12:02 PM EST, 12/04/2024 (MT Newswires) -- China's Central Economic Work Conference (CEWC) is an annual meeting where policymakers discuss and set the key objectives for economic policy for the coming year, noted Societe Generale.

The key numbers that investors pay the most attention to, such as the gross domestic product target, the budget deficit and planned government bond issuance, as well as detailed stimulus measures, will only be unveiled in the Two Sessions next March, wrote the bank in a note to clients. That means it may not provide strong catalysts for markets.

Nonetheless, next week's CEWC will allow SocGen to gain more insights into policymakers' thinking and plan for 2025.

China may aim for stable growth to boost confidence, stated the bank. The statement could indicate policymakers' preference for next year's GDP target. It's likely a choice between 'around 5%' -- same as this year -- and "4.5-5%." While the latter would allow policymakers some flexibility amid tariff uncertainty, SocGen expects the government to go for "around 5%" given the challenging economic environment and the need to shore up confidence.

That also seems to be the suggestion from the majority of government advisors reported by Reuters a few weeks ago.

An even more proactive fiscal stance, possibly through raising the official budget deficit ratio, pointed out the bank. Fiscal policy will be surely more expansionary in light of weak growth and tariff risks. A possible way is for the government to signal an increase in the official budget deficit ratio.

It has never breached 3% of GDP except under special circumstances such as in 2020 because of the pandemic, as it's seen as a 'red line' that safeguards fiscal sustainability. SocGen thinks an increase to 3.5%-4.0% in 2025 from 3.0% this year is possible.

As for the overall size of fiscal support, which includes the ultralong special Chinse government bond and special local government bond issuances, investors may only get a clearer picture in next March.

Under the bank's assumptions of a 20% increase in United States tariffs in H2 2025, SocGen estimates that the broad fiscal deficit needs to be about 1.5pp larger to stabilize growth. That means special bond issuances need to be RMB1 trillion to RMB1.5 trillion more versus 2024 to begin with, and even more given funding for housing destocking and potentially higher US tariffs.

Support will likely focus on investment projects related to national strategies and security as well as the replacement of equipment and consumer goods. Some targeted support to vulnerable populations and to encourage birth is also possible.

On property, the goal to "halt the decline and stabilize the sector" will likely be reiterated. To achieve this, resolving the bottlenecks of the housing destocking scheme and accelerating urban villagers' cash settlement would be important in SocGen's view.

Monetary policy would remain accommodative. Recently, central bank Governor Pan Gongsheng described the policy stance as 'supportive' rather than 'prudent'. The goals would remain to supply sufficient liquidity and to lower financing costs of the real economy, which means SocGen should continue to see interest rate and reserve ratio requirement cuts as well as government bond purchases, where the cumulative amount has already reached RMB700 billion since launched.

The bank would also watch the language on foreign exchange stability and on the capital markets after the surprise policy pivot.

Watch any signs of pivot to consumption, added SocGen. There seems to be an increasing discussion of demand-driven urbanization among policy advisors.

Most prominently, Liu Shijin, an ex-policy advisor to the State Council, advocated a RMB10 trillion package to boost "effective" consumer demand by providing public services for rural immigrants such as housing, education and medical care as well as accelerating the development of smaller towns around key cities. Such policy direction seems to be gaining some traction, with the government recently releasing some policy guidelines to strengthen public services for rural migrants.

http://www.mtnewswires.com
Copyright © 2024 MT Newswires. All rights reserved. MT Newswires does not provide investment advice. Unauthorized reproduction is strictly prohibited.