China used its most important economic planning meeting of the year to drop hints that it will wind down ultra-loose pro-growth policies, carefully couching its message in soft language to avoid spooking markets.
The headline theme of the Central Economic Work Conference, which concluded on Monday, was continuity: the government once again vowed to maintain the stimulus spending and accommodative monetary stance that it adopted last year to cushion the blow of the global financial crisis.
Beneath that headline, though, Beijing offered a smattering of signs that it will gently pull on the reins.
It said that new investment projects would be "strictly controlled," implying that capital spending, which has been the biggest contributor to overall growth this year, will ease as the government slows the pace of approvals.
The top leadership also insisted that it would enhance policy flexibility, opening the door to a more pronounced shift to tightening at a later date.
"Next year's overall policy stance won't be as accommodative as this year's. It will be accommodative, but far less accommodative than this year," said Qing Wang, an economist with Morgan Stanley in Hong Kong.
Beijing moved aggressively earlier this year to keep growth on track after the global financial crisis prompted a sudden collapse in exports, frontloading a 4 trillion yuan ($585 billion) stimulus package and encouraging a burst in new lending in the first half.
Growth rebounded in the third quarter to 8.9 percent over a year earlier from 6.1 percent in the first three months, so markets are looking for clues on when and how policymakers will move to unwind the stimulus.
The government's reluctance to declare a more substantial policy change is partly because it is waiting for exports, which have fallen through 2009 from year-earlier levels, and private sector investment, to pick up before it hits the brakes.
But Beijing has also learnt an important lesson about communication over the past few months. When the central bank said it would "fine tune" monetary policy in July, the stock market responded by tumbling 24 percent over the next month.
This time, Beijing will try to lead with action, not words.
The most immediate shift will be a pullback in new lending from this year's explosive pace. Wang forecast a dip to about 7-8 trillion yuan ($1-1.2 trillion) in 2010 from around 10 trillion yuan this year.
Increases in bank' reserve requirements could come as early as the start of the second quarter, while the central bank will probably raise interest rates by about 54 basis points during the second half of next year, he estimated.
In its post-conference statement, the government gave little reason to expect any more drastic moves: it only once mentioned the need to manage inflationary expectations and made no reference to concerns about asset bubbles.
These omissions have simple enough explanations. Inflation is still flat in year-on-year terms and many analysts expect it to remain subdued next year, restrained by industrial overcapacity.
Contrary to some claims that China's stock market is already in bubble territory after doubling from its trough last November, prices have gained little over the past four months.
The country's main stocks, or the A-shares, have an average price/earnings ratio of 25, just a slight overvaluation by domestic standards, said Wang Hu, an economist at Guotai Junan Securities in Shanghai.
And with housing prices at record highs in many cities, developers are rushing to complete new buildings, foreshadowing a jump in supply that will limit property inflation.
Still, Isaac Meng, an economist at BNP Paribas, said the government was alert to the risk of asset bubbles and, if necessary, poised to pop them.
He detected this message in a subtle change of wording. At last year's economic conference, the government said it would be focused on "promoting development" of capital markets. This year, that became "regulation and guiding for healthy development."
"This sends a plain warning to markets about a potential crack down," he wrote. "In our view, this is a bearish signal for A-shares."
Risks are building, especially in the frothy property market, Dong Tao, an economist with Credit Suisse in Hong Kong, said.
He warned that the People's Bank of China, the central bank, was implementing the same monetary policy as the Federal Reserve and the European Central Bank, with one crucial difference: Chinese banks, unlike their Western counterparts, have been lending heavily.
"That has created much bigger liquidity in China than in most other parts of the world," he said.
Overall, Beijing's policy stance is appropriate so far, Morgan Stanley's Wang said, but that will only be true so long as the recovery in the United States and Europe remains tepid
"The global economy could turn out to be much stronger than expected," he said. "In that case, with no change in China's policy, we could see overheating. That's definitely a risk."
While Wang, like many analysts, expects only modest appreciation of the yuan starting in the second half of the year, he acknowledged that any surprising rebound in global growth could force change on that front too.
"In that case, both China's inflation and overall global commodity prices would surprise on the upside. If that happened, the case for earlier and faster appreciation of the renminbi would be stronger," he said.
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