Chinese Policy Takeaways From Leaders' State Media Onslaught

  • Reform back in focus as stimulus seen leading to debt problems
  • Xi speech seeks to clarify details of supply-side reforms

China’s communist leaders have taken to their main mouthpiece this week to repudiate credit-fueled growth and re-emphasize that structural reform should come first.

The People’s Daily on Tuesday published a 20,000-character transcript of a speech by President Xi Jinping on key economic policies that was delivered in January to a closed-door study session with provincial leaders. A day earlier, an article quoting an unidentified "authoritative person" sought to clarify misunderstandings around policies, warning the world’s second-largest economy shouldn’t sacrifice deleveraging and upgrading industrial and corporate efficiency for the sake of boosting growth.

Top leaders are trying to convey a message that "macroeconomic control should focus on restructuring more than sustaining growth," said Ming Ming, head of fixed income research at Citic Securities Co. in Beijing. "As economic indicators continue to improve, they can now tolerate a slight slowdown and focus on structural reform."

The People’s Daily is a traditional platform for China’s communist leaders to send messages to and seek consensus from officials, leaders of state-owned enterprises and scholars from government-backed institutions. Deng Xiaoping used the party-controlled paper to start a discussion in the late 1970s that paved way for reform and opening-up.

These are the main policy implications from the Xi speech text:

  • No Reaganomics or Thatcherite policies please: Supply-side reform isn’t the same as Western-style supply-side economics. China’s supply-side reform is more than "an issue of tax or tax rate," instead it’s a slew of structural measures to boost innovation, prosperity and well-being. People seeking to use their interpretations of supply-side reform to promote "neo-liberalism" must be prevented from doing so.

  • Manufacturing must upgrade, not downsize: Chinese consumers spent a lot overseas on consumer goods like toilet covers and powdered milk, which shows the country isn’t producing the products needed to meet the changing demand.

These are the main policy implications from the "authoritative person":

  • Expect stabilization, not a rebound: "China’s economic performance will not be U-shaped and definitely not V-shaped. It will be "L-shaped" for more than one or two years."

  • Cutting debt is the priority, not further revving up growth: High leverage is the "original sin" and it inevitably leads to high risks.

  • Leaders are focused on risks in these areas: A slump in private investment, real estate bubbles, overcapacity, bad loans, local debt, securities markets, foreign exchange markets, bonds markets and illegal fundraising.

  • The old ways must change: China hasn’t solved "existing contradictions" and economic stabilization has relied on the "old method" of investment-driven growth.

  • Expect tough medicine: "Some regions, sectors or enterprises will always benefit from differentiation while some others will taste bitterness. But still they’ll learn a lesson and know what the next step is. In that sense, I don’t see it as a bad thing."

  • Less fiddling in property: Property inventory reduction will happen through urbanization, not levering-up. It is necessary to "scrap outdated administrative measures". Big stimulus will only result in bubbles, which is a "must-learn lesson."

  • Debt-to-equity swaps aren’t a universal tool: Enterprises should be closed down or declared bankrupt if they have no future. Don’t resort to debt-to-equity swaps or forced mergers just to keep them alive.

  • Watch for policy guidance and better communication: "If we go back to the stimulus-driven path, concerns will rise and the market will hesitate and will not know what to do." Policy communication is needed to improve guidance and transparency.

— With assistance by Malcolm Scott

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