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China Politics March 2019

China: Top leadership lowers GDP growth target as the country faces “tough” economic challenges ahead

China’s top leadership expects a challenging year amid cooling domestic growth and the trade dispute with the United States as highlighted by the annual gathering of the National People’s Congress’ (NPC), which ran from 5 to 15 March. Against this backdrop, the GDP growth target for 2019 was lowered to between 6.0% and 6.5%, from “around” 6.5% growth in 2018. Authorities also unveiled other economic targets for the year, which were broadly unchanged from last year’s goals and disclosed policy plans.

At the same event, Premier Li Keqiang announced a fiscal deficit target of 2.8% of GDP, above the 2.6% goal established for last year. This moderate increase in the target suggests a more proactive fiscal policy, especially given that fiscal deficits in recent years have been much larger than originally planned (2018 fiscal deficit: 4.2% of GDP); the government also uses off-budget measures such as local government special bonds and local government financing vehicles. Meanwhile, on the fiscal side, the government announced tax cuts worth CNY 2.0 trillion (USD 298 billion) for the year, with a VAT reduction of 3% for the 16% bracket (primarily for the manufacturing sector) and 1% for the 10% bracket (mostly for agriculture, transportation and construction) the standout measures. While the government decided to cut the social security tax rate, it left the corporate tax mostly unaltered.

Hunter Chan and Shuang Ding, economists at Standard Chartered, consider that the 2019 budget leaves ample fiscal room to achieve the growth target:

“The fiscal stimulus of nearly 2% of GDP, supported by credit growth in line with nominal GDP, appears more than sufficient to deliver growth of 6.0-6.5% in the absence of a trade war with the US. If trade tensions ease, the government may very well choose to save part of the local bond proceeds for rainy days.”

In terms of monetary policy, People’s Bank of China (PBOC) Governor Yi Gang confirmed that the Bank will continue with its prudent policy stance, while he stated that there is still room for reserve requirement ratio cuts albeit fewer than in 2018. Governor Yi also explained that the PBOC is intending to lower real interest rates this year, although he did not mention the use of the policy interest rate (the one-year lending and deposit rates). Instead, the PBOC will try to lower borrowing costs for small and medium-sized enterprises (SMEs) and private enterprises via targeted measures.

Iris Pang, Greater China economist at ING, adds that:

“We have removed the policy rate interest rate cut. This is because the central government wants to avoid a too low-interest rate, even if they want some parts of the economy to enjoy lower interest rates, eg, the private sector. In sum, this year’s monetary policy will be highly targeted to inject liquidity to small private firms, and therefore will not be as loose as in 2018 for the whole economy.”

Most of the remaining economic goals were left unchanged from last year. Particularly, authorities aim to keep the inflation rate at 3.0% and the registered unemployment rate 4.5%, while creating 11 million jobs in urban areas. Once again, the M2 growth target for this year was not disclosed; Premier Li nonetheless stated that it should expand at the same pace as nominal GDP and last year’s growth (+8.1%).

Reforms of state-owned enterprises will continue to top the agenda this year, especially in the electricity, oil and gas, and railway industries, along with the opening-up policies. In this regard, the country approved a new investment law, which forbids forced technology transfers and better protects confidential information, as part of efforts to soothe relations with the U.S. while both countries continue to hammer out a trade agreement.

Despite the measures announced by Chinese authorities at the NPC, the policy stimulus is nowhere near the scale adopted in the wake of the Global Financial Crisis in 2008. Rather, policymakers are trying to keep growth at reasonable levels in order to maintain social stability, while continuing with the implementation of longer-term economic reforms and financial deleveraging.

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