Economics05 December 2012
Sun Junwei | +861059998234 | JUNWEISUN@HSBC.COM.CNQu Hongbin | +85228222025 | HONGBINQU@HSBC.COM.HKView HSBC Global Research at:http: //www.research.hsbc.comIssuer of report: The Hongkong and Shanghai BankingCorporation Limited
In the Politburo meeting on 4 December, China's new leaders made their first official assessment of the economy andset the policy tone for the coming year, ahead of the upcoming Central Economic Work Conference. They see theeconomy stabilizing and more favourable factors in the coming year. They called for policy continuity and stability,and strengthening of reform efforts in key policy areas. This in our view implies that accommodative policy as well asproperty tightening measures will remain in place in the coming quarters. In addition, fiscal and urbanization reformsare set to be stepped up.
Facts:China's new leaders held the Politburo meeting on 4th December and issued an statement last night, including their first officialassessment of the economy and the direction of future policy.Key takeaways are as follows:- They see the economy as stabilizing and increasing positive signals, hence remain confident about achieving 2012's full-yeareconomic and social development goals.- Despite further difficulties and challenges ahead, which cannot be underestimated, China is seeing many other favourableconditions and positive factors start to emerge in time for the next year.- China will maintain policy continuity and stability, to strengthen the effectiveness and coordination of policies.- Their policy focus will be on boosting domestic demand, in particular to create growth hot spots for consumption. At thesame time, it will stabilize investment growth, optimize investment structure and crack down on the expansion of energy andresource intensive industries and sectors, especially those with over capacity.- It will steadily and pro-actively promote urbanization and the orderly transfer rural migrant workers into urban citizens. Itwill also enhance the social security net.- It will maintain price stability, keep existing property control measures and boost the construction of public housing.- Key reforms will be deepened: VAT reform, resources pricing, medicare, SOEs and rural.ImplicationsThe new leadership's first assessment of the economy set the policy tone for the coming year, although detailed growth targetsand policy agenda for next year will not be unveiled until the upcoming annual Central Economic Work Conference (likely tobe held in the coming weeks if not days). We believe the y-o-y GDP growth target for 2013 is likely to be 7.5%, the same aslast year. This reflects a desire to maintain policy continuity after the leadership transition and is in line with the medium-termtarget of quadrupling GDP and per capita GDP between 2010 and 2020 (see China: Key takeaways of President Hu's speech onparty congress, 9 November 2012).As Beijing sees growth bottoming out and the growing emergence of other positive factors, so the need for additional policyeasing has been reduced. Rather, the tone of "policy continuity and stability" implies both monetary and fiscal policies arelikely to stay accommodative to help China strengthen domestic demand and tackle external challenges. With inflation undercontrol and the risk of price hikes well managed, a modest below-potential growth recovery leaves room for the PBoC tokeep an easing bias in the coming quarters, although quantitative tools are likely to be preferred. More important will be fiscal