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Economic Update

2016/03/18

Takeaway from the Two Sessions

After almost two weeks of substantial news coverage, you should be aware of the Two Sessions where Chinese leaders gathered in Beijing to decide on national priorities during the beginning of March. The meeting covered the aspects of growth and reform, among many other matters, and this short summary covers what we have learned from the Two Sessions. In short, while we do expect the efforts on reform will intensify during the course of the 13th Five Year Plan (FYP), stabilising growth and managing expectation are higher on the priority list.

Growth

From the twenty some press conferences featuring top government officials, it appears that much attention was on the economy and that growth stabilisation remains at the top of the policy agenda.

Premier Li Keqiang said on 16 March that “it would be impossible for China to not achieve the lower range of the growth target (6.5%)” this year. Particularly, it is becoming more likely that the Government will be more active in delivering fiscal stimulus to support growth, as it was signalled that the Government is ready to expand the fiscal deficit from 2.3% of the country’s GDP in 2015 to 3% in 2016 (see Table 1). Such fiscal deficit would be the results of tax and fee reduction plans for stakeholders in the society, particularly with a keen focus on SMEs and micro firms.

Together with the higher target of money supply growth, the PBoC will likely maintain its loose monetary stance and keep abundant liquidity in the system through the use of various monetary tools and money market operations (see Table 2).

Reform

Policymakers have expressed the determination to carry on its ongoing reform efforts with defined targets set.

One aspect of reform that concerned market observers is the potential of massive job losses as a result of reduction of the overcapacity situation in some industries. Reportedly, the Government will prepare a pool of fund to help workers affected. More importantly, the Government suggested that workers affected by elimination of jobs in the industries facing overcapacity can be trained to serve in other service sectors. Such transformation could be killing two birds with one stone – taking forward the reform agenda and avoiding an abrupt disruption to the workforce.

Efforts on SOE reform will also continue. According to the full script of Premier Li’s Work Report published on 17 March, the Government will promote and execute “mixed ownership” of companies, and encourage more collaboration between the public and private sectors. This will be carried forward by the Government’s effort to “substantially relax” the private sector’s participation in sectors like electricity, telecommunications, transportation, oil & gas, and municipal utilities sectors. Enhancing its legal framework is also part of the Government’s reform agenda.

On VAT reform, it was announced that, starting from 1 May, the coverage will be expanded to include the construction, real estate, financial services, and consumer services sectors. On this front, the Chamber will be organising different events featuring tax experts to keep members informed about the development related to the reform agenda.

Pointing to the soaring Chinese demand for consumer goods internationally, policymakers have addressed the importance of enhancing the quality of consumer goods available domestically, through channels including the improvement on quality and safety standards. It also appears that the Government is set to reduce import tariffs on certain consumer goods and set up additional duty-free stores. Indeed, we believe the upgrading of both the manufacturing and services sectors would be a key element during the 13thFYP period.

Conclusion

It has become clear to us that the Central Government will become more active in its effort on stabilising growth and managing market expectation in the near term, while reforms will continue to be carried out in a controlled manner. With more stabilisation tools to be introduced, we maintain our forecast that the Chinese economy will grow 6.5% in real terms in 2016. More details related to our view on the Chinese economy are available in the April issue of the Bulletin.

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