China Plans Prudent, Neutral Monetary Policy for Next Year

  • Houses are built to be inhabited, not speculation: Statement
  • Economists have been raising growth estimates for next year

China Emphasizes Prudent, Neutral Monetary Policy

China’s top policy makers said they plan prudent and neutral monetary policy and proactive fiscal policy next year as they seek to sustain a steady expansion with room for reforms.

Preventing and controlling financial risk to avoid asset bubbles will be a priority, along with deepening supply-side structural reform, according to a statement Friday from the official Xinhua News Agency issued after officials concluded the three-day Central Economic Work Conference in Beijing. Policy makers said they aim to ensure currency and liquidity levels are both kept basically stable.

Optimism over the growth outlook has been increasing even as the People’s Bank of China shifts toward selective tightening after more than a year of record-low interest rates. Forecasts for full-year 2017 growth have climbed to 6.4 percent from 6.3 percent since September, a Bloomberg survey showed Friday.

"It’s a very slow shift and will not be abrupt, but the PBOC’s calculus is indeed beginning to change," said Andrew Polk, Beijing-based head of China research at Medley Global Advisors, which advises institutional investors. "Like often occurs, they’re really describing in retrospect how monetary policy has already started adjusting since September."

Read more: PBOC shifts to selective tightening to curb risk

Industrial output and fixed-asset investment maintained brisk expansions in November and retail sales accelerated, data released Tuesday showed. That’s resulted in an overall expansion of about 7 percent, according to a monthly tracker from Bloomberg Intelligence.

Economists also have higher hopes for prices after China snapped more than four years of factory-gate deflation in September. Forecasters increased estimates for producer prices, indicating gains will peak at 4 percent in the first quarter and average 2.5 percent for the whole year, Bloomberg’s survey shows. A month ago they projected a 3.1 percent jump in the first quarter and 1.6 percent for all of 2017.

Officials also laid out steps to ease risks from soaring home prices. The country will set up a market-oriented and long-term mechanism to deflate a real estate bubble and prevent erratic prices, Xinhua reported. China also will strictly limit loans flowing to speculative home purchases and eliminate excess housing supply in third- and fourth-tier cities, it said.

"Houses are built to be inhabited, not for speculation," the post-meeting statement said.

Zhou Hao, an economist at Commerzbank AG in Singapore, said that was an eye-catching phrase. "The stance of monetary policy has turned to ‘prudent and neutral’ from ‘prudent,’" he said. "The Chinese authorities are seriously concerned about asset bubbles."

President Xi Jinping reviewed this year’s progress by the world’s second-largest economy and mapped out the plan for 2017 at the conference, according to another report Friday from the official China News Service.

Xi has already said he’s certain China will achieve its major economic and social objectives this year. With state-led investment roaring, exports cushioned by a weaker yuan and retail sales accelerating, the expansion is on pace to land smack in the middle of the government’s 6.5 percent to 7 percent full-year objective. Economists surveyed by Bloomberg project a 6.7 percent expansion.

Read More: Xi certain China to achieve major economic goals

Threats ahead of a crucial party congress late next year still loom, such as soaring debt and risk of confrontation with U.S. President-elect Donald Trump over trade and Taiwan. Trump has threatened to impose tariffs on Chinese goods and to label it a currency manipulator after taking office Jan. 20.

Another challenge will be the Federal Reserve, which raised interest rates Wednesday for the first time this year and forecast a steeper path for 2017 increases. State-run media rolled out several commentaries Friday assuring readers that higher U.S. rates won’t roil the economy even amid capital outflows and a weakening yuan. "There’s no need to over-worry" because economic fundamentals are resilient, People’s Daily wrote in a commentary.

Top cadres use the annual conference to reach consensus on crucial issues in the next year. It includes members of the Communist Party’s Politburo, ministers, provincial governors, top officials from the nation’s judicial system, and heads of state-owned enterprises.

Several policy makers including PBOC Deputy Governor Yi Gang are scheduled to speak Saturday about the decisions at a related forum sponsored by the Center for International Economic Exchanges.

— With assistance by Kevin Hamlin, and Miao Han

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