China's Xi Declares ‘Critical Battle’ to Quell Financial Risks

Updated on
  • Policy language shifts to derisking from deleveraging
  • Prudent and neutral monetary policy stance continues in 2018
Kissinger Associates’ Robert Hormats discusses China’s Economic Work Conference and the challenges ahead for 2018.

China’s top leaders said they are taking a three-year approach to winning "critical battles" against financial risk, pollution and poverty, and signaled that monetary policy will remain "prudent and neutral" next year in support.

Economic policy makers led by President Xi Jinping agreed to "fight the battle of preventing and resolving major risks, with a focus on preventing and controlling financial risks," according to a statement following the annual Central Economic Work Conference in Beijing, released by the official Xinhua news agency late Wednesday. In the coming three years, China will seek to control financial risks and foster a "virtuous circle" between finance and the real economy, the statement said.

Click here for more on Xi Jinping’s shift away from growth targets

Policy makers didn’t repeat language on outright deleveraging from the previous two years, but instead focused comments on risk in the financial system, signaling that’s where pressure will continue to be applied in the coming year. The reiteration of a prudent and neutral monetary policy stance for next year signals that policy makers again seek to balance the goals of reining in the nation’s rampant credit growth and polluting industries while ensuring growth doesn’t slow too drastically.

"The statement doesn’t mention corporate deleveraging, suggesting financial de-risking takes priority for the moment," said Yao Wei, chief China economist at Societe Generale SA in Paris. "This is a more practical approach, as the economy would not be able to handle both financial and real economy deleveraging at the same time."

The nation also must build and improve mechanisms for pushing ahead high-quality development and further supply-side structural reforms, the statement said. Policy makers also agreed to move faster to put in place a housing system that ensures supply through multiple sources and encourages both purchases and rentals in 2018, the news service reported.

President Xi and his top policy lieutenants gathered for the three-day meeting after a robust economic performance this year with growth on pace to expand 6.8 percent, the first annual acceleration since 2010.

"The top priority of the past five years has been power consolidation. For this purpose, stimulus in property and infrastructure has been used to provide a stable economic backdrop," Larry Hu, chief China economist at Macquarie Securities Ltd. in Hong Kong, wrote in a note. Authorities are now "keen to curb the risks accumulated over the past five years, so that growth could be more sustainable over the next five years without having a financial meltdown."

Fielding Chen, a Bloomberg Economics economist in Hong Kong, noted that preventing financial risks has a more prominent spot in this year’s statement with a specific time-line and to-do list. "It highlights the increasing importance of this objective," he said.

The People’s Bank of China has increased borrowing costs in the inter-bank market this year, while keeping steady the benchmark rate that governs lending rates in the wider economy.

Click here for an official primer on the Central Economic Work Conference

Further details from the policy meeting include:

  • China to maintain pro-active fiscal policy
  • China seeks to limit growth of credit and total social financing to a "reasonable level"
  • China’s stance on the yuan seems little changed, as officials pledge to keep basic yuan stability at a "reasonable" level
  • Officials reiterated commitments to economic reform and opening-up, vowed to cut tariffs and increase imports
  • Officials said credit supply should support home purchases for living in, and that speculation should be strictly curbed

— With assistance by Yinan Zhao, Xiaoqing Pi, and Kevin Hamlin

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