After a 78-day delay due to the outbreak of coronavirus, the third annual session of China’s 13th National People’s Congress (NPC) – part of the annual Two Sessions meetings – was held in Beijing in late May.
The main emphasis of the NPC this year was to prioritize job creation and ensure living standards while maintaining effective epidemic control. To contain the spread of coronavirus, China has imposed travel and quarantine restrictions, which resulted in the first economic contraction in decades during the first quarter. Starting from March, China has stepped up efforts to resume economic activities, but the health and economic risks surrounding the economy still embrace growth uncertainties.
To cushion the economic shocks, China’s policymakers continue to launch countermeasures to provide relief to citizens and enterprises. The Central Government will increase spending, tax relief and subsidies for virus-hit sectors that are especially vulnerable to job losses, while the People’s Bank of China (PBOC) will maintain ample liquidity in the financial system to spur bank lending and relieve the financial burden of enterprises.
In general, although a growth target for 2020 has not been set in the Government Work Report, China will ensure the development goals against poverty are achieved, and the building of a moderately prosperous society is completed in all respects.
We are of the view that China’s economic growth has shown signs of stabilization in the second quarter of 2020 and the forward-looking economic indicators point to solid growth in domestic demand. Economic activities are expected to rebound strongly in the second half of the year, and we forecast that GDP growth will reach 2.0% in 2020.
2020 economic growth target dropped
As China faces growth headwinds including coronavirus shocks, trade disputes, global economic recession and heightened financial volatilities, the high degree of both domestic and external uncertainties remains intact. This has prompted China’s policymakers to abandon a specific growth target for 2020. Instead, they will concentrate on ensuring stability in the six fronts, namely employment, finance, foreign trade, foreign investment, investment and expectations as well as security in the six areas, namely safeguarding employment, people’s livelihoods, the development of market entities, food and energy security, the stable operation of industrial and supply chains, and the smooth functioning of society.
In sum, China remains wary of a second wave of pandemic on a lack of immunity among China’s population as well as unavailability of effective medicines and vaccines. We are of the view that China aims to strive for healthy recovery in all areas of economic and social development while implementing regular and effective epidemic prevention and control measures for the rest of 2020.
Despite all the challenges facing China, policymakers will strengthen the size of stimulus plans to revitalize growth in an attempt to prevent the economy from losing growth momentum and cope with profound changes in the external environment, thus ensuring a more sustainable path of economic recovery.
Targeting job creation to alleviate economic pressures
Creation of more than 9 million new urban jobs along with maintaining the surveyed urban unemployment rate at around 6.0% are the main targets of the Government Work Report. Amid a deep slump in economic activities, the unemployment rate has surged, posing a big challenge to China’s economic stability. The growing number of jobseekers intensifies pressure on China’s policymakers to treat job security as critical in maintaining economic and social order. In sum, China aims to launch several accommodative stimulus measures through monetary, fiscal and investment channels to support the economy, ensuring the continuation of job creation.
Targeting budget deficit at 3.6% of GDP to counteract coronavirus fallout
China is targeting a higher 2020 budget deficit of at least 3.6% of GDP, which will allow for increases in government spending, providing tax and fee relief, boosting confidence and strengthening the social safety net for vulnerable sectors.
For bond issuance, the quota on local-government special bond issuance is fixed at RMB 3.75 trillion (HK$4.1 trillion), up from 2019’s RMB 1.6 trillion, while the Central Government will issue RMB 1 trillion in special treasury bonds for anti-coronavirus purposes. Local governments can use the proceeds of the bond issuance to provide financial relief to households and SMEs in some regions hit hardest by the pandemic as well as invest in building infrastructure, including public health and transportation facilities.
In addition, China will extend the tax and fee reduction plan, through which companies will obtain savings of RMB 2.5 trillion. The plan will stimulate business incentives to increase investment in services and consumer goods industries as well as boost domestic consumption. In sum, deployment of proactive fiscal stimulus helps shore up China’s economy and strengthens recovery momentum.
Pursuing a prudent monetary policy in a more flexible and appropriate manner to support growth stabilization
China’s economy is facing a potential drag from the health crisis. Accommodative monetary policy plays a key role to help stabilize the financial system and resist growth deceleration. Although global central banks have aggressively conducted monetary easing to battle a broad-based downturn, the People’s Bank of China (PBOC) aims to keep market liquidity at a reasonable and ample level to boost economic growth. In sum, China will adopt a prudent approach with flexibility for liquidity management in 2020 in order to maintain economic and financial stability.
Under this monetary stance, we expect the PBOC will roll out a mix of targeted lending facilities including RRR cuts, repo, standing lending facility (SLF), short-term liquidity operation (SLO), mid-term lending facility (MLF), and pledged supplementary lending (PSL), central bank bills swap (CBS), thus lowering loan prime rate (LPR) and entailing more flexibility to accommodate capital demand in 2020.
Investment in ‘new economy’ infrastructure to boost growth momentum
Due to the complicated and volatile external environment, China’s economy faces surging downside risks. Stimulus plans can only provide short-term relief to the economy but investment in technology and innovation will foster a rapid development of new industries, thus upgrading and transiting China’s economy to more sustainable growth. The Government Work Report has approved an increase in the quota of special bonds issuance, thus strengthening investment in traditional and new infrastructure to advance the upgrading of traditional industries, and boosting investment in emerging strategic industries.
Promoting the application of big data, AI, the 5G mobile network, info tech, high-end equipment, biomedicine, new energy, new materials and other emerging industrial clusters will help China become a leader in “new economy” infrastructure. As new infrastructure is conducive to advancing the industrial upgrading, nurturing new growth drivers and promoting employment and entrepreneurship, we are of the view that China will further strengthen its innovation-driven development strategy, thus making the economy more innovative and competitive.
Shaping consumption market to generate growth resilience
The Government Work Report highlights that China’s domestic demand has enormous potential to support the country’s economy. Strengthening the recovery of consumption, enlarging the size of the consumption market and improving the consumption environment will help revive the growth momentum of economic activities. Stabilization of employment and enhancement of income growth, which are supported by Government’s countermeasures, provide stimulus to consumer spending.
The plans will support the recovery of food and beverage, brick-and-mortar shopping, culture, tourism, domestic services, and other consumer services, promote the integration of online and offline consumption, develop elderly and child-care services, and enhance the roll-out of e-commerce and express delivery services in rural areas. We believe that China’s consumption market will generate a strong wave of growth to support the real economy.
14th Five-Year Plan to promote sustainable economic growth, improve livelihoods, and prevent and defuse risks
The Government Work Report indicates the that tasks laid down in the 13th Five Year Plan will be completed this year, and the 14th Five-Year Plan (2021-2025) will start to be draw up. In sum, the external environment could be even more complicated, uncertain and challenging during the 14th Five-Year Plan, which will be a crucial period for transforming the path of development, refining economic structure and fostering new growth drivers.
We are of the view that China will aim to boost infrastructure development, enhance the level of innovation, improve competitiveness in different sectors and better protect the environment in devising the country’s development blueprint for the 2021-25 period.
Banny Lam, Managing Director, Head of Research, CEB International Investment Corporation