Driving the Day
1.Government work report drops
Li Keqiang kicked off this year’s National People’s Congress by delivering the Government Work Report (GWR) this morning.
Some context for the uninitiated: The GWR reviews the government’s achievements over the past year and sets out key economic and social goals for the year to come.
Put simply: This is the annual meeting where cadres get their marching orders.
Key macro goals for this year include:
- Achieving real GDP growth of 6-6.5 percent
- Creating over 11 million new urban jobs
- Seeing aCPI increase of around 3 percent
- Keeping the macro leverage ratio basically stable
- Effectively preventing and controlling financial and fiscal risks
- Reducing the rural poor population by over 10 million people
- Growing personal income at a rate that is basically in step with economic growth
Get smart: The GDP growth target is always the big shiny object for the media. It was lowered from “around 6.5%” last year. That shows two things:
- The government expects the economy to continue to slow.
- Policymakers are baking in a bit more flexibility.
Get smarter: Hitting 6% growth won’t be easy. Li Keqiang acknowledged as much, saying it will be a “tough battle.”
2.Leaning on fiscal policy
How canthe government achieve the goals listed in the previous entry?
The plan is torely much more heavily on fiscal policy:
- “We will pursue a proactive fiscal policy with greater intensity and enhance its performance.”
What that means in practice:
- Increasing the central government budget deficit target to 2.8% of GDP from 2.6% in 2018
- Reducing companies’ tax and social insurance burdens by RMB 2 trillion
- Cutting key VAT rates, as a part of the overall fee reduction effort
Meanwhile, monetary policy stay relatively restrained:
- “Our prudent monetary policy will be eased or tightened to the [degree needed].”
In practice, that means:
- “Keeping M2 and credit growth basically inline with nominal GDP growth.”
The fundamental goal of these macro settings:
- “Maintaining stable growth, first and foremost, is to ensure employment.”
Why it matters: Authorities are leaning heavily on the fiscal lever because they don’t want another credit binge that would add to the overall debt load and undo hard-won gains on de-risking the financial system.
What that means for growth: Medium-term, that’s positive. But in the short-term, the economy will continue to slow as fiscal measures take a relatively long time to translate into tangible economic improvement.
3.Li Keqiang tries to strike the right balance
Li Keqiang laid out why policymakers don’t want to pump-prime the credit markets to salvage growth:
- “We need to achieve the right balance in the relationship between maintaining stable growth and guarding against risks, to ensure sustained, healthy economic development.”
- “The many risks and potential problems that have built up over the years demand stronger mitigating action.”
- “At the same time, we must not attend only to immediate concerns or adopt short-term strong stimulus policies that will end up undermining long-term development and generating new risks.”
Putting it all together: The fiscal approach makes sense to achieve these aims.
Policymakers have stated that their number one concern is employment. And since businesses are the main entities that provide employment, lowering their operating burdens makes much more sense than ramping up a new round of bank lending that would largely just end up in infrastructure and the property market.
Get smart: Policymakers have genuinely internalized the need to balance growth against risk.
4.Nine priorities for 2019
Keeping in mind the need to guard against long-term risks (see last entry), it’s clear that supporting short-term growth is now key.
Li Keqiang’s nine specific priorities for the year make that clear:
- Developing new and improved approaches to macro regulation and keeping the main economic indicators within an appropriate range
- Energizing market entities and improving the business environment
- Pursuing innovation-driven development and fostering new growth drivers
- Stimulating the development of a robust domestic market and unlocking the potential of domestic demand
- Making solid progress in poverty alleviation and rural revitalization and moving closer to completing the tasks of building a moderately prosperous society in all respects
- Promoting coordinated development across regions and improve the quality of new urbanization
- Strengthening pollution prevention and control, enhancing ecological improvement, and making big advances in green development
- Deepening reforms in key sectors and speeding up the improvement of market mechanisms
- Promoting all-round opening up
Get smart: Last year, the top two priorities were about medium-term goals – namely, supply-side structural reform and innovation.
Get smarter: This is year it’s all about supporting short-term growth, but critically through “new and improved approaches.”
The bottom line: In case you haven’t gotten the message, policymakers are not going back to the same old credit-boosting playbook.
5.Government promises opening,but lacks specifics
At first glance, 2019 doesn’t look set for any banner market openings to foreign investment.
Some context: 2018was a banner year for market openings, with meaningful progress across a range of sectors, most notably financial services and autos. Those moves were telegraphed in the 2018 Government Work Report.
This year’s report promises to “open more sectors” and “shorten the negative list.” But unlike last year, it fails to mention specific sectors.
But, but, but…This year’s Government Work Report is coming in the middle of the trade negotiations with the US. And a big part of those negotiations revolve around China’s willingness to open more sectors to foreign investment.
Our take: The government does not want to tip its hand while negotiations are ongoing.
Despite the lack of specifics, the government is trying to send a positive message:
- “China’s investment environment is all set to get better and better, which means more and more business opportunities for foreign companies in China are a sure thing.”
Get smart: We remain pretty bullish on market openings. And there is seems to beconsensus among key policymakers that China needs more foreign investment to stabilize the economy and capital flows.
6.SOE reforms focus on oil and gas
One of the perennial questions for China’s economy is – how are they going to manage the state-owned sector?
Reading the Government Work Report, it is clear that the current overall approach to SOE reform remains in place. That consists of two pillars:
- State-capital investment reforms that aim to take the government out of direct management of companies.
- Mixed-ownership reforms that aim to introduce more private capital into SOEs.
The NDRC report has more specifics on what to expect with regard to SOE reforms this year (but it’s not online yet, so no link below).
The energy and power sectors are the clear focus:
- “We will…establish a national oil and gas pipeline corporation.”
- “We will lift restrictions on access to petroleum and natural gas exploration and exploitation, and actively encourage private investors to step up exploration and exploitation activities.”
- “We will move swiftly in making electricity transactions market-based, steadily establish pilot markets for spot trading of electricity, and expand trial reforms on raising the number of electricity distributors.”
- “We will make more progress in price reforms in key sectors such as petroleum, natural gas, and transportation.”
Get smart: It is that last sentence that might be the most important. More market-based pricing would go a long way towards creating a more efficient state sector.
7.What to watch for over the next 10 days
The NPC fun justdon’t stop!
In fact, the Two Sessions still has another 10 days to go.
The wonderful folks at NPC Observer have been nice enough to translate and post the schedule.
What we will be watching: We always like to check out the press conferences by various ministers. They don’t tend toinclude any bombshells, but they do give a bit more detail on certain policies.
Here’s are the one’s that we will be watching most closely:
- Wednesday March 6, 10:00 am: NDRC Chairman He Lifeng
- Thursday March 7, 9:00 am: Minister of Finance Liu Kun
- Saturday March 9, 10:30 am: Minister of Commerce Zhong Shan
- Sunday March 10, 10:30 am: People’s Bank of China Governor Yi Gang
- Monday March 11, 8:45 am: Minister of Industry and Information Technology Miao Wei
- Monday March 11, 10:30 am: State Administration of Market Regulation head Zhang Mao
Go deeper: Click through the link below to get the whole schedule!
NPC Observer: 2019 NPC Session: Agenda and Daily Schedule