China tries to bridge economic policy ‘credibility gap’


After one of the toughest years for China’s economy and its investors, the country’s central bank governor had a sobering message: there may be more pain to come.

Speaking to bankers in Hong Kong last week, Pan Gongsheng warned that the country’s economy was embarking on a “long and difficult journey” away from its traditional growth engines of property and infrastructure investment.

Pan’s comments point to the principal challenges facing Chinese policymakers as they prepare for the central economic work conference expected this month. The annual policy-setting meeting will send a signal to investors about how much help the government is prepared to offer to the world’s second-largest economy.

Even as Beijing tries to focus policies away from investment in infrastructure and property, investors are seeking indications of how it plans to arrest a liquidity crisis among developers and how far policymakers intend to support struggling local governments.

Analysts are also seeking hints of the Communist party’s target for gross domestic product growth in 2024, which will dictate levels of fiscal and other support for the economy. This year, the target was 5 per cent, its lowest in years.

Pan Gongsheng, governor at the People’s Bank of China, speaks at the HKMA-BIS High-Level Conference in Hong Kong on November 28 © Vernon Yuen/NurPhoto/Getty Images

“I think the market is expecting signals for more support measures,” said Fred Neumann, chief Asia economist at HSBC. “Is there going to be more fiscal stimulus in the pipeline? What’s the thinking around monetary easing? Because there is a sense that without further policy support, the economy will struggle to reach 5 per cent next year organically.”

After a solid first quarter, investor and consumer confidence has wavered, as not only property but China’s export earnings have disappointed.

In response, policymakers have released a series of policies. In October the central bank for the first time pledged to resolve default risks for large property groups and “stabilise expectations” for the sector. Last month the PBoC and other regulators urged state-owned lenders to “meet the reasonable financing needs” of private-sector developers and to treat them the same as state-owned ones when issuing mortgages to homebuyers.

Other reports said regulators were considering a “white list” of developers eligible for bank loans, debt and equity funding. People familiar with the matter said some state banks, at the behest of regulators, had started summoning some private developers to provide “verbal” pledges of credit support.

Coupled with this are what policymakers are calling the “three major projects”: the renovation of “urban villages”, construction of “social housing” and some public infrastructure spending. Analysts said these programmes would boost the construction industry and developers, especially if they involved buying up incomplete or unsold homes.

“Those initiatives could be used to provide a backdoor bailout to developers,” said Gavekal Dragonomics analysts Rosealea Yao and Xiaoxi Zhang in a report.

Economists believe these measures, coupled with others announced by the government, such as a Rmb1tn ($140bn) central government bond issue, are meant to strengthen the economy going into the new year.

Now the focus is turning to what will come in 2024, when the year-on-year base effect will be less favourable than in 2023 as the economy was recovering from the previous year’s Covid-19 lockdowns.

“I expect more credit support to developers,” said Tao Wang, chief China economist at UBS, which forecasts the country’s economy will grow 4.4 per cent next year.

While the work conference may not formally announce the 2024 growth target — that would usually come during China’s annual parliamentary meeting in March — economists believe the government could target 5 per cent again, which would be “challenging but deliverable”, said Zhu Haibin, chief China economist at JPMorgan, who added that 4.5-5 per cent might be easier to achieve given challenges from housing and local government debt problems.

Investors would probably welcome a 5 per cent target, said Miao Yanliang, executive head of the research department at China’s CICC investment bank. This would be the first time in recent years that the government has not lowered the target. “The target is an important indicator and will have a big impact on the market,” said Miao.

The government’s plan for medium-term growth beyond next year would normally be laid out by the so-called Third Plenum, an important economic meeting traditionally held by the Communist party once every five years. It was due to be held in October, but China’s President Xi Jinping has not given any indication of the meeting’s timing or whether it will be held at all.

This comes as China’s trading partners fret that Beijing is ploughing funds that once went into property into manufacturing instead, at a time when it is already running record trade surpluses with many of them.

Bank credit to the industrial sector grew 30.9 per cent in the third quarter compared with a year earlier, more than four times higher than the pre-pandemic level of growth at the end of 2019. This is marginally being offset by a fall in bond issuance by manufacturers.

Tensions with trading partners such as the EU are high over China’s exports of electric vehicles and other items.

“There is clear overcapacity in China, and this overcapacity will be exported, especially if overcapacity is driven by direct and indirect subsidies,” European Commission President Ursula von der Leyen said last month. She is expected to raise the issue during a visit to Beijing this week.

European leaders are unlikely to receive a receptive audience for such complaints. China’s officials say its trade is fair and its economic prospects are bright, while blocking any discussion of the country’s problems domestically.

Even Pan’s speech in Hong Kong was toned down for domestic consumption — the Chinese transcript omitted the phrase “long and difficult”. It also offered few hints as to what Beijing had in mind for the coming transition away from property and infrastructure, only that it was aiming for “high quality and sustainable growth”.

Such platitudes might be enough to satisfy China’s censors. But some investors will need more convincing before they return to a market that they left in droves this year.

“The reason why the market hasn’t reacted more to it yet is because we have lack of details,” said HSBC’s Neumann. “And also there’s a question of what is the medium-term policy.”

On the measures to kick-start the property sector in particular, Neumann said the “market wants to see more specifics . . . that’s the credibility gap that we need to bridge”.

Additional reporting by Sun Yu in Beijing

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