Economic Work Conference: Six Key Signals

The issues raised at the Politburo meeting have been addressed with a "point-to-surface" answer at today's economic work meeting. Faced with the "deepening" of external adverse influences and the existence of "many difficulties and challenges" internally, policies are indeed actively seeking change and increasing efforts. For example, a very intuitive reflection is that the economic work targets for next year are set quite differently: Unlike before, price stability, balance of international payments, and growth in residents' income have been elevated to the same level as stable growth and stable employment.

Therefore, to grasp the main line of the economy for next year, we believe the following six signals are very critical:

First, a more candid acknowledgment of external and internal problems and risks. The meeting pointed out that "the adverse effects brought about by changes in the current external environment have deepened," and the description of difficulties in economic operation has upgraded from "some" in 2023 to "many." In the face of the challenges posed by Trump's new term next year, domestic issues are likely to become more complex, but acknowledging problems is the basic prerequisite for effectively solving them.

Second, directly "revealing" an increase in the deficit, which is rarely seen in history. The Central Economic Work Conference usually sets the policy tone, but this time the fiscal policy has provided clearer guidance, especially by directly signaling an increase in the fiscal deficit rate for next year, giving the market a "reassurance."

Fiscal: From "proactive" to "more proactive." The Politburo meeting has officially changed the fiscal tone from the previous "proactive" to "more proactive," and the Central Economic Work Conference has provided clearer guidance on the "more"—first, to raise the deficit rate (it is rare to explicitly state an increase in the deficit rate at the Central Economic Work Conference, the last time was back in 2015); second, to increase the issuance scale of ultra-long special government bonds and special bonds; third, to optimize the structure of fiscal expenditure and increase support for the "three guarantees." With this fiscal combination, we expect that by 2025, the scale of government debt is very likely to cross from nearly 12 trillion yuan to 15 trillion yuan.

The fiscal context for 2025 is becoming increasingly clear. We believe that raising the deficit mainly corresponds to "ensuring the bottom line of the three guarantees at the grassroots level," with fiscal expenditure tilted towards areas that truly boost domestic demand, such as people's livelihoods; increasing ultra-long special government bonds mainly corresponds to "continuing to support 'two 重' projects and the implementation of 'two new' policies"; increasing special bonds mainly corresponds to "promoting the stabilization of the real estate market and prudently addressing risks in local small and medium financial institutions."

Third, the emphasis and determination to boost consumption are unprecedented. In addition to being at the forefront of work arrangements, the press release reiterates in the consensus-building section that "efforts should be made to boost domestic demand, especially household consumption demand," indicating that boosting consumption is not just a work deployment but may also represent a paradigm shift in policy thinking from "investment" to "consumption."

Where to focus on boosting consumption? The meeting pointed out key areas for stimulating consumption: first, "increasing efforts and expanding the scope" to implement "two new" initiatives; second, benefiting people's livelihoods and ensuring stability: for example, promoting "income growth and burden reduction for low- and middle-income groups" and "increasing pensions"—solving the public's concerns about consumption through fiscal transfer payments and targeted measures.

What to do next year? It is better to act early than late, and the scale should be sufficient, with a broader scope. From the 2023 Central Economic Work Conference proposing to promote "two new" initiatives to the allocation of 300 billion yuan in fiscal funds to local governments in September this year, there is a certain time lag in policy transmission. However, with experience and pathways cleared next year, the continuation of "two new" initiatives can also be launched in advance, covering the entire year. The support scope is expected to expand to this year's relatively weak furniture, catering, and communication equipment with replacement potential. We estimate that under the baseline scenario, expanding fiscal funds to new categories by 150 billion yuan next year could correspondingly drive about 400 billion yuan in potential sales space, equivalent to 0.9% of the total retail sales of consumer goods in 2023.

Fourth, monetary policy focuses on continuity and strengthening, ensuring good coordination with fiscal policy. First, to maintain ample liquidity, the intensity of tools such as reserve requirement ratio cuts, interest rate cuts, and buying and selling government bonds will be greater; second, in the face of internal and external pressures, there may also be an increase in the "tolerance" for the exchange rate, but the pace will still be relatively cautious, relying on adjustments to a "reasonable equilibrium level."

The meaning of "moderately loose" monetary policy is further clarified in the press release: First, it rarely and directly indicates "reserve requirement ratio cuts and interest rate cuts," suggesting that the potential reduction next year may exceed this year; second, it is the first mention of "central bank macro-prudential and financial stability," with the goal of macro-prudential policy being to prevent systemic financial risks, specifically stabilizing the stock market, bond market, and exchange rate.

Facing the uncertainty of tariffs next year, the tolerance for the exchange rate is expected to be "recalibrated," potentially breaking through 7.3, opening up space for monetary easing. In addition, the exchange rate can also increase its flexibility against the US dollar by "re-anchoring" (shifting to anchor a basket of effective exchange rates), thereby releasing space for domestic easing

Fifth, stabilizing the real estate and stock markets, and clarifying the bottom may be the most important at present. The "926" Politburo meeting revealed a shift in policy focus from emphasizing the liability side to placing greater importance on the asset side. In the short term, the work may be to ensure that the market bottom is firmly established, especially in the stock market and the housing prices of core first-tier cities, which serve as a barometer.

Stabilizing consumption also requires stabilizing housing prices first. Only with stable expectations for housing prices, and when household balance sheets no longer shrink, can residents' consumption be more "unrestrained." From a policy perspective, we believe that as mortgage rates are further relaxed next year, housing prices are expected to show initial signs of stabilization in the second-hand market of first-tier cities; however, local special bonds supporting the storage and transformation of affordable housing projects may still be slow due to rental yield and project profit and loss issues. Therefore, the subsequent participation of central finance may be a potential direction for policy enhancement.

Sixth, new ideas on the supply side—addressing "involution." The "involution competition" mentioned in the July Politburo meeting has reappeared, but this time it used the term "addressing." Involution is closely related to the current situation of oversupply in many fields. However, balancing the goals of stable employment and society, through structural optimization of existing stock, is more appropriate than the previous "supply-side reform." This may also imply the introduction of policies such as deepening zero-based budgeting reform, reducing export tax rebates, and extending holidays without adjusting for time off.

Authors: Tao Chuan (S0100524060005), Shao Xiang, Li Xiaoyu, Zhong Yumei, Source: Chuan Yue Global Macro, Original Title: "Economic Work Conference: Six Key Signals"

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