DDN Business Insider | 2024 Central Economic Work Conference: Deficit rate to further increase next year, experts say

Editor's note: Bloomberg reported on China's upcoming Central Economic Work Conference, where economic targets and stimulus plans for the following year will be established. Expectations are for a proactive macro policy tone. Post-announcement, Hong Kong and A-share markets have seen upward trends. What can the market expect from this year's economic work conference?

【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang.

Bloomberg reported that China will hold its annual closed-door Central Economic Work Conference this week to set economic targets and stimulus plans for next year. The market generally expects that the tone of next year's macro policy set by the conference will continue to be proactive. Following the announcement last Tuesday, the Hong Kong and A-share markets have also shown upward trends. So, what can the market expect from this year's economic work conference? To discuss related topics, we have invited renowned economists Jia Kang, founder and president of the China Academy of New Supply-side Economics, Feng Jianlin, chief economist of FOST, and Wu Zhuoyin, senior economist for Natixis, Asia-Pacific. Welcome, everyone!

【Anchor】First, I would like to ask Mr. Jia. Currently, the market generally believes that the keynote of next year's macro policy may be more proactive, keeping economic growth at around 5%. However, some institutions, such as the World Bank, believe that this growth figure may fall below 5%. What are your thoughts on this?

Many influential forecasters have shown, in their predictions over the years, that they do not fully understand China's economy and its potential.

As a researcher, I suggest that we should firmly continue to pursue a 5% so-called annual guiding growth target. Achieving this target is not merely wishful thinking; it reflects the ongoing industrialization and urbanization in China and the exploration of this vast economic entity's potential. Furthermore, it aligns with the possibility of setting a strong foundation, releasing vitality, and facilitating the transition between old and new growth drivers in the context of rapid policy changes and the slower implementation of reforms from the Third Plenum. Therefore, I believe that it is reasonable to set next year's economic growth target at around 5%, supported by China's objective growth potential. Of course, it is crucial to continue advancing reforms and opening-up, as well as promoting technological and management innovation, and to deepen institutional and conceptual innovation, further liberating the productivity.

【Anchor】Good. Regarding whether GDP growth can reach 5% by 2025, the implementation of incremental policies and future supports are key to the issue. Mr. Feng, we know that the specific GDP target for next year will only be announced during the Two Sessions next year. What is your perspective on the keynote of next year's macro policy or economic growth target in mainland China?

In recent years, one significant change in the mainland's policy is that the government no longer emphasizes a single economic growth target. However, this does not mean that economic growth is unimportant. In an environment where demand, supply, and confidence face challenges, corporate investments, household incomes, and government revenues will be affected to varying degrees. Additionally, the policy direction aims to address some structural issues in the economy, such as confidence problems arising from the real estate industry chain and potential risks that local governments may face in the future. In this policy environment, I believe there is still a good chance that, by 2025, the central government will steer macroeconomic policy towards a more supportive and accommodative direction. This implies that the economic growth target should remain around 5%, as at least 4.5% to 4.8% growth is needed to address some of the current economic challenges.

【Anchor】Thank you. Mr. Feng, what is your view on the expected economic growth target for next year?

We also believe that the economic growth target for next year will be around 5%. This means that the targets for 2023, 2024, and 2025 will all be around 5%. However, the situation may differ each year, and it should be noted that the targets are quite ambitious.

The current pressing issues are some of the prominent contradictions in the operation of the economy, such as adjustments in the real estate sector, local government debt, corporate difficulties, and the overall weakness of residents, which require further consideration from a long-term perspective.

One reason for maintaining a 5% target is that both last year and this year had the same target, and this year is expected to achieve around 4.9%. If the target is actively lowered next year, it may affect confidence and expectations regarding China's economy. Secondly, the 5% target is aligned with potential growth rates and medium-to-long-term planning. Thirdly, President Xi has repeatedly emphasized the importance of achieving the annual economic and social development goals, highlighting the need for speed. Recent articles from the People's Daily and Xinhua News have also stressed that China's development should maintain a certain pace.

【Anchor】Alright, after this news was released on December 3, it drove up the Hong Kong and A-share markets. Mr. Feng, do you think this is a market reaction to expectations for the Central Economic Work Conference? Will this trend continue?

Personally, I believe the stock market may still experience fluctuations. There are several reasons for this. First, the Central Economic Work Conference's press release will not clearly state the economic growth target for next year or how the fiscal deficit will be arranged. It will only provide some qualitative descriptions, which may still maintain relative continuity and stability but may differ from market expectations. Second, the market's expectations for next year's fiscal policy seem to be relatively high, and if the conference presents a relatively cautious approach to fiscal policy, it may disappoint market expectations. Third, the trend of the stock market ultimately depends on economic data and the medium- to long-term economic situation. From the current fundamentals, some unfavorable factors are still developing.

【Anchor】Yes. Mr. Wu, what do you think about the market's expectations for the Central Economic Work Conference currently?

Whenever the central government holds different meetings, we can see various investors in the market hoping for new policies that might improve the economy, especially corporate profits. However, the major shift now is that the mainland government hopes to maintain growth at a relatively controllable level and to control debt. Therefore, many policies may depend on whether economic data improves or not, or how large the external risks and tariffs are, before determining the actual scale of future policies. In this context, I think it is understandable for the market to have hopes, but whether it will ultimately match the scale that the market originally expected, I think there is still some doubt here.

【Anchor】Some economists have suggested that China can consider increasing the deficit ratio to over 3.8% by 2025. You previously mentioned in an interview that the deficit ratio could be raised to 4%; and by adopting a more proactive fiscal policy and a more supportive monetary policy, we can expand domestic demand and stabilize growth. Mr. Jia, can you share your current views with us?

This year's official stance is a 3% deficit ratio. However, this 3% differs from previous years because last year, in 2023, there was a budget adjustment plan in the fourth quarter, raising the announced deficit ratio from 3% to 3.8%. The main change in funding was the issuance of one trillion yuan in government bonds, with half intended for last year and half for this year. According to the specific statements this year, a large majority was used in 2024. Therefore, the comparable deficit ratio for 2024 should be at least 3.5% to 3.6%. If it is necessary to continue this adjustment next year, it will involve the same basis for comparison. Generally, the public may not be aware of these details, but they will perceive the government's official announcement of the deficit ratio as a reflection of government's attitude. This attitude is crucial for managing expectations and can significantly influence the overall market atmosphere.

【Anchor】Yes. Mr. Feng, do you believe that the deficit ratio will further increase next year?

Due to the more severe and complex internal and external environments, and with heightened uncertainties, macroeconomic policies next year will certainly require more comprehensive arrangements. Amongst all policies, the core one is fiscal policy.

We estimate that the structure of fiscal spending will further optimize, and incremental fiscal funds will be directed more towards improving people's livelihood and promoting consumption. It is important to emphasize that there is no need to be overly concerned about whether the deficit ratio is 3.5%, 3.8%, or 4%. Relative to the national expenditure scale of over 20 trillion yuan, a 0.5 percentage point change in the deficit only corresponds to a scale of several hundred billion yuan.

We anticipate that next year, in terms of quantity, fiscal policy will continue to lean towards a loose approach. Monetary policy adjustments can be achieved through the buying and selling of government bonds. We can also consider measures like reverse repos to release liquidity, and there may be room for further interest rate cuts. Resolution tools can be further increased.

【Anchor】Good. Mr. Feng, you previously mentioned, in a previous interview, that China's response to Trump's administration would be reflected the Central Economic Work Conference in December. How do you think this might be specifically presented?

The Central Economic Work Conference will certainly prepare for changes in the external environment next year. Regarding the trade war, in order to mitigate potential negative impacts, we must fully maintain traditional growth drivers and accelerate the cultivation of new ones. Specifically, in terms of demand policy, there will be an emphasis on expanding domestic demand, particularly through reforms in areas related to people's livelihoods to boost consumption, while ensuring investment support for infrastructure and manufacturing. In terms of foreign trade, as friction in goods trade increases, there will be a focus on developing service trade. In the industrial sector, the aim will be to accelerate the development of strategic emerging industries and the digital economy, while continuing to promote stable operations in the real estate market. Regionally, there will be efforts to accelerate the construction of modern cities, promote urban-rural integration, and to develop the interior regions of China, such as Sichuan. On the diplomatic front, we must strive to stabilize relationships with the European Union, Japan, South Korea, ASEAN, India, and other countries, and actively develop relationships with Africa and Latin America.

【Anchor】Mr. Wu, what do the conference's policies mean for Hong Kong? Do you expect the SAR government to make corresponding policy adjustments based on the central government's economic plan?

For Hong Kong, a key point is whether the economic situation in the mainland will improve with recent policy changes, thereby leading to a significant rebound in investor confidence. Indeed, the economies of Hong Kong and the mainland are becoming increasingly intertwined, and policy changes will have a notable impact. However, the likelihood of continued substantial shifts in policy direction has already been established in previous meetings. Therefore, for Hong Kong, it is perhaps more important to leverage its own advantages in financial technology and trade to seek for opportunities in real economic stability. I don't expect a very significant policy shift to emerge from this conference.

【Anchor】Alright, will the conference focus on the development of specific industries or sectors, such as technology, AI, manufacturing, or the green economy? How might this affect the development and investment choices in these areas in the coming year? Mr. Feng, what do you think?

We estimate that in terms of investment, there will likely be a focus on urban renewal. In consumption, attention will be on consumer goods and replacements, as well as fertility, childcare, education, elderly care, home economics, cultural tourism. In terms of development, sectors such as telecommunications, education, and healthcare may be highlighted. In terms of technological innovation, there will still be a focus on vehicle production and other future-related industries, such as low-altitude economy, chips, AI, commercial aerospace, robotics, and bio-manufacturing.

【Anchor】OK, thank you. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thanks for watching, and see you next time.

Anchor: Laura Cheung | Edited: Kelly Yang, Laura Cheung | Translate: Kato Ip | Proofread: Chris Liu

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