The Communist Party's Political Bureau (Politburo) convened today and decided that next year's monetary policy would be "prudent" -- a change from this year's "appropriately relaxed" -- and fiscal policy would remain "proactive." This decision will provide the framework for specific macro policy targets to be announced during the forthcoming National Economic Work Conference to be held in the middle of this month. This change in the tone for monetary policy is long over due and should not be a major surprise to most market participants, given the rapidly rise in CPI inflation recently.

We think the reality of next year's monetary policy will be "tightening", although it is officially labelled as "prudent". Specifically, we think M2 growth will likely slow from this year's 19% to next year's 15%, loan growth will slow from this year's near 20% to next year's 14%, interest rates will likely rise another 75bps in the coming seven months, and RMB appreciation will likely be quick in the next 3-5 months. On fiscal policy, we also expect it to become less expansionary next year, although it officially remains “proactive”. We think the deficit/GDP ratio will fall to around 2% in 2011 (down from 2.7% in the 2010 budget). The absolute RMB amount of the fiscal deficit will likely decline to RMB950bn in 2011 from RMB1.05tn in 2010.

At the sector level, we think the most interesting reference in the Politburo's press release today is the need to "aggressive promote service sector consumption growth".

• [Editor:editor]