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China Special May 2020

China: Leadership drops growth target for this year; announces bolder policy support

China’s top leadership decided to scrap its traditional annual growth target for this year, the first time since it was first established in 1994, highlighting the severity of the economic crisis facing the country. At the same time, the authorities emphasized the importance of job stability and vowed to create 9 million new urban jobs in 2020 and keep the registered unemployment rate from rising above 5.5% (2019 target: below 4.5%).

These remarks were made at the opening of the third session of the 13th National People’s Congress, which runs from 22 May to 28 May. The all-important gathering was first scheduled for March but was delayed due to the Covid-19 pandemic.

Putting the job creation program in context, Ting Lu, Lisheng Wang and Jing Wang, economists at Nomura, noted:

“There are strong downside pressures on employment, especially from export-oriented manufacturing sectors and hard-hit services sectors. We also see a higher risk that the labour market could be worse than what is implied by the official unemployment rate.”

Although no growth target was unveiled, analysts have tried to calculate the implicit figure based on data from the budget.

For example, Wang Tao, chief China economist at UBS, stated:

“We infer that the government’s working assumption of nominal GDP growth is 5.4%, and based on its CPI target of 3.5%, we deduct a real GDP growth of about 1.8% in 2020. We maintain our baseline 2020 GDP growth forecast of 1.5%, and our assumption of nominal growth is about 2%.”

The fiscal tone was another key factor to watch from the meeting. Although authorities did set a larger fiscal deficit of 3.6% of GDP (2019 target: 2.8% of GDP), off-budget measures suggest that the actual fiscal stimulus will be much larger.

Raymond Yeung, Greater China chief economist at ANZ, highlights that:

“With a higher official fiscal deficit of 3.6% of GDP (or CNY3.76trn), assisted by CNY3.75trn issuance of special local government bonds and CNY1trn Special Treasury Bonds, China’s consolidated fiscal deficit could go above 9% of GDP in 2020, compared with 5.6% in 2019. In addition, a new policy measure is the special transfer mechanism, a big spotlight in our view. Money from issuing STBs and incremental parts of the fiscal deficit (total CNY2trn) will likely go directly to county-level local governments via competition, which will improve their shattered fiscal condition and support local job markets and growth.”

Regarding monetary policy, the top leadership announced that growth in both M2 and total social financing (TSF) will be “significantly higher than in 2019”. Last year, authorities expanded M2 and TSF in line with nominal GDP growth. This suggests that further cuts in the reserve requirement ratios and deeper interest rate reductions could be in the pipeline. A higher inflation target of 3.5% for 2020 (2019 target: 3.0%) also provides more space for expansionary policies.

Similar to last year’s meeting, deepening SOE reforms and more opening up will be at the top of the policy agenda this year. Authorities also vowed to further support investments in “new infrastructure”, including 5G, industrial internet and data venters.

As Iris Pang, Greater China economist at ING, points out:

“The focus of growing technology is obvious and the report highlighted this as an important objective. Though this plan has been laid out by the government, it will be up to the private sector, i.e. the market to decide which areas will grow within the wide scope of technology. To us, this signals that the technology war between China and the US has escalated. China is going to develop its own technological capacity so it won’t be too dependent on the rest of the world.”

Looking ahead, it is yet to be seen whether the recent measures will be enough to prevent an economic downturn. While China seems to have succeeded in its attempt to contain the Covid-19 outbreak, private consumption remains anaemic as social distancing measures and fears of a second wave continue to weigh on consumer sentiment. Moreover, the spread of the pandemic across the world paints a bleak outlook for the all-important trade sector.

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