by local governments to stimulate growth. Flexibility increased this year due to the pandemic, with an unusually high fiscal deficit target of more than 3.6 percent of the GDP.

Premier Li Keqiang said in a November meeting with provincial leaders that stimulus this year worked "better than expected," setting the stage for normalization of fiscal policy. China's central bank recently indicated that it expects the ratio to stabilize at a reasonable level as the economy continues to recover.

A statement released after the conference confirmed that fiscal policy should become more efficient next year, effectively ruling out any abrupt course changes. The objective is to help keep economic growth within a reasonable range in 2021.

In addition to COVID-19 induced turbulence, China has faced persistent stormy relations with the United States in 2020. Although there is hope that these storms may reduce under President-elect Biden, there is no guarantee they will entirely disappear. The legacy of the Trump presidency will linger and play a role in shaping the formulation of policy for China's new development stage. The tasks of the Central Economic Work Conference included tackling economic vulnerabilities to offset an unstable external environment.

Sailing forward on future winds requires rejigging the sails of economic policy. This is addressed by the "dual circulation" strategy, which focuses on developing the domestic market for future growth.

This development path is designed to avoid the so-called middle-income trap. It's fashionable in some circles to talk about this concept as if it is an unavoidable brake on China's growth. However, there is no inevitability when careful economic management is applied.

The outcome of the Central Economic Work Conference shows that the "steady as she goes" approach will deliver yifanfengshun results.