The Central Economic Work Conference, which was held in the second half of December, indicated a shift from the 2017 deleveraging campaign towards a more growth-oriented policy easing. China’s economy has been steadily decelerating over the past decade and must now grapple with the U.S. trade dispute and high levels of off-balance-sheet borrowings by local governments. That is why the annual Central Economic Work Conference declared a major shift in focus towards more growth. In 2017, the CEWC laid out a three-year program to win “critical battles” against financial risk, pollution and poverty, with a focus on deleveraging. Last month, however, the three-day gathering formulated a “six-stability” policy, seeking to achieve stability in employment, financial markets, trade, local and foreign investment, and market expectations for 2019.

The CEWC plans to achieve this with a proactive fiscal policy, which includes “larger scale tax and fee cuts”, increased issuance of local government bonds and further “counter-cyclical adjustments” such as increased government spending. While it pledges to continue its “prudent” monetary policy, the government has deleted the word “neutral” from its policy statement, and called for “appropriately abundant liquidity”. Policymakers had apparently asked for moderate monetary policy easing, with possible measures to achieve overall growth in M2 supply. They might also include multiple cuts to banks’ reserve rate requirements, more use of liquidity facilities, rebound of overall credit growth, and lower market interest rates. Beijing’s revised policy stance comes as economists forecast China’s growth might be slowing to around 6% to 6.2% in 2019 from the estimated 6.6% in 2018. They also see a significant decline in both consumer and investor confidence due to U.S.-China tensions.

China’s economic growth had already slowed to 6.5% in the third quarter, the lowest rate since the first quarter of 2009. November economic data confirmed the economic downturn. China’s year-on-year industrial production growth fell to 5.4% from 5.9% in October; fixed asset investment growth eased to 7.7%, after registering 8% in October; export growth fell sharply to 5.4% from 15.5% in October, largely due to front-loading before 2019’s possible U.S. tariff rate increase; and China’s retail sales slowed to 8.1%, from 8.6% in the previous month, with auto sales plunging 10% year-on-year. The fiscal stimulus and loosening of monetary policy will mean China will again pile up debt, reversing its campaign to clean out debts accrued between 2015 and mid-2018 and jeopardizing the achievements of the three-year-long deleveraging and derisking drive.

The purchasing managers’ index (PMI) for December fell to 49.4 from 50.0 in November, with the reading contracting for the first time since dropping to 49.9 in July 2016. It was the lowest figure since hitting 49.0 in February 2016. Analysts expect China’s economic growth to slow significantly in the first half of 2019 when the full impact of tariffs imposed by the United States hit. The drop in manufacturing activity was led by a contraction in export orders for the seventh straight month to the lowest level since November 2015.

The service sector purchasing managers’ index (PMI), compiled by Markit and published by Chinese financial news outlet Caixin, rose to 53.9 in December. The measurement is well above 50.0, the point between expansion and contraction, showing services were performing strongly in the last month of 2018. Despite the U.S.-China trade war, new export orders in the Chinese service sector also rose to a six-month high last month, with export companies stepping up their overseas sales and marketing. The services sector accounted for half of China’s output in the third quarter of 2018. The World Bank predicts growth will slow to 6.2% in 2019, still robust by global standards but what would be the weakest expansion in nearly 30 years.