China’s policy makers wrapped up the annual Central Economic WorkConference (CEWC) on Wednesday. The CEWC emphasized the curbing oftail risks, the tightening of local government debt and control of credit growth.It also toned down the stance on fiscal policy. As such, we continue to seenext year’s GDP growth facing downside risks relative to the currentconsensus. That said, the CEWC also suggests that policy makers still valuestability, so they should have a bottom line for next year’s growth, likely to be6%, in our view.    Curbing tail risks tops the priority: The big picture is that China justfinished a five-year political cycle and is about to start a new one, which leadsto the 20th Party Congress in 2022. The top priority of the past five years hasbeen power consolidation. For this purpose, stimulus in property andinfrastructure has been used to provide a stable economic backdrop. Stimulushas indeed made the slowdown much less bumpy than it would be, but it hasalso heightened the systemic risks, especially in the housing market, thefinancial market and local government debt. As the power consolidation wasaccomplished this autumn, it’s time for policymakers to take a longer-termperspective on the next five years. No wonder they are keen to curb the risksaccumulated over the past five years, so that growth could be moresustainable over the next five years without having a financial meltdown.    Three battles on growth quality: A key change in the 19th Party Congress isa shift from the speed of growth to the quality of growth. Quality not onlymeans that growth is sustainable, but also means that growth should makepeople happy. As such, the CEWC proposed three battles for the next years:curbing tail risks, poverty reduction and environment protection. TheCEWC also emphasized the importance of the service sector, includingeducation, social security and health care, which are viewed as the keydrivers of the Chinese economy in the coming years.    Deleveraging pressure to linger: For more than a year, policymakers havepressured for deleverage of the financial system. As such, the 10-yeartreasury yield has risen from 2.7% last Oct to 3.9% this week. The CEWCsuggests the deleveraging pressure will continue unless growth slows downmeaningfully. On the other hand, given the importance of growth stability thisyear, they haven’t started deleveraging the real economy yet, as creditgrowth, measured by Total Social Financing, has remained steady. The debtto GDP ratio continues to rise, albeit at a slower pace thanks to faster GDPgrowth this year. We expect to see more pressure on credit growth in the realeconomy in the coming months.    Property: Focusing on rental housing: For the property sector, the CEWCfocused on rental housing and didn’t mention property tax. We don’t seerental housing fundamentally fixing the surging prices in tier-1/2cities, as thesupply of rental housing is way too small to accommodate the populationinflows. But property tax might be a bit too risky, so policymakers didn’t wantto raise it in the CEWC this time around. However, lately China’s financeminister clearly outlined a timetable for property tax, suggesting policymakersare seriously considering it. If rolled out in 2019-20, as proposed, property taxcould be a significant game changer for China’s economic model.

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