An emphasis on stability

The Chinese government wrapped up its annual Central Economic Work Conference (CEWC) on Dec 13 and released a statement afterwards. The CEWC is part of the annual policy cycle, following on the Politburo meeting earlier this month.

The statement is meant to express the government's view on: first, current economic developments and the outlook for next year; second, the overall macroeconomic policy stance; and third, in general terms, giving an idea of the focus of economic policymaking and structural reforms next year.

The CEWC sets the stage for more concrete policy formulation in the coming months, in the run-up to the presentation of the work reports of the premier, the National Development and Reform Commission and the Ministry of Finance to the National People's Congress in March.

The statement suggests an emphasis on stability; stability of economic growth and macroeconomic policy, but also on policymaking more generally. While the statement suggests reforms in several areas in 2014, it does not indicate major movement next year on key, but thorny areas such as reform of the fiscal system, rural land arrangements and State-owned enterprise issues.

The statement discusses preventing "debt risk" but does not necessarily imply a major shift in the stance on overall credit growth. The emphasis is on local government debt; on improving supervision, regulation and budgeting; and the statement lays the responsibility for local debt in the hands of provincial and municipal governments.

While the statement calls for adjusting the economic structure and stimulating domestic demand, there is relatively little focus on rebalancing away from investment to consumption or on urbanization and its role in adjusting the pattern of growth.

While the growth target for 2014 was not mentioned, the statement emphasized the need for "stable", "reasonable" growth. Thus, it would not surprise us if the government ends up setting a target of 7.5 percent for GDP growth next year.

The official prescriptions remain for fiscal policy to be "proactive" and monetary policy "prudent". These labels should not really be taken literally but the fact that they remain unchanged matters and is consistent with a stability-oriented approach.

The line on stability of policy extends to policies with regard to the property market; there is no call for either relaxing or tightening them.

A "focus on debt risk prevention" is one of the six key tasks the government has set for 2014. Such an emphasis is not new; last year's statement after the CEWC did the same. Thus, it does not necessarily imply a major shift in the stance on overall credit growth. Indeed, the language on debt is matched by a commitment to maintain growth of money, credit and social financing at "a reasonable pace".

This year's statement emphasizes local government debt. It calls for better regulation, supervision and budgeting. It also lays the responsibility for controlling and resolving local government debt in the hands of provincial and municipal governments instead of the central government.

The statement mentions several areas of economic reform, without including a lot of specifics. These areas, and the language used to discuss them, are largely similar to that in earlier policy documents, for instance the statement after last year's CEWC. But there are changes.

There is more emphasis than before on the need to "resolve the overcapacity problem".

The statement suggests the government will continue to stimulate domestic demand. However, as in the March 2013 work report of the government to the National People's Congress, there is little emphasis on the need or plan to rebalance the pattern of growth towards more consumption and services, away from investment and industry. While the statement noted that consumption has a "basic role", it added that investment has a "key" role.

Relatedly, there was no mention anymore of urbanization and its role in driving domestic demand and consumption. This featured in last year's statement after the CEWC, but it seems to have been de-emphasized recently.

In our view, significant financial and monetary reform is likely to take place in 2014, as indicated by the commitment to "improve and optimize the financing and credit structure", "increase the proportion of direct financing" and "promote interest rate liberalization and the exchange rate formation mechanism reform".

We think the six "key tasks" for 2014 point to areas where policy measures and reforms are likely to take place in 2014:

First, ensure food security.

Second, adjust industrial structure, which is about "resolving the overcapacity problem", "vigorously developing strategic emerging industries", "accelerating the development of various types of services", "promoting upgrading of traditional industries, "creating an environment where enterprises are (doing the) innovation", and "strengthening intellectual property protection".

Third, focus on debt risk prevention, which is about controlling and resolving local government debt risk and lays out the need to "impose strict standards for the sources (of debt)", "categorize local government debt in budget management", and "standardize the government borrowing process". The statement is explicit about the division of responsibility: "Provincial and municipal governments should take responsibility for the local government debt in their regions".

Fourth, actively promote coordinated regional development.

Fifth, protect and improve the people's livelihood, which calls for effort and policies to "solve the housing problem", "increase construction and supply of low-rent housing and public rental housing".

Sixth, continuously improve the level of openness (of the economy): "maintain the traditional export advantage", "create new comparative and competitive advantages", "expand equipment and technical imports which are good for adjusting the domestic growth structure", "accelerate negotiations for free trade agreements and investment", "build a stable, transparent and equal investment environment and protect the investors' legitimate rights and interests".

Urbanization did not feature much in the CEWC statement. It was the subject of a separate high level conference. The statement released after that conference on Saturday called for "steady", "active" and "human-focused" urbanization. As did the statement after the Third Plenum in November, it called for partially relaxing the hukou system (or household registration) but did not elaborate on the needed overhaul of the fiscal system.

Next year is the first year after the Third Plenary Session of 18th Communist Party of China Central Committee that addressed comprehensive reforms. How much progress can be made in achieving the six key tasks and making headway with the broader reform plans outlined in November will show the Party's resolve on reforms.

Louis Kuijs and Tiffany Qiu are economists with The Royal Bank of Scotland.