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What we should expect from China's NPC meeting
Package of aggressive fiscal policy likely, with strong focus on stimulating domestic demand
21 May 2020 | The Asset

THE annual National People’s Congress (NPC), scheduled to begin on May 22, is highly anticipated by the global financial markets and investors. As the meeting sets the tone of China’s future economic development post-Covid-19, The Asset summarized the top three key upcoming announcements and potential policies to watch for.

GDP forecast

Covid-19 has hit China’s GDP growth hard, with a -6.8% GDP growth in Q1, its worst in over 40 years. According to David Chao, global market strategist, Asia-Pacific (ex-Japan) at Invesco, it’s possible that Chinese leaders may choose to scrap the growth forecast altogether.

Chao expects a 2020 growth forecast of 2-3% or an alternative forecast such as desired 2020 growth levels or targeted growth for fiscal spending, household income or aggregate financing.

Prior to the Covid-19 outbreak, J.P. Morgan Asset Management expected the Chinese government to lower the growth target to “around 6%” in 2020 from the 6-6.5% range target and the 6.1% actual outcome in 2019. This would have ensured that China achieved its political commitment of doubling GDP from 2010 to 2020, which requires at least 5.6% growth in 2020.

According to BNP Paribas China, China’s reported growth recovery for April exceeded expectations across the board, supporting their forecasts that GDP will grow by 2.5% in Q2, 5.5% in Q3 and 6.9% in Q4. Despite the remaining growth gap between output and demand, the measure of quasi-aggregate demand recovered from a 16.5% y/y slump in Q1 to show almost flat growth in April. 

“With risks and uncertainty ahead relating to exports, we expect the legislative meeting of May 22-28 to adopt further policies to promote domestic demand,” reveal X.D. Chen, chief China economist, and Jacqueline Rong, senior China economist of BNP Paribas.

Fiscal policy

China’s fiscal stimulus commitment has been relatively smaller compared to developed countries. According to Invesco, the fiscal stimulus only accounted for 2.5% of China’s GDP while the percentage in the US is around 15% and 20% in Japan. 

“It’s likely that Beijing will set its budget deficit target to be around 3.5% of GDP or slightly higher – from the 2.8% in 2019. Overall fiscal stimulus measures could amount to around 5% of GDP, with a strong possibility of it being higher as the global economic situation deteriorates,” Chao notes.

According to BNP Paribas, China has underscored the leadership’s awareness of the deterioration of external political and economic fundamentals and highlighted policy preparations being made in terms of both broad approaches and details. Despite the relatively good situation in terms of its domestic Covid-19 outbreak, China faces mounting risks and uncertainty relating to the security of supply chains, exports, inflow of foreign capital and technological developments.

“Accordingly, we expect a strong focus on stimulating domestic demand. We expect the legislature to adopt a package of aggressive fiscal policy, with a de-facto fiscal deficit to the tune of 15% of GDP, even wider than the 13% deficit in 2009,” say Chen and Rong.

In addition, as the NPC will give guidance on key specific sectors or industries that could drive economic growth post-Covid-19, such as new infrastructure and 5G, it is also important to keep an eye on new policies coming out in favour of those strategic sectors.   

“The bulk of the fiscal stimulus measures will go to infrastructure projects, financial relief measures and, to a lesser extent, its digital infrastructure initiatives. If China’s 2H 2020 economy underperforms, Beijing may then consider measures to stimulate the property sector – which policymakers are loathe to do at the moment,” Chao notes.  

Monetary policy

Since the outbreak of Covid-19, the People’s Bank of China (PBoC) has taken several measures to provide financial assistance to SMEs by injecting liquidity into the system and funnel loans. Chao expects the PBoC to inject more liquidity via reserve requirement ratio (RRR) and medium-term lending facility (MLF) cuts in the near-term. 

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