Setting China’s 2020 Economic Policy Priorities

China’s leadership will hold a critical meeting next month, the Central Economic Work Conference (CEWC), to establish economic policy priorities for 2020. Our expectations for the meeting include:

Monetary easing takes center stage as the PBOC begins a cycle of interest rate cuts. Cuts to banks’ funding rates—open market operations rates and medium-term lending facility (MLF) rates—are necessary to reduce corporate borrowing costs and offset deflationary pressure. Given more limited room for RRR cuts, the central bank needs to take more creative measures in expanding its balance sheet to add liquidity more aggressively.

Local government bond issuance will be increased, together with a larger fiscal deficit. A larger proportion of special revenue bonds will fund infrastructure next year, to offset the probable drag from weaker property construction.

Policymakers will focus on determining the path for “supply-side reform” of the financial sector. Mergers of smaller banks appear to be a key strategy but no regulator wants to take the lead and bear the costs of a larger bailout.

Posted December 4, 2019
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