Decoding Macroeconomic Control Policies for 2012: Fine-tuning and Pre-tuning

It is now Christmas time again! We, Mr China, have special greetings as our Christmas gift to you. Details please refer to our full greetings for Merry Christmas & Happy New Year.

Another Christmas gift is for our readers who would like to better understand the China macroeconomic strategy in 2012. The below paragraphs decode and outline the details about the China Central Economic Work Conference (CEWC), the most important annual economic meeting to set out main theme for 2012 national macroeconomic control policies.

China top leaders finished the Central Economic Work Conference (CEWC), chaired by President Hu Jintao, on 14 December 2011 in Beijing. They concluded to keep fiscal policy proactive and monetary policy prudent in 2012 but may still possible to fine-tune and pre-tune these macroeconomic policies shall conditions change at a time of global economic uncertainty.

This outcome of CEWC implies that there will be no aggressive easing in 2012 even on weak economic outlook, mainly because there will be a leadership transition within the Chinese Communist Party (CCP) in 2012. The current top leaders will step down for transition of power to the next-generation leaders in 2012 and economic policies should better be kept stable during the transition period. As China is facing dual-pressure in the slowdown of economic growth and the fear of reigniting domestic inflation, the current leaders prefer to see a basically-stable inflation and are reluctant to relax the relatively tight credit environment.

The Central Economic Work Conference (CEWC) outlines five main tasks in 2012 as follows:

(1) Continue to enhance macroeconomic control policies for steady and relatively fast economic development.

Must co-ordinate relations between speed, structure and price. Priority of macroeconomic control policies should be placed at:

(a) to address the outstanding problems and contradictions during economic and social development;

(b) to avoid the potential financial risks effectively during economic development.

Strength, rhythm and focus of macroeconomic control policies should be accurately mastered. Fiscal policy shall continue to improve the structural tax cut policy, to enhance investment relating to people's livelihood, to facilitate economic restructuring, to make fiscal and expenditure management serious, and to enhance debt management of local governments. Monetary policy shall be able to implement appropriate pre-tuning and fine-tuning timely with forward-looking ability of the changing economic situation, to make integrated use of different monetary policy tools for keeping reasonable growth of credit and money supply, to optimize credit structure, and to avoid potential financial risks effectively. Continue to enlarge investments for the following: "three rural", supporting less-developed areas, affordable housing programs, strategic emerging industries, major infrastructure projects under construction, technological innovation, technological upgrade of enterprises, environmental protection, etc.

(2) Insist the "three rural" tasks to enhance ability for assuring the supply of agricultural products.

Steadily increase the minimum grain purchase prices and raise direct subsidies to grain productions. To enhance the quality and safety management of agricultural products, improve storage system, regulate and reduce the circulation costs of agricultural products. To extend the constructions of water supply infrastructure, expand small-scale irrigations and also water conservancy constructions.

(3) Speed-up economic restructuring.

(a) to expand domestic demands (especially consumer demands). To reasonably increase incomes of urban and rural residents, especially for the low-income ones. Promote consumption of people's health, pension, cultural, tourism, housekeeping and other services. Improve circulation efficiency between urban and rural areas to reduce logistics costs. Crack down seriously on commercial frauds or counterfeiting behaviors, so that people can feel safe to spend. To maintain an appropriate scale of fixed asset investments (for the approved projects or projects under construction), and to ensure funding for the approved construction projects including water supply conservancy, railway, and main facilities etc.

(b) to promote structural upgrade for innovation and intellectual property protection. Focus on the development of strategic new industries, strengthening core competitiveness, promoting major technological breakthroughs. Upgrade and transform traditional industries, eliminate the excessive production capacities through promoting mergers and acquisitions (M&A). Develop service industry (especially modern service industry), and expand the middle-income class. To develop new energy aggressively but orderly, and to speed-up constructions of the related distribution channels.

(c) to strengthen mechanisms for energy conservation and emission reduction. Enhance environmental protection, emphasizing on water, air heavy metals, and agricultural pollution controls. Constructively participate in international climate change cooperation and negotiations.

(d) to promote coordinated regional developments across the country. Eastern region shall take the lead in improving the quality of economic development, while central and western regions shall develop through innovation.

(4) Deepen reforms and improve opening-up level.

To promote reforms such as: transformation of business tax to value-added tax (VAT), property tax (through pilot program), consumption tax rate structure, resource tax system, and study on environmental protection tax. To deepen the interest rate reform and exchange rate formation mechanism reform, keep the RMB (Renminbi) exchange rate basically stable. To improve the crude oil price formation mechanism, and gradually smoothen relations between coal and electricity prices. Maintain stability and continuity of the foreign trade policies, so as to keep steady growth in exports and to facilitate export structural upgrade. Expand imports aggressively to encourage a balanced trade. To steer foreign investments to the less-developed central and western regions, but also actively avoid the possible risks of foreign investments. To deepen international trade cooperation, oppose all forms of protectionism.

(5) Protect and improve people's livelihood, enhance social management and innovation.

To invest more in education, and improve the overall quality of education. Stick to an active employment policy, and strengthen employment support. To further improve the social security system, expand pension and coverage of social insurance programs. Support development of labor-intensive industries as well as small-and-micro enterprises. Put improvement of the county hospitals as the main focus of public hospital reform in health and medical system. Work further on affordable housing development, for all the phases including financing, construction, operation and management. Adhere firmly to the current property market regulatory policies and cooling measures, in order to return home prices to a reasonable level. To enhance food, medicine, production safety supervision, and crack down on illegal behaviors.

As Chinese are used to put the task with highest priority at the top of their list, decoding the messages from the Central Economic Work Conference (CEWC) is not that difficult. Surely promoting economic growth has already replaced taming inflation as the top priority in 2012 for Chinese macroeconomic control policies. It is also believed that, going forward, China will continue to seize the economic development growth opportunity during the important strategic and leadership transition period.

To emphasize particularly, it is the first time that China plans to expand its middle-income class for growth in domestic consumption. In all, China is ready to cope with a weakened domestic economy and a complicated global demand, and shall take prompt macroeconomic control actions (including policy fine-tuning and pre-tuning) whenever necessary in the next year.