China’s economy: What new National People’s Congress policies mean

March 8, 2019

HONG KONG - Global credit insurer Coface, describes as "a  bittersweet set of contradictory measures" measures announced out of China's current National People's Congress. The measures aim to selectively open some sectors to attract more foreign investment while simultaneously controlling macro headwinds and tightening State control over strategic sectors.

Coface says China's slowing economy in recent months (owing to both domestic factors and a lingering trade war with the United States) has led to weaker activity indicators, with the Purchasing Manager's Index (PMI) in contractionary territory for three consecutive months.

"In this context, the outcome of the NPC is significant because it outlines the approach that Chinese

authorities will adopt in order to manage risks in 2019."

China's GDP target has been trimmed to 6.0%-6.5%, giving authorities more policy room to manoeuvre and adapt to


In addition, China has announced that it will continue to reduce the population living in poverty by at least 10 million in 2019, and that it will create 11 million new jobs in order to keep unemployment at 5.5%.

"This implies that the Government is not willing to abandon growth and will aim for an economic soft landing," Coface says.

One of the ways that Beijing will go about sustaining

growth is through a more expansionary fiscal policy. In this spirit, the fiscal budget deficit was expanded to 2.8% from 2.4% last year.

"The fact that they have left it under 3% signals a strong, proactive but also restrained approach to fiscal policy easing in 2019," Coface says.

"Tax cuts are also part of the equation. Social security fees will be trimmed by 2 trillion yuan, while there will be an additional 3% reduction in VAT."

Coface says massive  stimulus is off the table for now as the People's Bank of China (PBOC) pays attention to the balance between tightening and loosening.

"Premier Li Keqiang announced that aggregate financing growth will remain in line with nominal GDP, which should be in line with the levels observed in 2018 (10%).

"In the same vein, the PBoC will implement additional targetted reserve requirement ratio cuts and will continue to inject liquidity via the Targetted Medium-term Lending Facility (T-MLF) to boost lending to the private sector."

Coface says consumption was a real drag on China's GDP in the fourth quarter of 2019.

"Unsurprisingly, there was special mention to boost domestic consumption - which included an agreement to introduce incentives for automobile and home appliances sales in rural areas - to lift demand so as to keep consumer inflation stable around 3.0%."

On reform and opening up, Coface says deleveraging will reportedly remain a priority, "but this will most likely take a very secondary position, meaning it will only be pushed in the event that conditions improve significantly".

"Nonetheless, there is scope to promote reforms in the energy (power generation and oil) and transportation (rail) sectors.

"Abnormal fluctuations in financial markets will be avoided, which is only possible via increased State oversight. The move is somewhat controversial given

that the Central Government has had mixed success with this in the past.

"Similarly, the number of financial activities currently included under the macro-prudential framework will be extended.

"On the other hand, the Government intends to attract more long-term capital inflows through liberalisation of the bond market and removing limits to foreign

ownership in some sectors.

"Moreover, the Premier pledged that China will improve intellectual property (IP) protection across the board, improve the system of punitive compensation for IP

infringements, and promote domestic innovation."

On foreign exchange, Coface believes Beijing will aim to keep the yuan "basically stable at a reasonable equilibrium level, and maintain FX reserves at a reasonable size".

"We maintain our forecast at USD/CNY 7.10 for 2019. This should reduce pressures on other emerging Asian economies, who feared that China would resort to aggressive devaluation in order to boost its terms of trade."

Of risks, Coface says President Xi Jinping's overarching target is to double nominal GDP growth rates by 2020 relative to 2010, which means 6.2% in 2019 and 2020.

"Most likely, they will aim for the upper end of the band (6.4%) this year, leaving more wiggle room next year," it says.

"Fiscal policy is more aggressive than stipulated. If you include local Government bond financing into the budget, this results in a much higher deficit of around 5.4% of GDP.

"These bonds are not guaranteed by the State, but the incidence of defaults is low and has not correlated with financial performance.

"Moreover, the tax cuts will add pressure on local government finances, which means that compromises will have to be made in order to meet targets locally.

"There will likely be less support for local State-owned enterprises with large non-performing balance sheets." (ATI).