China NPC closing focused on employment, income creation and conciliation
Published 29 May 2020 | 3 minute read
China NPC emphasized domestic growth, income stimulation, employment creation and reconciliation. Chinese officials will need to adopt a more conciliatory stance vis a vis the U.S. and other neighboring countries, and to temper their Belt and Road ambitions. Domestic politics will shift to horse-trading in anticipation of the 2022 Central Committee election.
Growth target is alive and well
The government work report and subsequent policy statements from central officials refrained from citing a specific growth target, but in practice it is alive and well.
The onshore consensus is for a nominal target of 5.4%, and a real target of 2.4%-3.4% depending on the range.
Fiscal stimulus will be worth around 9% of China’s nominal GDP
Beijing plans to deliver on this target via infrastructure investment and transfer payments to SMEs and households.
These broad categories of spending amount to a fiscal stimulus worth around 9% of China’s nominal GDP. The stimulus will be financed through a 3.6% deficit, special central government bonds equivalent to 1% of nominal GDP and a local government special purpose bond quota equivalent to 3.75% of GDP.
Policy banks will also participate with targeted lending to regional governments. Augmented fiscal bond proceeds will be levered with commercial banks loans to increase to the total incremental policy impulse.
Compared to stimulus in 2009, the size of headline fiscal expansion is roughly the same, at around 10% of nominal GDP. The key difference will be the pace of credit growth. In 2009, net new total social financing eventually grew by 100% YoY, whereas in April it was only up by 37% YoY.PRC Macro
A new emphasis on conciliation
Greater pressure on the domestic recovery and external criticism of its early handling of Covid-19 are prompting Beijing to take a more conciliatory stance towards its neighbors, and will also encourage the leadership (we think) to avoid unnecessary escalation vis a vis the US during the coming year.
That said, China will continue to be on the defensive. Given the ongoing and escalating nature of China-US tensions, and the observed intent of the White House to continue putting pressure on China, in some areas Beijing may need to respond to policy measures by the US.
This implies that Beijing will do what it can to honor its commitments under the Phase I deal. It will also be reluctant to retaliate against American businesses in China.PRC Macro
A strategic contraction of Belt and Road projects
Despite a push to accelerate RMB internationalization, we think Beijing will enter a period of strategic contraction on Belt and Road projects, as well as other geopolitical initiatives.
This will divert funds to focus on domestic substitutes for imported materials and components, as well as transport infrastructure upgrades in western regions.
Entering an era of pre-electoral politics
At the same time, Xi will face pressure for his “reelection” in 2022 and the need to control key appointments.
Accordingly, he will continue to take a strong line on domestic factional politics and consolidate power in the security and justice systems. We also expect him to foment nationalism as a source of domestic legitimacy.
We think the later successful handling of Covid-19 has also put him in a stronger position than he has been in for some time within the Party ranks and among the general public.
Such popularity will allow him to work on the economy and defend China’s external interests without unnecessary domestic political wrangling, which would all pave the road for the 2022 reelection.