China: Balance between stability and reforms targeted in 2017
March 16, 2017
The Chinese government will pursue economic stability while deepening economic reforms, amidst mounting economic challenges at home and increasing global uncertainties. Premier Li Keqiang made this declaration during the opening of this year’s National People’s Congress (NPC), which ran from 5 to 15 March. Overall, the economic targets and policies unveiled at the NPC were in line with the blueprint delivered at the Central Economic Work Conference (CEWC) held in December, with some relatively minor changes.
Presenting the Government Work Report, Li announced a reduction in the country’s growth target from a 6.5%–7.0% range to 6.5%. The target growth for nominal fixed asset investment was lowered by 1.5 percentage points to 9.0% (2016 final result: +8.1%), while the growth target for nominal retail sales was cut from 11.0% to 10.0% (2016 final result: +10.4%). Unexpectedly, the government increased its new urban jobs target by 1 million to 11 million (2016 final result: 13.1 million). The inflation goal for this year is 3.0%, matching the target in the previous two years.
The main fiscal priorities for the government for this year will be bolstering investment in public infrastructure, social housing and social welfare. Although the fiscal deficit target was left unchanged at 3.0% of GDP and Li reaffirmed that the government will continue its proactive fiscal stance, the authorities will likely incur more debt than previously envisaged after lifting the planned issuance of local government bonds from CNY 400 billion to CNY 800 billion. Moreover, the government heavily relies on quasi-fiscal measures to fund infrastructure projects, which are not included in the budget target. Against this backdrop, our panel of analysts believe that the deficit for 2017 will actually reach 3.9% of GDP. On the fiscal front, the government also unveiled tax reductions for small businesses and a higher deduction for research and development, among other initiatives to encourage private activity.
The authorities restated their prudent monetary policy but added that it will also be neutral. This slight tweaking of the wording, combined with a lower growth rate for M2 and for total social financing from about 13.0% to 12.0%, signal a marginal tightening bias for this year. Despite the reduction in the credit growth target, monetary policy still remains accommodative and should support this year’s economic growth target. Moreover, Li emphasized that the government will closely follow potential financial risks, including shadow financing and non-performing loans.
Reducing overcapacity (particularly in steel and coal production) remains on the agenda, but the targets were scaled down following last year’s larger-than-expected production cuts in some sectors. Reforms to State-Owned Enterprises (SOE) will continue this year focusing on mixed ownership, particularly in the electricity, oil, natural gas and railway sectors. Regarding the property market, Li announced a two-speed approach of encouraging home purchases in tier 3 and 4 cities, while boosting land supply and keeping some restrictions in cities that have experienced a strong rise in prices.
Even though the shadow of a trade war between China and the United States hung over the summit, officials did not unveil any significant changes to trade policy. Li vowed to strengthen China’s ties with its Asian neighbors, making the “One Belt One Road” initiative the cornerstone of China’s opening-up policy. On the sidelines of the meeting, Li highlighted the importance of China-U.S. relations and stressed that China does not want a trade war with the U.S., ahead of the expected meeting between Donald Trump and Xi Jinping in April.
With an economy sailing smoothly, the authorities are gradually tackling spillovers stemming from bold policy support in recent years. However, a sharp correction in the property market or a trade war between the world’s two largest economies could prompt the authorities to rely on old receipts to shore up growth, which could in turn derail much-needed economic reforms and increase financial risks.