Our Take on China’s latest National People’s Congress Meeting
A higher than expected growth target – at around 5.5% – sent a clear signal of Beijing’s determination to achieve economic stability in 2022. We have never doubted the authorities’ desire to foster a stable macro environment in a politically sensitive year, the question has always been: do they have the tools to do it? Premier Li Keqiang, at the opening day of this year’s National People’s Congress (PRC), delivered a clear answer by laying out a clear policy roadmap.
A clear policy roadmap for achieving economic stability
First, monetary and fiscal policies will return to their roots of being ‘counter-cyclical’, as opposed to ‘cross-cyclical’ as described last year. The latter, in retrospect, was the codeword for policy tightening, which is expected to unwind this year to buffer the economy against internal and external headwinds. A higher augmented fiscal deficit, to be supplemented by greater credit and liquidity supports, should help growth to regain its momentum after the trough in Q1.
Second, the reform agenda is recalibrated to minimize near-term growth shocks. This means the property curb will likely be further fine-tuned, regulatory policies will be more leniently implemented, and the energy transition will strike a better balance between long-term gains and short-term pains. The last point is also made prominent by surging energy prices amidst the current geopolitical tensions.
Finally, as expected, there is no let-up on ‘zero tolerance’ against COVID-19. However, a fine-tuning of the virus-containment policies is likely given the recent developments, even if the zero-COVID principle remains intact. A more targeted and differentiated approach will help to bolster consumption and services recovery, making economic growth more balanced.
Overall, the announced stimulus package looks decent, and necessary in light of the acute economic challenges. However, not all will likely be convinced by its effectiveness to rejuvenate the economy to hit the ambitious growth target. We would also like to maintain a degree of caution by holding onto our 5% growth forecast for now, but acknowledge some upside risks to it. With the planning out of the way, Beijing now needs to walk the talk to dispel skepticism.
Key takeaways from the meeting
Below are a few key takeaways from the NPC’s Government Work Report (GWR):
- A higher growth target than market expectations. This year’s economic growth target is set at ‘around 5.5%’, closer to last year’s ‘above 6%’ to reflect economic stabilization. But hitting it against stiff headwinds of a collapsing housing market, lingering pandemic and soaring energy prices is a challenge. Given that yoy growth already dropped to close 4% last quarter, considerable policy uplifting is required to stop the economic slide. The ambitious growth target therefore sent a clear signal of Beijing’s desire to stabilize the economy ahead of the leadership transition.
- Fiscal supports larger than meets the eye. At the first glance, the aggressive growth target seems at odds with the underwhelming fiscal numbers. The headline budget deficit is trimmed to 2.8% from 3.2% last year, while the special local government bond quota is kept unchanged at RMB3.65trn, lower than 2020’s RMB3.75trn. Beneath the surface, however, the fiscal impulse is much stronger if all the announced measures are duly implemented. The Budget Report shows that fiscal spending in 2022 will be boosted by around RMB2trn (or c2% of GDP) thanks to carryover funds from last year (worth 1.27trn due to underspending) and various contributions from State-owned enterprises (SOEs) (via dividends paid to the Budget Stabilization Fund). Policy implementation has already sped up with local governments (LGs) front-loading bond issuance by close to 1trn year to date – vs. no early issuance last year – which should support infrastructure investment. Apart from that, the GWR also pledges to cut tax and fees for small and mid-size enterprises (SMEs), manufacturing firms and companies in innovative industries to the tune of RMB2.5trn, up from 1.1trn last year. The only direct benefits, in the GWR, to households are tax deductions for some childcare expenses and more supports for the three-child policy. Hence, Beijing’s support to consumption will continue to be channeled through improved business and job market conditions, as opposed to transfer payments to households as seen in developed markets.
- Monetary policy to play an important role. The GWR has never been a platform for major monetary policy announcements despite major decisions of the People's Bank of China (PBoC) – on required reserved ratio (RRR) and interest rates – are dictated by the State Council. As per the usual practice of recent years, the GWR states that major monetary metrics – such as M2 and Total Social Financing (TSF) growth – should be in line with nominal GDP growth to avoid “flood-like” policy easing. But in practice, this guidance – of marching credit and GDP growth – is much less binding than the GDP target. Had it been followed strictly, monetary policy would have been much more stimulatory than was the case last year. Hence, there is a need for the PBoC to correct the overtightening and ensure monetary policy play its part in the stabilization effort. The talk of using both ‘aggregate and structural’ tools suggests more cuts to the RRR (we expect two) and interest rates (one) are forthcoming, together with targeted liquidity injections to support SMEs, manufacturing and green industries.
- More lenient implementation of reforms to mitigate short-term pains. The discussions on various reforms suggest that Beijing is trying to strike a more balanced and flexible approach towards policy implementation without altering the long-term path. On the housing market, the Premier reiterated the need to return real estate back to its roots of providing sheltering services under ‘house is for living, not speculation’. However, maintaining a healthy development of the commodity property market is also important for fulfilling people’s basic needs. The shift – from ‘deleveraging’ the market to ‘stabilizing’ land and house prices – is consistent with our view that Beijing is taking a ‘two step forward and one step back’ approach to reallocate resources from real estate in an orderly fashion. To alleviate the near-term growth shock, Beijing plans to build 2.4m units of rental housing this year, more than double the amount announced last year. The central government also appears relaxed with the recent policy easing by some local authorities, which could be seen as an implicit endorsement that encourages others to imitate going forward.
- The GWR mentioned no words on the ‘energy double controls’ which contributed to last year’s severe power shortages. Mitigating energy security risks has likely become a priority in light of the external geopolitical conflicts, and a critical component of what constitutes to macro stability this year.
- Finally, the GWR provides no hint on any imminent pivot away from the ‘zero-COVID’ strategy. However, keeping the underlying principle does not mean the implementation of containment measures need to stay the same. In fact, China’s COVID-fighting strategy has evolved with the pandemic, moving from ‘absolute zero tolerance’ that involved draconian lockdowns at the beginning of 2020, to a ‘dynamic zero COVID’ approach that entailed more selective and targeted tightening in 2021. As the cost-and-benefit trade-off of the current strategy changes again in light of a more transmissible but less lethal variant, we see rising odds of Beijing further fine-tuning its COVID policies to strike a better balance between virus containment and economic growth.