Central Economic Work Conference Concludes with Familiar Messages

The PRC government agreed to pursue “a proactive fiscal policy and prudent monetary policy” in 2012, according to a statement issued after the government’s three-day Central Economic Work Conference. The annual conference, held on December 12-14, is the PRC government’s highest-level authoritative economic meeting to evaluate the year’s economic trends and set macroeconomic policy for the next 12 months.

The conference resulted in policy statements in line with the 12th Five-Year Plan (2011-15) and that reflected Chinese concerns about the global economy. Policymakers said they will shift emphasis from controlling inflation to maintaining steady GDP growth, given the easing of inflation pressures as well as falling external demand. The conference also forecasted that 2012’s GDP growth rate will likely be lower than that of 2011. Analysts predict that GDP growth in 2012 will dip to below 9 percent for the first time since 2009. These developments will likely fuel policies and programs to spur domestic demand. The work conference statement also called for measures to be taken in the following areas:

• Increasing domestic demand Potential measures include tax cuts on small- and medium-sized enterprises, firms in service industries and selected sectors; increased spending on public services; increased incomes for the middle class and disadvantaged groups; and stabilization of consumer prices and inflationary pressures.
• Monetary and fiscal policy The government aims to improve the renminbi exchange rate mechanism while maintaining a stable exchange rate; reform business taxes and increase the use of value-added taxes to support the services sector; deepen market-oriented interest rate reforms; and maintain a “reasonable increase” in monetary and credit supply.
• Real estate The PRC government plans to adhere to policies to control the real estate market, including limits on the number of homes an individual can buy, increased down payment requirements, and regulations on how nonresidents qualify for housing purchases. The government says it will also expand coverage of the real estate tax, which is currently only levied in select cities, and build 7 to 10 million housing units to help low-income families move to or remain in cities.

What remains to be seen is how a “prudent monetary policy” will play out, given that the same terminology was used at last year’s conference when rising inflation was a major concern. Analysts expect that the government will continue to cut the Reserve Ratio Requirement (RRR), a measure of how much money banks have to hold instead of lending out. The RRR peaked at 21.5 percent last year, and was subsequently lowered to 21 percent in late November 2011--the first cut in three years.  Many economists are predicting more monetary easing in the months ahead, but do not expect a repeat of the monetary environment during the 2008 stimulus period.