Coronavirus delayed China’s annual National People’s Congress and it will dominate the NPC agenda as Beijing sets out measures for its economic recovery. We expect the government to downplay GDP growth targets, stressing instead the importance of stable employment, reducing poverty and ensuring people's livelihoods.
A low but realistic 2020 GDP target of 2 per cent to 3 per cent growth could be set, but for the first time in two decades there may be no numerical target – or possibly even a relative figure based on global growth.
The sharp contraction in GDP in early 2020 has already affected the labour market but official unemployment rates omit people classified as ‘employed, but not working’. Total job losses could be 15.8 million in the first half of the year including 13.6 million service-sector jobs. Renewed growth later this year should absorb almost half of the displaced workers, but the slack will affect consumption.
Stabilising the job market should thus top the policy goals at the NPC. Unemployment targets are likely to remain at 2019 levels but support will be concentrated on the hardest hit sectors and those that create jobs, such as small- and medium-sized enterprises, the self-employed, and export-oriented businesses.
We also expect more aggressive broad-based stimulus measures to lift demand. Fiscal measures are more powerful than monetary policies for boosting domestic demand and can target support on the worst-hit businesses and households.
The government is likely to budget for a fiscal deficit of about 3 per cent to 4 per cent of GDP in 2020, exceeding the long-standing limit of 3 per cent – though the actual deficit could be around 7 per cent. While spending rises strongly, tax revenues in 2020 will fall for the first time in over three decades because of tax cuts and the slowing economy.
Beside the fiscal deficit, we expect up to 3.7 trillion renminbi (USD525 billion) of special local-government bond issuance with stricter guidance to use them for infrastructure – not just traditional projects such as railways, roads and airports, but public facilities related to 5G, big data and artificial intelligence.
We also expect around 2 trillion renminbi – 2 per cent of GDP – of special central-government bonds. These could recapitalise banks to expand their lending capacity and prevent banking failures, or the proceeds might finance national-level infrastructure projects including healthcare.
Monetary-policy easing still has a role however, not least in supporting credit growth, particularly for private-sector SMEs. The loan prime rate, cut by 0.3 per cent in the months before the NPC, could be reduced by the same amount again during the rest of 2020 with expected cuts in the central bank’s reserve requirement ratio and deposit rate.
The growth shock caused by COVID-19 can also be an opportunity for Beijing to introduce new reforms to boost the economy, probably focussing on increased flexibility in allocating production factors, especially land and labour reforms. Giving farmers more rights in managing rural land not used for farming will increase their wealth and thus boost rural consumption.
And we expect Beijing to give guidance for strengthening relationships with other countries by measures that include cutting import tariffs.
First published 8 May 2020.
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