China Plays the Long Game in Shift to ‘Cross-Cyclical’ Strategy

By Bloomberg

(Bloomberg) -- The Chinese Communist Party has a new catchphrase to guide its economic policy, a “cross-cyclical” approach that government advisers say means taking action sooner, in smaller steps and with a longer time frame in mind.

It’s a departure from counter-cyclical policy, which is when central banks and governments add stimulus to spur a slowing economy -- like cutting interest rates or taxes and boosting infrastructure investment -- and tighten when growth starts accelerating.

Officials haven’t outlined what “cross-cyclical” policy entails, but several economists with links to the government say the objective is to take action that’s preemptive and moderate in order to smooth out fluctuations in growth.

It implies keeping restrictions in place in some areas, while easing up in others. That was highlighted recently by the central bank cutting the reserve requirement ratio for banks to boost liquidity, but tightening property restrictions to rein in prices.

Here’s a summary of what can be expected from the policy shift:

Longer Time Horizon

A cross-cyclical approach suggests authorities are considering economic performance over a longer time period when deliberating policy tools, according to Zhang Xiaojing, deputy director of the National Institution for Finance & Development, a state think tank under the Chinese Academy of Social Sciences.

“Policy makers will look past volatility at present, and aim to make sure the economy stays on track over the next two to three years,” said Zhang. That’s reflected by the slower pace of local government borrowing so far this year. An acceleration toward the end of the year will help drive the economy when momentum further weakens at the beginning of next year.

A longer-time horizon also explains why China has recently cracked down on Internet platforms and after-school tutoring firms, and why it’s pushing ahead with policies to reduce carbon emissions, boost births and increase urbanization.

Preemptive Action

Authorities will make more forward-looking adjustments to the economy, like cutting the RRR to provide liquidity even before economic data showed a slowing momentum, according to Zhong Zhengsheng, chief economist at Ping An Securities Co. Ltd., who consulted with Premier Li Keqiang last year.

“The central bank went ahead of the curve” because policies usually have a delayed effect on the economy, Zhong said. Another cut in the reserve ratio is likely before the end of this year, even though the central bank will probably refrain from lowering policy interest rates, he said.

Smaller Adjustments

Authorities will cut their reliance on large-scale fiscal and monetary stimulus, and “use smaller quantities of policy to achieve the goal of smoothing out economic cycles,” said Zhong.

This new approach underscores the lesson China learned from its massive 4 trillion yuan ($616 billion) stimulus unleashed in the wake of the global financial crisis, which led to severe overcapacity in the economy starting from 2013, he said.

Restrictions Remain

Unlike in previous downturns, authorities probably won’t relax tight curbs on the property sector, nor drop their focus on reducing local governments’ off-balance sheet debt, said Zhong. China has steadily tightened restrictions in the real estate market over the past year, reining in developers’ borrowing and increasing scrutiny on mortgages. Local governments were also put on notice by top leaders to tackle their off-balance sheet debt, and appear to be making progress on that front.

Debt Control

Balancing financial risk and economic growth is key to implementing a cross-cyclical policy, according to NIFD’s Zhang. This means China must keep its debt ratio stable and improve the structure of its debt, he said. The central government should take on more borrowing to replace the off-balance sheet debt among local governments, he added.

The government could also have more flexibility when implementing policies. For example, it may be able to go beyond its budgeted fiscal deficit set at the beginning of the year to provide support for the next year, he said.

Structural Policies

Monetary and fiscal policies “must serve the medium to long-term goals” and provide more support to solve structural issues in the economy, said Liu Yuanchun, vice president of the Renmin University of China, who attended an economic round-table chaired by President Xi Jinping last year.

Policies will be made to help small businesses, innovative industries and sectors that promote technology self-reliance, he said.

Supply-Side Changes

The policy shift could also foreshadow more reforms on the supply side of the economy, to allow private capital greater access to industries from education to medical services and tourism, which will help address a structural shortage of quality supply in those sectors, according to Zhang. This will in turn expand domestic demand and consumption, which has played a much weaker role in driving the economy’s recovery than investment and export.

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