driving the day
1. Government abandons GDP growth target
All it took was a once-in-a-century global pandemic and economic crisis.
- The Chinese government finally dropped its annual GDP growth target, long the foundation for economic policy.
Premier Li Keqiang announced the change in his Government Work Report delivered this morning:
- “I would like to point out that we have not set a specific target for economic growth this year.”
- “This is because our country will face some factors that are difficult to predict in its development due to the great uncertainty regarding the covid-19 [sic] pandemic and the world economic and trade environment.”
This does not mean that the government will not pursue economic growth:
- “We must be clear that efforts to stabilize employment, ensure living standards, eliminate poverty, and prevent and defuse risks must be underpinned by economic growth; so ensuring stable economic performance is of crucial significance.”
Get smart: Reformers have advocated for dropping the GDP growth target for years, but have always been rebuffed – until now.
Why it matters: The obsession with growth led to misallocated capital and unproductive investment as officials throughout the system sought to juice GDP above all else. Jettisoning the growth target allows formore sustainable economic growth.
The bottom line: Growth this year will be weaker than many expected.
2. Government tries to thread the needle on fiscal policy
The government may have abandoned the GDP growth target (see previous entry), but it is still in economic support mode.
Government spending is set to ramp up:
- “We will pursue a more proactive and impactful fiscal policy.”
- The deficit-to-GDP ratio this year will be more than 3.6% – up from 2.8% last year and above expectations of 3-3.5%.
- RMB 1 trillion in special bonds for COVID-19 will be issued – below expectations of RMB 2-3 trillion.
- A further RMB 500 billion in tax and fee cuts for businesses are in the pipeline.
- The quota for local government bonds will be RMB 3.75 trillion – up from RMB 2.15 trillion last year and in line with expectations of RMB 3-4 trillion.
- By targeting a deficit ratio of “more than 3.6%” the government is giving itself leeway to increase spending further if need be.
- The higher than expected fiscal deficit target is a clear signal that the government will step in to put a floor under economic growth.
- But the slightly less impressive special bond and local government bond numbers reflect the fact that policymakers are trying not to overshoot like they did in 2008-09.
The bottom line: The government wants to do two things here. They want to boost confidence by signaling that they are ready to spend. But they are also at pains to show that this will not be a free-for-all.
3. Monetary policy lets loose
Do you hear that?
- It’s that telltale squeak of the credit taps slowly opening.
The Government Work Report reiterated that a “more flexible” – i.e. looser – monetary policy is the order of the day.
The key line:
- “We will use a variety of tools such as required reserve ratio reductions, interest rate cuts, and re-lending to enable M2 money supply and aggregate financing to grow at notably higher rates than last year.”
Just as important was what the report did not say. Unlike last year:
- There was no mention of keeping the macro leverage ratio stable.
- And no mention of avoiding stimulus.
Window guidance may be more important than traditional monetary policy tools in keeping credit flowing. Check this out:
- “The policy allowing micro, small, and medium businesses to postpone principal and interest repayments on loans will be further extended till the end of March next year.”
- “We will encourage banks to substantially increase credit loans, first-time loans, and loan renewals without repayment of principal for micro and small businesses.”
- “Large commercial banks should increase inclusive finance lending to micro and small businesses by more than 40 percent.”
Get smart: China’s hands-on approach to the financial sector makes it inefficient at allocating capital. But the flip side is that it can also be leaned on to provide stability in a crisis in a way that Western financial systems cannot.
4. Government’s investment plan
Where will the government spend the money from its fancy new fiscal policy (see entry #2)?
You guessed it.Infrastructure!
It has a long list of stuff it wants to build:
- “We will shore up weaknesses in public health, biosecurity, emergency supplies, material and energy reserves, logistics facilities, agriculture, forestry, water conservancy, and urban and rural infrastructure, launch projects for new types of infrastructure, and promote investment in new types of infrastructure including 5G, the Internet of Things, the Internet of Vehicles, the industrial internet, artificial intelligence, and the national big data center.”
That’s a lot to be investing in.
So Premier Li Keqiang wants to bring the private sector on board:
- “[We will] improve market-based investment and financing mechanisms and encourage private companies to participate [in infrastructure investments].”
Get smart: The government wants to have its cake and eat it too by getting private investment to fund a bunch of infrastructure.
This will be tough: Infrastructure investment has positive externalities, but it doesn’t produce a lot of what companies want – cold hard cash.
5. Li reiterates commitment to foreign investment
Amid the unprecedented disruption of COVID-19, Premier Li acknowledged that foreign companies are important to China’s supply chain.
- “Opening up to foreign investment is key to keeping China‘s industrial and supply chains stable.”
That’s why the government has promised to significantly shorten the negative list for foreign investment.
According to the NDRC, further openings could happen in the service, financial, manufacturing, and agricultural sectors.
Openings in the service sector may *finally* see some progress:
- The government promised to draw up a negative list for cross-border trade in services.
This is telling:
- The Government Work Report did not mention the EU-China Comprehensive Agreement on Investment (CAI).
Some context:China and the EU had originally hoped to sign the EU-China CAI in September.
Our take: The CAI is not getting finished this year.
6. Foreign policystay the course (mostly)
The Government Work Report (GWR) also discussed foreign policy.
The main message: We’re all in this together:
- “China is committed to building a human community with a shared future.”
- “China will continue to pursue peaceful development, and advance friendship and cooperation with other countries as it opens up wider to the rest of the world.”
The report reaffirmed China’s commitment to multilateralism:
- “China stands ready to work with other countries to strengthen international cooperation on covid-19 [sic] control, promote stability in the world economy, advance global governance, and uphold the international system with the United Nations at its core and an international order based on international law.”
Get smart: This is essentially the same message that’s been conveyed in the last several GWRs.
But this caught our eye:
- The 2019 GWR promised to “actively offer constructive Chinese approaches” to global challenges and flashpoints.
- That language was absent in the 2020 GWR.
What does that mean?
- Hard to say, but it could represent a slightly more cautious approach to world affairs compared with last year.
Get smarter: Every word in the GWR is carefully weighed. Even small changes happen for a reason.
7. Beginning of the end for Hong Kong
The big news on Hong Kong came on Thursday night.
National People’s Congress (NPC) spokesperson Zhang Yesui announced that the NPC will deliberate a “Draft decision on establishing and improving the legal system and implementation mechanism for the safeguarding of national security in Hong Kong.”
What that means:
- The draft decision is NOT the much-talked about National Security Law.
- Instead, the draft decision, once passed, will authorize the NPC Standing Committee to start drafting such legislation.
The upshot: The mainland will be able to enforce national security provisions in Hong Kong without the need for the Hong Kong Legislative Council to pass such a law.
Get smart: This is the beginning of the end for Hong Kong. The new law will give Beijing wide latitude to punish behaviors that “threaten national security.” That means tighter control over media, education, and free speech.
Our take: Xi Jinping is fed up with Hong Kong and is ready to take a tougher line – no matter the consequences.
What to watch: The NPC Standing Committee will meet in June and could pass the legislation then.