Consumer Stimulus in 2021: Policy Options and Limitations

Consumer-focused stimulus has been the obvious missing link in China’s efforts to combat the economic effects of the COVID-19 outbreak, which now include deflation in consumer prices. Recent Politburo statements suggest policy-makers will focus on boosting household consumption in 2021. However, the policy options available to Beijing are still limited, including subsidy programs for major purchases or consumption coupons, distributed via digital wallets or digital currency. Ultimately, China’s soft recovery in consumer spending is linked to income and employment growth, which were both slowing even before the virus outbreak. Marketizing rural land, the fastest option to boost rural incomes significantly, has been implemented very slowly since the Third Plenum reform pledges in 2013.

Posted December 18, 2020
Share
Facebook Twitter Pinterest

Plans Are Nothing, But Planning is Everything

Beijing’s upcoming Communist Party conclave will discuss the 14th Five-Year Plan, covering economic targets for the first half of the next decade. The meeting comes amid geopolitical and economic uncertainty, with China’s economy bouncing back from the shock of COVID-19 but facing a far more challenging external environment and threats of decoupling in high-technology industries. There will be few details in the statement issued immediately after the meeting, but a more detailed document with policy guidelines is likely be released in the following week. We see the following elements as the most important to watch:

The presence or absence of a longer-term GDP target. These targets have always featured in past Five-Year Plans, but the days of China doubling GDP every decade are in the past, and Beijing may gain policy flexibility by eliminating a target.

Details on how China plans to implement its “dual circulation” strategy. This could include measures to support domestic consumption and changes to technology and industrial policy goals facing a more hostile external environment. Whether the strategy is primarily focused on import substitution in high-tech supply chains or more conventional consumer-focused stimulus for domestic demand will influence global views of this new policy element.

Environmental and energy policy changes that support Beijing’s recent pledge of carbon neutrality by 2060. The focus will be on whether Beijing adjusts near-term fossil fuel utilization and greenhouse gas emission targets, and sends signals about broader changes to energy policy.

Posted October 26, 2020
Share
Facebook Twitter Pinterest

China’s Current Account Surplus and the Politics of Currency Intervention

China’s current account surplus is about to become a much larger issue for global markets and policy-makers, as it represents a drain on global demand. Recently released 2Q 2020 balance of payments data show China’s surplus expanding again after the COVID-19 outbreak, along with China’s share of global exports. Some of this expansion may moderate as outbound travel from China resumes and the services trade deficit expands once again.

Policy measures in Beijing appear to be driving stronger surpluses, though, rather than promoting market-based adjustments that would reduce external imbalances. China’s “dual circulation” push, the PBOC’s recent management of yuan appreciation, and implied hidden intervention in foreign exchange markets all imply larger surpluses. Recent on-the-ground conversations with exporters suggest a strong outlook for outbound shipments through the end of the year, at least. If there were ever a time for China to back away from currency intervention, that time is now—but we do not expect that to happen.

Posted October 2, 2020
Share
Facebook Twitter Pinterest