China announced its major economic indicators of 2017 on January 18. The Central Committee and State Council also jointly convened the Central Economic Work Conference (“Conference”) from December 18-20, 2017 to determine economic policy for 2018. This paper summarizes economic trends in 2017 and uses the Conference and the December 21, 2017 People’s Daily editorial (the “Editorial”) as a basis to explain the characteristics of “Xi Jinping Thought on Socialist Economy with Chinese Characteristics for a New Era” (“Xi Jinping economic thought”) and the key points of economic policy for 2018.
The real GDP economic growth rate was 6.9%. By quarter, the GDP grew 6.9% from January-March, 6.9% from April-June, 6.8% from July-September, and 6.8% from October-December, with growth in the second half of the year slowing marginally. Looking at the contribution ratio of the growth rate, final consumption accounted for 58.8% of growth, followed by capital formation (investment) at 32.1%, and external demand at 9.1%. The key items are as follows.
(1) Prices
Consumer prices rose 1.6% from the previous year, clearing the inflation target of 3% or less.
(2) Consumption
Total retail sales of consumer goods maintained a virtually identical level of growth, increasing 10.2% over the previous year (10.4% increase in 2016). This was supported by nationwide Internet retail sales (e-commerce) that saw year-on-year growth of 32.2% and have continued their high growth, driven by the expansion of consumption.
(3) Investment
Growth in investment in noncurrent assets in urban areas was somewhat slow, increasing 7.2% over the previous year (8.1% in 2016). This is because infrastructure investment increased 19.0% and supported investment, and investment in real estate development also maintained constant growth, rising 7.0% due to high housing prices. Private investment was somewhat weak, increasing 6.0%.
(4) Imports and exports
Exports increased 7.9% from the previous year (-7.7% in 2016), while imports increased 15.9% (-5.5% in 2016), reflecting the shift from negative to positive territory as the world economy recovers. The contribution to the growth of external demand has turned from negative to positive because of this.
(5) Employment
In 2017, 13 million newly-employed people were added to the workforce, exceeding the annual target of more than 11 million. Employment continues to be strong.
Taking the Conference and Editorial together, the main content of Xi Jinping economic thought can be presented as follows.
(1) Recognition of an era
First, the use of “China’s economy has been transitioning from a phase of rapid growth to a stage of high-quality development” shows a recognition of an era.
The “new normal” used so far had pointed to recognizing “China’s economy has been transitioning from a phase of rapid growth to a stage of medium-high growth.” By replacing “medium-high growth” with “high-quality development,” the “new normal” gave way to the “new era.”
(2) The content of Xi Jinping economic thought
The main content of the Conference was the new development philosophy presented by General Secretary Xi Jinping in 2015 (innovative, coordinated, green, open and sharing development ideas), which is embodied by “high-quality development.” The Editorial summarizes this as “high-quality development is development that fully satisfies the growing demand by the people for a wonderful life and development which embodies the new development philosophy.”
Apart from the new development philosophy, the Editorial lists the following items as important details.
(1) Strengthen the concentrated and unified leadership of the Central Committee for economic policy.
(2) Adhere to a people-centric development philosophy, plan and promote a uniform “five in one” (economic construction, political construction, cultural construction, social construction, ecological civilization construction), and coordinate and promote the “four comprehensives” (to promote the comprehensive completion of a moderately prosperous society, comprehensively deepen reform, comprehensively promote the rule of law, and comprehensively and strictly manage the Party).
(3) Allow the market to exercise a decisive role in allocating resources, and further demonstrate the role of government.
(4) Adapt to changes in the major contradictions of Chinese economic development, develop macro controls, and make promoting supply-side structural reforms a principal pillar of economic policy.
(5) Arrange a new economic development strategy by being problem-oriented.
(6) Adhere to formulating accurate policy and methods, seek progress in stability, maintain the underlying strength of the strategy, and protect the bottom line.
(7) Adapt to the new normal of economic development, understand it, and adhere to take the lead.
In other words, Xi Jinping economic thought is premised on recognizing that China is in a new era of economic development that transitioned from rapid growth to high-quality development, in which innovative, coordinated, green, open, and sharing development ideas are the foundation of development, while advancing economic system reforms and economic structural adjustments under the concentrated and unified leadership of the Central Committee.
Three priority policies to be implemented until 2020 were revealed at the Conference.
(1) Preventing and defusing major risks
The macro debt ratio must be effectively controlled along with effectively preventing and controlling systemic financial risks.
(2) Targeted alleviation of poverty
Aim to provide targeted poverty support to specific poor groups, concentrate efforts on areas where there is serious poverty, and enhance the quality of escaping poverty.
(3) Tackling pollution
Win the Blue Sky Defence War, significantly reduce the total amount of major pollutant emissions, and improve the quality of the ecological environment as a whole.
Due to the call for high-quality development of the economy, the priority targets to be implemented until 2020 are not goals that emphasize quantity, such as doubling conventional GDP, but rather an improvement of the quality of the economy with an emphasis on eliminating financial risk, correcting economic disparities, and improving the environment.
The Conference first declared the overall tone of policy as seeking progress while maintaining stability, an underlying principle of the administration that must be adhered to over the long term. It was also declared that “stability” and “progress” are dialectically unified and should be understood as one. While “stability” was emphasized before the 19th National Congress in 2017, 2018 marked the 40th anniversary of reforms and opening up, so a certain amount of progress was deemed to be necessary for economic structural adjustments and economic system reforms.
The following principles are offered as an overview of macro policy.
(1) Keep the direction of aggressive fiscal policy unchanged and strengthen the debt management of local governments.
(2) Maintain a moderate monetary policy that is neutral and avoid systemic financial risks.
(3) Promote the reasonable growth of private investment in structural policies.
(4) Strengthen basic public services and resolve social inconsistencies without delay in issues of public welfare.
(5) Accelerate economic system reforms and make breakthroughs in fundamental and key fields.
From the viewpoint of defusing financial risks, this shows a policy to accelerate economic system reforms while avoiding monetary easing for the time being and supporting the economy with fiscal policy and private investment.
The Conference put forth the following eight priority policies.
(1) Deepen supply side structural reforms.
The policy proposes three transitions that China must make: the transition from “made by China” to “created by China,” the transition from rapid (growth) in China to quality (development) in China, and the transition from a major manufacturer to a powerful manufacturing country. The supply-side structural reforms are broader than the traditional five major duties (reduce excess production capacity, reduce housing inventory, de-leveraging, reduce business costs, and reinforce vulnerable areas).
(2) Stimulate the vitality of various market actors
The policy seeks to prepare a plan for the reform of state-owned enterprises and state-owned capital, and reform the authorized management system of state-owned capital with capital management as a main axis.
It announces support for the development of private enterprises, saying it will “implement policies to protect property rights and identify and rectify cases of property rights disputes under the law where societal discontent is intense,” indicating that it will continue to strengthen the protection of private property rights. This is also a means to securing the reasonable growth of private investment.
(3) Implement a rural development strategy
In agriculture, it intends to “promote supply-side structural reforms, and adhere to promoting agriculture in terms of quality and green agriculture, and also shift agricultural policy from increasing production to improving quality.”
(4) Implement a regional cooperative development strategy
The policy notes that it “must realize that basic public services are equalized, the extent of the spread of infrastructure is relatively balanced, and the standard of living of the people is roughly appropriate,” and also incorporates reducing regional disparities in infrastructure.
On the construction in the One Belt One Road Initiative (the Silk Road Economic Belt and 21st-century Maritime Silk Road), the policy notes “the method of foreign investment needs to be updated and investment must lead the development of trade and industry.” It is noteworthy that the One Belt One Road Initiative is referred to as a “regional development strategy” for foreign investment, and that it needs to be “updated.”
The policy also states that it will accelerate reform of the family register system.
(5) Promote the formation of a new framework of full openness
Given the 40th anniversary of reforms and opening up, the policy affirms that “the scope and level of openness must be further advanced,” and cites things such as the drafting of legislation concerning foreign capital and strengthening the protection of intellectual property rights. In terms of constructing a strong exporting country, it states it “will place more emphasis on improving the quality of exports and added value and will greatly develop trade in services.”
(6) Increase the people’s well-being and level of improvement
On employment, the policy states it will “focus on resolving contradictions in structural employment and firmly resolve issues of discrimination on gender and identity.”
On social insurance, it will “reform the basic pension system and realize a nationally unified pension system as soon as possible.” The national unification of pensions has become a huge financial problem in recent years.
Also, with the spread of online finance, it added the statement “focus on solving outstanding problems, such as false information on the Internet, fraud, and the trading of personal information.”
(7) Quickly establish a housing system for both renting and purchasing that is supplied from many entities and guaranteed by many routes.
The policy seeks to develop a rental housing market and support the development of specialized rental housing businesses. Because the conditions of the real estate market differ from tier 1 cities to tier 4 cities and it is necessary to avoid a sharp drop in real estate prices due to excessive tightening, it uses the cautious phrase “maintain the continuity and stability of the real estate market control policy and carry out differentiated control.”
(8) Accelerate the promotion of ecological civilization construction
The policy puts forth several initiatives, such as measures to fight air pollution, the start of a national, large-scale land greening campaign, developing expert corporations specializing in ecological protection and restoration, and implementing water pollution and soil contamination prevention action plans.
Although these eight items are thought to be the pillars for the arguments behind the economic policies of the Government Work Report released in March, structural reforms and the reform of state-owned enterprises have been prioritized in their ranking, implying a stance that puts structural adjustments and structural reforms at the forefront based on the above-mentioned basic macro policies.
This Central Economic Work Conference placed emphasis on clarifying the content of Xi Jinping economic thought, but at its core is the transition to “high-quality development” of the Chinese economy in the “new era” it has entered, confirming that the new development philosophy is the main content.
In addition, it also revealed the three tough battles strategy of eliminating financial risk, reducing poverty, and combating pollution by 2020, with the key policies of the second Xi Jinping administration slowly but surely becoming clear.
Speaking of 2018, the Conference touted the acceleration of economic system reforms it is promoting while conscious of the 40th anniversary of reforms and opening up. Whether progress is made in the long-criticized stalled reform of state-owned enterprises will become a barometer of the administration. Key economic Cabinet members are also expected to be replaced in March, so attention should be paid to the content of the Government Work Report and the amendment of the constitution.
（Dated Jan 23, 2018）