Driving the Day
1.Trivium’s Two Sessions Wrap Up
The Two Sessions came to a close on Friday with Premier Li Keqiang’s press conference.
There wasn’t a ton of news out of the presser – like much of the Two Sessions – but Li did take the chance to reiterate one more time that big stimulus isn’t coming:
- “An indiscriminate approach may work in the short run but may lead to future problems.”
- “Thus, it’s not a viable option.”
- “Our choice is to energize market players.”
Those statements nicely encapsulate the new approach to economic policy that the government committed to, over the past few days – i.e. trying to improve the business environment by lowering taxes and other burdens on companies.
It’s a decidedly different tack than the credit-fueled stimulus of yesteryear, and the practical outcomes of this new policy response are two-fold:
- Given that it’s a new strategy, the transmission channels from policy to actual economic growth support are not well understood.
- The one thing we do know – this approach will take longer to impact the economy than the credit-driven responses of previous cycles.
The bottom line: It will take China’s deceleration longer to bottom out than markets and businesses currently expect.
- From a business perspective, we counsel caution in settinggrowth and expansion targets in 2019.
- From a markets perspective – the consensus is still underestimating how much of a drag China will be on global growth in 2019.
With that, we offer a few other quick, key takeaways from this year’s Two Sessions:
- Authorities are leaning on fiscal policy,and efforts to improve the business environment, in order to support the economy. Policymakers remain intently focused on boosting the private sector, in particular.
- Monetary policy will remain prudent, which authorities have defined as having credit and monetary growth in line with nominal GDP growth. Currently, all three are basically in line – so don’t expect much additional firepower from new lending.
- Housing policy is unchanged. Purchasing and other market restrictions will remain largely in place, though there will be marginal adjustments on a city-by-city basis.
- The policy approach is more nuanced than inpast years. It’s focused not just on growth, but also on sustainability and quality. There were several explicit mentions that officials are willing to focus on the environment at the expense of the economy.
- The new approach to economic policy management is not well understood, noris it particularly appreciated. In fact, there was a noticeable amount of grumbling about economic policy among officials at the Two Sessions.
- The dissatisfaction cuts both ways, though. Senior leadership is unhappy with the quality of government work and the level of implementation by local officials – expect better implementation to be a focus in 2019.
- Authorities are increasingly focused on risk. Premier Li’s work report included extended sectionshighlightingrisks that the economy facesand the difficulty of achieving the government’s aims this year.
- Changing the global narrative toward China is a high priority. The unusual speed with which the Foreign Investment Law was rolled out and approved at the NPC underscores that China is looking to keep the foreign business community onside. But the hastiness meant that policymakers punted on key details.
- 2019 is turning out to be a reality check. Last yearwas the first year of Xi Jinping’s “New Era,” and as such, leadership was in an aspirational, forwarding-thinking mindset. No longer. The Party and government now seem to understand that the economy is in desperate need of short-term attention, if China is to realize its long-term goals.
Did we miss anything, or get anything wrong?
We’d love to hear readers’ thoughts on the Two Sessions, so let us know what you think!