China's 2018 fiscal, monetary policies aim for high-quality development

China will stay on course for a proactive fiscal policy and prudent monetary policy in 2018 to foster high-quality development while containing financial risks.

"The proactive orientation of fiscal policy will be maintained, while the structure of fiscal spending should be optimized," said a statement released after the Central Economic Work Conference concluded last week.

Fiscal support for major fields and projects will be ensured while reducing regular expenditures, according to the country's most important annual meeting on economic work.

"Compared with previous years, when a proactive fiscal policy was also implemented, the priority for 2018 should be investment in weak links, including education, healthcare, social security and pubic services," said Zhao Xijun, a finance professor with Renmin University of China.

Investment in innovation and entrepreneurship as well as emerging industries should also be increased to foster the country's strategic competitiveness, said Zhao.

"Infrastructure investment in 2018 is expected to fall, with more funding going to environmental protection and targeted poverty reduction," said Lu Zhengwei, chief economist with Industrial Bank.

Since the global financial crisis prompted the Chinese government to spend big to fend off risks, government-driven investment has resulted in falling business profits and efficiency for nearly a decade.

With the focus of fiscal policy shifting further toward improving income distribution and mobilizing social resources next year, analysts believe further progress is expected in boosting the quality and sustainability of China's economic growth.

In addition, concrete measures will be taken to strengthen regulation of local government debt, according to the conference, which reviewed China's economic performance over the past five years and mapped out plans for 2018.

China's local government debt soared during an investment and construction binge following the global financial crisis in 2008. Well aware of the risks, authorities have taken an array of measures to reduce the local debt burden.

Outstanding local government debt stood at 15.86 trillion yuan ($2.4 trillion) as of June 30, slightly higher than the 15.32 trillion yuan at the end of 2016, but below this year's government-targeted ceiling of 18.82 trillion yuan.

On the monetary front, China will maintain a prudent and neutral monetary policy next year, keeping appropriate liquidity levels but avoiding excessive liquidity injections.

"Prudent monetary policy should be kept neutral, the floodgates of monetary supply should be controlled, and credit and social financing should see reasonable growth," said the statement released after the tone-setting meeting.

The Central Economic Work Conference in 2016 set the tone for monetary policy as prudent and neutral for 2017, while striving to smooth monetary policy transmission channels and improving mechanisms to help maintain stable liquidity.

"Compared with 2017, China is more determined in 2018 to implement a prudent and neutral monetary policy," said Lu Zhengwei, noting that the Chinese leadership has made it a priority to prevent financial risks in 2018.

China has maintained prudent monetary policy since 2011. However, in practice the policy has been loosening slightly due to downward pressure on economic growth.

As the country's economic health continued to improve, policy makers announced that they would maintain "a prudent and neutral" policy for 2018.

Analysts said the shift indicated that China will lean toward monetary tightening should they need to curb any asset bubbles or mitigate financial risks.

"The monetary policy will remain prudent while tilting to slight tightening next year," said Li Qilin, senior researcher of Lianxun Securities, adding that the central bank should balance its goals of stabilizing economic growth and preventing bubbles.

Proactive fiscal policy and prudent monetary policy, both major macroeconomic policies, will pave a solid foundation for China's economic restructuring and deepening supply-side reform next year, said Zhao Xijun from Renmin University of China.