NPC signals Beijing is aiming for stable but more balanced growth
The National People’s Congress (NPC) commenced on March 2 with an opening speech by Premier Li Keqiang stressing the need to balance the delivery of near-term growth with the furthering of structural reforms.
The desire to minimise shocks to the economy was evident in the very modest changes to the growth and policy targets, which also indicated a wish to maintain stability ahead of the leadership reshuffle later in the year.
As anticipated, the government lowered the 2017 growth target to about 6.5 per cent from last year’s 6.5 to 7 per cent. This does not qualify as a tangible shift in the official view towards near-term growth. Not only did Li hint that the government, in reality, should aim to achieve a better result, the target for job creation was also increased from last year, which will require higher growth to achieve.
All of this suggests that preserving short-term growth stability remains a priority for the government.
On monetary policy, the “neutral and prudent” setting was confirmed by the lower M2 money supply and total social financing targets. Growth stability and a heightened desire to de-risk the financial system have led to targeted tightening in the interbank market and shadow banking sector recently.
While additional tightening is possible in order to step up deleveraging efforts, the People’s Bank of China is a long way from lifting the deposit and lending rates for the real economy, as the recovery remains on a fragile path.
On the fiscal front, the government has kept the target deficit unchanged at 3 per cent, but it would be incorrect to think fiscal policy will deliver zero growth impetus. Not only can the government mobilise fiscal savings to beef up actual spending, it can also deploy resources, such as issuing “revenue bonds”, that are not captured by the budget.
What is also interesting is that the mix of fiscal outlays has shifted gradually from spending-focused (eg. on infrastructure) to more tax/fee reductions. This is an important and favourable change, as the latter can benefit the private economy more broadly, making it more effective in stimulating non-official sector demand.
The plan on structural reforms treads a similar line as that of last year, highlighting the need to reduce overcapacity, deleverage the corporate sector and restructure state-owned enterprises (SOEs). But because of the need to maintain growth stability, the government has refrained from setting more ambitious targets.
The removal of “zombie” companies also gained momentum in the official rhetoric, although concerns about layoffs have led local governments to prefer cutting production, as opposed to shutting down companies altogether. More political pressure and realigning incentives are needed to improve the market clearance of unviable businesses.
The all-important SOE reforms got a special mention, and the commitment to accelerate the process has made the A-share market excited in recent months. However, the strategy preferred by the government – making the SOEs larger and more efficient, without losing the state control – seems to be at odds with the market, which favours more privatisation and break-ups. The government is likely to stay on its own course and push the reform at a faster pace this year.
Finally on the financial market, currency reforms are among the most anticipated policies. In its work report, the government has pledged to make the exchange rate “more market-determined” and to maintain the “stable status of the [yuan] in the international currency system”. The first part of that sentence is easy to understand, indicating as it does that the foreign-exchange reform will not backtrack, despite temporary interruptions along the way. On the second part, since the yuan has already become a special drawing rights (SDR) reserve currency, reinforcing its global status means that yuan assets need to be more widely held by foreign investors.
In that regard, recent efforts to improve the accessibility of the onshore bond market – for example, by allowing foreign investors to hedge currency risks – should help to push the process forward. To the extent that successful market liberalisation can attract more capital inflows, it will help to balance the capital account and ease pressure on the yuan.
Overall, the ‘steady as she goes’ policy settings should help the government to preserve economic stability ahead of the Party Congress later in the year. External shocks, particularly those from the US, are major risks, but the government appears to have the policy levers necessary to keep the economy on a steady track.
Aidan Yao is senior emerging Asia economist at AXA Investment Managers