Premier Li Keqiang’s government work report, unveiled on the opening day of the National People’s Congress, argued that Beijing would do well to safeguard near-term growth without undermining the long-term sustainability of the economy. The question is: can Beijing achieve this daunting task against a challenging local and global backdrop, and with a smaller policy toolkit to deploy compared with five or 10 years ago? Let’s take a look at what has been proposed for the task. First, the government has cut this year’s growth target to 6-6.5 per cent from “around 6.5 per cent” last year. This serves two purposes. First, it puts less pressure on Beijing to aggressively stimulate the economy, which may exacerbate the trade-off between speed and quality of growth. Second, expressing the target as a range gives Beijing greater flexibility to manage the economy in an uncertain, fast-changing environment. Overall, the new growth target suggests that the central government understands the prevailing economic challenges, and is becoming more tolerant of slower growth in exchange for better-quality growth. Second, Beijing has vowed to step up policy support, without which the bottom line of the growth target may not be defendable against economic headwinds that are growing stronger. Even though the policy stance, on paper, has been kept the same – with “proactive” fiscal policy and “prudent” monetary policy – in reality, it is set to feature more stimulus measures. But contrary to past measures, the focus this time has clearly shifted more towards fiscal policy. Beijing has promised a 2 trillion yuan (US$298 billion) tax and fee reduction for 2019, up from 1.3 trillion yuan in 2018. A major source of tax relief will come from the reduction of value-added tax rates, where the top bracket will be lowered to 13 per cent from 16 per cent, and the middle bracket will be cut from 10 per cent to 9 per cent. A back-of-the-envelope calculation suggests these measures will lower corporate tax payments by around 800 billion yuan, benefiting mainly manufacturing firms, which pay the top VAT rate, and construction and logistic companies that pay the middle rate. Beijing has also pledged more bond issuance by local governments to support higher fiscal spending. The quota for local governments’ general bonds has been increased to 930 billion yuan, while that for special project bonds was raised to 2.15 trillion yuan. The latter represents nearly a 60 per cent increase from last year, indicating a greater propensity for local authorities to ramp up infrastructure investment. With both on- and off-balance-sheet engines firing up, fiscal policy is set to become a more proactive, effective and stronger engine of growth in 2019. There are, however, more reservations about turning on the liquidity taps. The overall monetary policy stance is still “prudent”, which means, as Li stated, the monetary aggregate (M2) will grow in line with nominal GDP growth. Additional monetary easing will be provided, but Li specifically stated that further reserve requirement cuts would be geared towards smaller banks to support lending to small and medium-sized businesses. Importantly, the government has not given up on “structural deleveraging” and will strive to keep total deleveraging “broadly stable”. While the policy stimulus will inevitably lead to a renewed increase in China’s total debt, the cautious words from the premier serve as a reassurance that the changes will be monitored carefully to ensure no major setbacks to Beijing’s long-term debt management goals. Low inflation is no cause to celebrate – we need a global policy push Overall, these policy measures should be sufficient to put a halt to the current economic slowdown, but not enough to generate the vigorous growth rebounds seen in past cycles. Hence, lower growth is still expected for 2019, at 6.1 per cent compared to last year’s 6.6 per cent. Finally, Beijing has pledged to accelerate structural reforms to unlock growth in the private sector and emerging industries. Some of the moves to further liberalise trade and the financial system will also help dial down tensions between China and the US. For the real economy, the focus will be on state-owned enterprise reforms, spearheaded by changes in power, oil and railway sectors as testing grounds for mixed ownership and “competitive neutrality”. The latter implies that the official backdrop for SOEs will be gradually scaled back, and market barriers will be torn down to level the playing field for private and foreign companies. Support for new industries, particularly hi-tech and advanced manufacturing, will continue, although the volume of discussion has been trimmed compared to previous work reports, possibly as Beijing tries to avoid infuriating the US amid ongoing trade talks. Overall, this year’s work report clearly shows that Beijing understands the severity of the short-term challenges and is crafting a pragmatic strategy to address them in a way that does not impinge on long-term economic sustainability. Careful management of these policies can ensure an economic soft landing, but the journey ahead will not be easy, and investors need to be prepared for bumps along the way. Aidan Yao is senior emerging Asia economist at AXA Investment Managers