Sign in
Research link-chevron Created with Sketch.
link-chevron Created with Sketch. Products and Services link-chevron Created with Sketch.
link-chevron Created with Sketch. Products and Services
Economics link-chevron Created with Sketch.
Equities link-chevron Created with Sketch.
Analysts
Analysts
Help and Support
Help and Support
06 March 2019

Premier's policy steer is about striking the right balance

Jeremy Stevens

China’s Premier Li Keqiang opened the 19th National People’s Congress (NPC) by delivering an annual government work report, which is essentially a state of the nation address to the country’s top legislature (3,000 party delegates). Regarding China’s current economic environment, he admitted severe challenges facing the economy.

Neither the report nor its targets offered too many surprises; the government remains steadfast in its focus on creating a favourable business environment for job-creating as well as growth driving private firms – especially SMEs – consistent with the “new” economy.

Indeed, there is scant evidence for the pro-growth tilt in policy coming at the expense of recent progress made in de-risking the financial sector. Instead, policymakers remain focused on trying to balance short-term and long-term interests. Easier said than done, of course, but clearly a credit-reliant short-term growth push is not what’s going on here.  

Instead, policy priorities for 2019 focus on the deeper structural issues which continue to shape the cyclical policy path:

  • GDP growth of around 6%-6.5%, down from a target of 6.5% in 2018, and 6.6% in 2018. A lower growth target should anchor expectations, reducing the likelihood for a hefty stimulus in 2019.
  • Stable macro-leverage, and a focus on preventing financial risks. Monetary metrics, like M2 and TSF growth, to expand in concert with nominal GDP growth. All the while, avoiding a flood of credit yet maintaining sufficient liquidity, which likely translates to another three cuts in RRR and the ongoing use of targeted operations.
  • CPI to average an annual increase of 3% (unchanged from the last two year’s target and below the 2.1% increase realized in 2018). It was clearly stated that supply-side structural reform remains the overarching policy framework, therefore, even though no target is provided for PPI, it suggests that negative PPI would trigger a supply response in over-capacity sectors to lift upstream inflation, like in 2016.
  • Underlining government’s focus on SMEs, financial institutions must prioritise measures to ensuring private businesses have access to funding sources – including capital markets. Loans of large SOE banks to SMEs are required to expand by 30% in 2019. Total loans to SMEs increased by 21% in 2018.
  • Fiscal policy will be supportive and active, but, like we have stated before, it aims to cushion the ongoing slowdown rather than cause a lift in growth.
  • Invest CNY800bn in railway and CNY1.8trn in highways and waterways. For context, railway investment in 2017 was CNY800bn, and investment in highways and waterways was more than CNY4trn, suggesting this is only the central government’s planned portion. This clearly is far from excessively stimulative but rather aims merely to ease the slowdown.
  • The budget deficit is expected to be 2.8% of GDP (up 0.2pps from last year). Importantly, the government will increase central transfers to local governments for the provision of basic services by 10.9% in 2019.
  • An allocation of CNY2.15trn in special local government bonds for infrastructure will be allowed to be issued – up only a fraction from CNY 1.95trn in 2018. Meanwhile, local governments will continue to restructure existing debt stock to try and reduce interest burdens.  
  • As noted from the priorities set out at the China Economic Work Conference in December 2018, manufacturing is a key sector, and Li announced that tax rate for manufacturing from 16% to 13%, and transportation from 10% to 9%.
  • A target for reducing the tax burden and social insurance contribution on businesses by CNY2trn. More broadly, the government will continue to cut government approvals and improve services to create a favourable environment for business investment and start-ups.
  • Anecdotal evidence that unemployment and or weaker job creation have become increasingly significant. Thus, it is no surprise that pursuing an employment-first policy has been tabled. A target for creating over 11 million new urban jobs (the same as last year)) and a registered urban unemployment rate within 4.5% (currently 4.1%) where announced. Also, 15 million people will receive training for upgrading skills.
  • Further relax controls over market access for foreign firms and capital, reduce the negative list of sectors for foreign participation and widen the net of sectors available for wholly-owned foreign enterprises.
  • Diversify export markets and promote Belt and Road Initiatives.
  • A reduction of at 3% in energy consumption per unit of GDP – down from at least 3.4% in 2018.

Read PDF