China’s Central Economic Work Conference in Focus

This week is set to mark the opening of the Central Economic Work Conference in China, where the country’s top officials will discuss and devise economic policy for the forthcoming year. The conference comes amid several socio-economic tremors being felt across the country, not least given its fragile property sector, high levels of municipal debt and weakened demand which has driven deflation. Such headwinds have put into question whether Beijing will be able to achieve their growth target this year.

Accordingly, ahead of the conference, Beijing telegraphed that they would seek “A more proactive fiscal policy and an appropriately loose monetary policy…enhancing and refining the policy toolkit, strengthening extraordinary counter-cyclical adjustments”. This has bolstered the market’s view that Beijing will continue to enact stimulus measures, continue in their course of monetary loosening, and set a higher deficit target (somewhere in the region of 3.5-4% of GDP).

In devising such measures, the conference will look to shore up confidence in the Chinese economy as the Politburo continues to pursue their 5% growth target. However, they acknowledged that stability would need to be achieved in the property sector and stock market. This announcement comes alongside a number of fiscal and monetary loosening packages account in recent months, in an attempt to bolster demand. (For example, last month Beijing announced a $1.4tn debt package to reduce municipal government debt and stimulate growth).

Nevertheless, in another blow to policy makers ahead of the conference, Chinese inflation missed expectations again yesterday, with CPI softening to 0.2% on an annualised basis for the month of November. This marked the lowest level of inflation since June and came against a consensus which was pointing to a 0.5% print. On a monthly basis, prices fell 0.6%, marking the second consecutive print to fall into deflationary territory.

This latest deflationary print follows the PBoC’s decision at the end of October to cut their 1-year loan prime rate (LPR) to fresh lows. Here, the central bank cut the benchmark interest rate 25bps from 3.35% to 3.1%, with the five-year rate also being cut 25bps from 3.85% to 3.6%.

While close attention will be paid to the conference, such is the opaque nature of China’s economic policy making, the CCP do not tend to give advanced warning of the meeting, and any measures or targets will not be announced until March.

German headline HICP figures came in-line with expectations this morning at 2.4% as markets turn their attention to the ECB’s next monetary policy meeting on Thursday.

Here, money markets are implying that a 25bps cut has been fully priced in, though convictions of a more aggressive 50bps cut have marginally eased in recent days.

During their last meeting, the ECB met market expectations in cutting rates 25bps. This represented the third rate cut in the central bank’s present cycle and brought their deposit rate facility to 3.25%, main refinancing operations rate to 3.65% and marginal lending facility to 3.4%, respectively.

The Central Bank cautioned that manufacturing and exports remain weak, while firm’s level of investment remains low. Nonetheless, some optimism was expressed with services performing stronger, thanks in part to a good summer in tourism.