China’s annual parliament gathering kicked off in Beijing on Friday with Premier Li Keqiang’s government work report abandoning an annual growth target. It also left its fiscal deficit target open at over 3.6% of GDP, with an eye to issue more government bonds as the world’s second-largest economy grapples with the impact of the coronavirus pandemic.
This follows the 6.8% contraction in real GDP growth in the first quarter, which has made the finance ministry and central bank more proactive via policy support and policy flexibility to try to create 9 million urban jobs.
“It should be noted that we did not propose specific targets for the annual economic growth rate, mainly because the global epidemic situation and the economic and trade situation are highly uncertain, and China ’s development faces some unpredictable factors,” Li said in his opening remarks.
The premier announced an array of fiscal measures while warning about falling consumption, investment and exports, and risks around job creation and financials.
# GDP growth target abandoned
# Fiscal deficit target of over 3.6% of GDP (2019:2.8%)
# Central govt special bonds issuance 1.0 trillion yuan
# Local govt special bonds target 3.75 trillion yuan (US$526 billion)
# CPI target of 3.5% (2019 around 3%)
# 9 million new jobs in urban centres
# China to pursue prudent monetary policy in a more flexible, appropriate way
'Tighten their belts'
Morgan Stanley analysts said in a note: “China announced a fiscal package that beat our expectation in the NPC with a slightly more dovish credit stance, despite omission of the GDP target due to uncertainty in global economy.” They also said the government bond issuance target of 9.5 trillion yuan surprised the market, which expected more.
Analysts say the revenue growth objective of -5.3% this year was too optimistic after the 14.5% contraction in the first four months of 2020.
“Beijing may still have to allow local government financing vehicles (LGFVs) to take on more debt despite the larger official deficit, the re-introduced CGSB issuance and a larger LGSB quota,” Ting Lu, Nomura’s Chief China Economist, said.
“This also means the PBoC will have to inject liquidity via RRR cuts and medium-term lending facility (MLF). We believe the PBoC will cut the RRR by as much as 100bp over the next couple of weeks. Premier Li also pledged rate cuts, and we believe the probability of a benchmark deposit rate cut (by ~25bp) could rise again,” Lu said.
Apart from raising its budget deficit target this year, China will issue another one trillion yuan ($140 billion) of government bonds for Covid-19 control, Li said, calling these "extraordinary measures for an unusual time".
The added funds will be transferred to local governments, to be primarily used for ensuring employment, meeting basic living needs, and protecting market entities.
Li also said governments at all levels should "tighten their belts", and that all types of surplus, idle and carryover funds will be withdrawn and re-allocated, to be put to better use.
Beijing will also issue 3.75 trillion yuan ($526 billion) in special local government bonds this year, in part to boost infrastructure spending in the virus-hit economy.
It will make further tax and fee cuts as well to help firms.
China has said it will tap its massive domestic consumer market to support the economy after external demand collapsed.
Urban unemployment 6% or more
But the official urban unemployment rate rose to 6% last month, with analysts saying the real figure could be even higher.
Li said the government aims to ensure the urban unemployment rate remains around this figure, through the creation of over nine million new jobs.
The government work report also stressed its commitment to the China-US phase-one economic and trade agreement, safeguarding the global multilateral trading regime and to actively participate in the reform of the World Trade Organisation. To do this, it said it will significantly shorten its negative list for foreign investment.
“The next key to watch is the policy implementation, especially on how to channel the additional funding to the most productive field,” Natixis Senior Economist Jianwei Xu said. “The latter is crucial as the return on investment has been sluggish in China over the past few years, and sustainable productivity growth has become a key factor for long-term economic growth.”
Tommy Xie, head of Greater China Research at OCBC Bank, told AFP this year's move was "realistic", reflecting global uncertainties from both Covid-19 and rising geopolitical tensions.
Analysts, however, believe the country still holds an implicit growth target of two to 3% percent for 2020, given its ambitious employment goals.
Premier Li said China was "keenly aware of the difficulties and problems" the country faces, with Covid-19 sending the world economy into recession. Although Beijing had "paid a large price" economically in its virus fight, he added it "was a necessary and worthy price to pay".
"At present, the epidemic has not yet come to an end, while the tasks we face in promoting development are immense," he said.
Stimulus measures below levels in other countries
Xie, however, said China's support measures remain below levels seen in other countries, lagging behind a global norm of around 10% of GDP. Using similar guidance, this would translate to around 10 trillion yuan in stimulus.
Instead, Beijing has left itself "an open-ended option" for stepping up fiscal support if the situation worsens, he said.
Song Houze, a research fellow at the Paulson Institute, believes Beijing likely expects a "slow and uncertain" recovery from Covid-19.
Iris Pang of ING said that official support was below her expectations, although the work report tends to understate the fiscal budget – meaning authorities could beef up numbers if jobs do not recover or trade tensions worsen.
She believed the report this year made "wise" political choices, given that having no growth target is less damaging than failing to meet a lowered one.
Currently, millions of citizens in the northeast of the country are believed to be living in lockdowns, although virus cases are reportedly down to a trickle. And while Beijing insists its efforts to curb the spread have been a success, questions remain about whether it underreported the numbers affected by the contagion.
- with additional reporting by AFP