What Significant Signals Will the Central Economic Work Conference Send?
Yicai Global
/SOURCE : Yicai
What Significant Signals Will the Central Economic Work Conference Send?

(Yicai Global) Dec. 15 -- China's highest-level economic conference, the Central Economic Work Conference, is held this week. It will determine China's economic development plan for 2017. Yicai Global interviewed several experts who predicted the priorities of 2017's economic work and reform. Among these, steady GDP growth, in-depth reform of state-owned enterprises (SOEs), implementation of individual tax reform, real estate regulation and establishment of a 'perpetuating mechanism may be the focuses of China's economic work next year.

The conference is the highest-level economic conference convened by the Communist Party of China's Central Committee and China's State Council. It has been held annually since 1994, and normally convenes between November and December each year, often for no more than four days. The purpose of this meeting is to sum up the year's economic work and formulate the macroeconomic development plan for the following year.

In 2015, the Conference proposed 'supply side structural reform.' Per this mantra, the Chinese government has pushed for a massive removal of excess capacity, involving steel and cement, among other commodities.

State mouthpiece Xinhua News Agency reported that the meeting was in session yesterday, but disclosed no additional details.

GDP growth target at 6.5% or so

The official People's Daily newspaper said in a commentary this week that China's economy will not grow as fast as in the past, as the country's overall economy and base grew. The economy cannot maintain a 'perpetual motion machine' type of long-term high-speed growth.

A report the State Information Center released this month -- compiled by the government research institute -- considered the potential economic growth in China and the changing trend of demand in the coming year, as well as the reality that macroeconomic downward pressure is still large, and thus proposes fixing the target for economic growth control in 2017 at around 6.5 percent.

Zhang Jun, Morgan Stanley Huaxin Securities Co. chief economist, told Yicai Global that, given the difficulty in promoting structural reform in China, as well as the political and policy uncertainties of the global economy in Europe and the US, if the Chinese government appropriately expands the target range of GDP growth and revises its lower limit down to six percent in developing its economic growth target, this will greatly ease the pressure of steady growth on the government, diverting more effort toward structural reform. This will benefit the mid- and long-term sustainable development of China's economy.

Reform of Individual Income Tax to Be Instituted

Yicai has learned that, currently, the scheme for the reform of individual income tax has been basically finalized and submitted to the State Council. Before then, a departmental head in the Ministry of Finance told Yicai Global that the scheme for the new round of reforms in individual income tax aspires to add more special deduction items like education, interest on home mortgage loans and pensions to ease the burdens on low- and middle-income groups. Currently, individual income tax in China is mainly assessed per tax payers' incomes, and those earning less than CNY3,500 (USD500) per month may be exempted from such imposts.

In March this year, China's former Finance Minister Lou Jiwei revealed this policy trend, but added that implementation of these policies requires a consummated personal income and property information system, as well as corresponding amendment of relevant laws.

A report published by investment bank China International Capital Corporation Ltd. [SHA:600489] says reform of individual income tax will take effect in 2017, with the reform orientation to encompass a combination of both classified and integrated collection, a deduction for commercial insurance and mortgages, and overall consideration of family burdens. This reform will not necessarily lessen the overall burden on the public, but will optimize income distribution and facilitate consumption growth.

Reform of SOEs to Accelerate

Zhang Xiwu, vice director of the State-Owned Assets Supervision and Administration Commission once said to the public that 2017 will continue to see actions resolving overcapacity and accelerating the restructuring and merger of central enterprises (CEs). The merger and reorganization of CEs next year will speed up to, specifically, pare their number down to a double-digit figure. Currently, there are 103 CEs, whereas they numbered 196 in 2003.

At our interview, Li Jin, chief researcher for the China Enterprise Management Institute, said that next year will also see highlights in the reform of local SOEs. Faced with the great downturn pressure on local economies, local authorities will have more incentives to advance reform of their SOEs.

Growth of Investment in Real Estate to Slacken

After the rocketing growth in its real estate market in 2016, China yielded more revenue for real estate enterprises, which also stimulated developers' purchase of land for massive outlays. Consequently, China also saw a rise in its debts.

Zhu Jianfang, chief economist in CITIC Securities [SHA: 600030], said that, in view of the short-term effect, after China released more restrictive policies on home purchases, the real estate market in first and second-tier cities has swiftly cooled down. Restrictions will impact real estate developers' investments via marketing, so that they will have less motive to further invest in realty. Hence, the growth rate of investments in real estate will flag in 2017, at a rate projected at zero to two percent throughout the year.

The meeting of the Political Bureau of the Central Committee on Dec. 9 noted that accelerating research on a 'perpetuating mechanism' is consistent with both China's practices and market disciplines for the stable and sound development of China's real estate market. Ni Pengfei, director of the Global Urban Competitiveness Research Center, China Academy of Social Sciences, said that, to develop the real estate market in a stable manner, it is necessary to conduct de-stocking in third and fourth-tier cities. The investment speculation in first and second-tier cities must also be restrained.

Some analysts expected the negative effect of the housing regulatory policies to gradually manifest itself in the second quarter next year. Moreover, the driving effect of infrastructure investments will also weaken again. Given the possibility of a significant shock wave to the global economy from the expected by the US Federal Reserve Bank's interest rate rise anticipated in December, China's economy may slip back into a torpor at the end of next year's second quarter as a result of all the above factors.

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