SINGAPORE (May 21): China’s National People’s Congress (NPC) will take place for about a week from tomorrow, May 22. The annual Congress is crucial for the Chinese government as it is a platform for announcing key macroeconomic targets like its GDP growth target and for highlighting national priorities such as financial stability, anti-corruption and environmentalism.
For China watchers, the Congress is a rare opportunity for insight to the Communist Party of China (CPC)’s possible policy stance in months ahead, giving clues to whether the emphasis might be on monetary or fiscal policy, whether the bulk of spending will be on- or off-budget and whether financial policy will be prudent or appropriate.
What to watch for at the Congress
This year’s NPC meeting was postponed from the beginning of March to end May due to the COVID-19 pandemic and faces a particularly challenging slate of issues. For example, the gathering will have to navigate the ongoing domestic demand downturn, slumping external demand, the pressures of large import commitments to the US and growing technology restrictions. The latter will potentially be most vexing, as China is trying to boost its tech-dependent domestic manufacturing sector at the same time as international companies are actively trying to “de-Sinocise” their global supply chains.
Against this backdrop, we recommend that international China watchers pay extra attention to:
The full-year 2020 GDP growth target – Although there are some signs that China’s economy is hewing to a tepid and uneven V-shape recovery, the government’s official 2020 GDP target is likely to be junked due to the sheer scale of ongoing demand- and supply-side disruptions. That said, the debate continues as to whether the official 2020 growth target should instead be lowered to “around 3%”, thereby providing some guidance to government officials. There is also some chatter about framing an average growth target for 2020 and 2021, which could hug the 5% level and provide a medium-term (face-saving) segue to coming off of the 6% level.
Efforts to maintain domestic stability – As the risk of an outright “cold war” with the U.S. have risen, China needs to focus on maintaining domestic confidence in the CPC. Shoring up employment and ensuring that policy easing efforts do not lead to a surge of speculative activity are crucial to this goal. As term premiums have risen in China, we have seen some interesting debate about whether the People’s Bank of China (PBOC) should engage in quantitative easing (QE), as most other G3 central banks have done. The consensus seems to be no QE just yet for China, with policy support likely to be limited to a benchmark deposit rate cut at best. As a result, we expect the Chinese yuan (CNY) to take the brunt of any adjustment arising from deterioration in sentiment in the event that Sino-U.S. relations deteriorate further or if upcoming macroeconomic data releases disappoint. This is one reason why we prefer forex hedging over holding CNY bonds.
Fiscal stimulus – The on-budget portion of China’s 2020 deficit is expected to breach the 3% ceiling, signalling an expansionary fiscal policy stance that we expect to amount to around 3% to 5% of domestic GDP. As fiscal stimulus rolls out, we expect heavy emphasis on 5G infrastructure, data centres, artificial intelligence and electric vehicles rather than on more hard infrastructure such as roads and railways.
A large portion of this spending will likely be funded via special issuance of local government debt but at least 1% of GDP worth could be financed via rarely used special central government bond issuance – which was used sparingly to recapitalise banks in the late 1990s and to fund the China Investment Corporation (CIC). Recent increases in Chinese Government Bond (CGB) yields reflects investors pricing in a stimulus package at the upper end of the 3% to 5% of GDP range.
The decision made by fiscal authorities during the NPC meetings will set the tone for the PBOC. In the event of a larger (-than-expected) stimulus package, a benchmark deposit rate cut seems unlikely. On the other hand, if the stimulus package (and expected growth) is at the lower end of expectations, rate cuts and other measures to boost liquidity are likely.
Consumer Price Index (CPI) disinflation and Producer Price Index (PPI) deflation have intensified more than expected over the past two months. What’s more, while exports and IP have recovered more quickly than expected, the broader domestic demand picture has lagged and it is clear that output gaps are significant. As a result, expectations are high that fiscal authorities will deliver a stimulus package of sufficient magnitude to preclude PBOC easing. This is why we remain bullish CGBs. That said, it remains unclear whether we the Congress meetings will provide any insights to the government’s medium-term fiscal framework, which would potentially clarify the speed of exit strategies.
The Phase One trade agreement – We expect the authorities to remain conspicuously silent on the Phase One trade agreement between China and the U.S., as the prospects of the former meeting its import purchase commitments remain un-even at best. The agreement calls for China to ramp up imports from the U.S. by almost US$200 billion by the end of 2021. This is a considerable ask as it amounts to about 1.4% of China’s GDP and comes at a time when the country’s output gaps are large, its economic recovery remains uneven and U.S. restrictions on tech transfers intensify and cloud the medium-term domestic supply-side outlook. In this context, stimulating the economy to raise imports seems increasingly at odds with maintaining external balance and raising domestic employment.
Other topics of interest – The NPC is also likely to discuss matters such as a comprehensive (draft) civil code which contains provisions governing property rights, contract law, personality rights, marriage and family, inheritance and torts. Pronouncements on these matters are likely have medium-term implications for China’s institutional framework, internal governance and macroeconomic performance.
A brief primer on the National People’s Congress
China’s NPC is the broadest organ of state power, bringing together the countries roughly 3,000-member national legislature to represent the interests of provinces and local constituencies. Unlike other parliaments, however, the CPC overwhelmingly comprises the NPC and: 1) endorses rather than debates key objectives of the state’s economic and social policies (both internal and external); and 2) sets a detailed plan for how delegates are to implement the state’s economic and social policies when they return to their provinces and other related lateral (national level) institutions.
The NPC meets for around 10 days in early March each year to set key macroeconomic targets, establish policy goals and establish the tools and methods to achieve them. The targets, goals and policies endorsed by the NPC are ultimately meant to: 1) help maintaining the supremacy (and legitimacy) of the State and the CPC; and 2) ensure annual progress toward the party’s centennial goals, which include “doubling per-capita incomes’ by the end of 2020 to transform China into a moderately prosperous society by 2021” (the CPC’s centennial year).
Aninda Mitra is senior sovereign analyst for BNY Mellon Investment Management
