Market Views: What do the “Two Sessions” say about China?

What are Beijing's economic priorities this year, and how much will China's economy expand in 2020? Seven experts shared their opinions.
Market Views: What do the “Two Sessions” say about China?

China's tightly-managed economy rarely misses its GDP growth target. That all changed with Covid-19. In the first quarter of this year, China's economy contracted 6.8% year-on-year - its worst GDP performance in over 40 years. 

Domestically, unemployment has soared as lockdowns curtailed consumption, exports and tourism. A bigger challenge is the country's intensifying tensions with the US, which will likely get worse ahead of the US elections in November.

A drawn-out trade war that started in 2018 culminated in a January pact, which committed China to buy vast quantities of US products over 2020 and 2021. But the future of the deal now hangs in the air as the two sides engaged in a war of words over issues ranging from the origins of the Covid-19 pandemic, Huawei's alleged corporate espionage to corporate frauds of Chinese companies listed in the US.

Hong Kong has become the latest battleground. On the final day of the annual meetings of the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC), known as the Two Sessions, China approved a controversial proposal for sweeping new national security legislation in Hong Kong. The move has already sparked a backlash from the US.

Amid the immense uncertainty over trade and its foreign relations, China has also not set a GDP growth target for 2020. Premier Li Keqiang said in one of the sessions that the outlook for this year was "difficult to predict". However, China announced additional fiscal stimulus measures equivalent to about 4.5% to 5.0% of its GDP. Still, some economists are sceptical that the measures will be adequate to revive an economy faced with major challenges at home and abroad.

So what are the options for Beijing to deliver growth? What policies will it likely roll out this year, and how much will its economy expand this year, given that it has not set a target? 

Seven experts have shared their views on this subject.

Their contributions have been edited for clarity and brevity.

Paul Hsiao, Asia economist 
PineBridge Investments

Paul Hsiao

Labour market indicators remain the weakest they have been for some time, and even if the central government meets its job growth requirements, it will still likely leave many millions unemployed compared to where they were last year. A lack of job growth and wage increases will surely weigh on the economy during the second half of the year, so it's no surprise to us that the government would eschew a hard GDP growth target this year.

The US-China relationship is also another key risk for the rest of the year. First, the phase one agreement signed in January contained provisions that were very aggressive for China to meet, including large-scale agricultural product imports. It is unlikely for the Chinese to reach their end of the deal by year's end.

President Donald Trump’s threat of delisting Chinese companies from US stock market exchanges has also further fuelled the tension. Second, the US has put itself in a bind with the Hong Kong Human Rights and Democracy Act that was passed last year, which may come into conflict with China's new national security law that was announced during the NPC.

The government has been setting a looser band for its GDP expectations in recent years instead of a hard number, and given the uncertainty from the coronavirus outbreak and a more acrimonious trade relationship with the US, this is not surprising. We expect growth this year to trend within a 1% to 3% range, depending on the severity of any coronavirus resurgence, developments in the US-China trade relationship, and the revival of demand.

Kevin Kang, chief economist 
KPMG China

Kevin Kang

It is the first time since 2002 that the Chinese government has stopped setting a GDP growth target. This is due to the uncertainty caused by the coronavirus pandemic, but it also reflects Beijing’s stance of focusing more on maintaining stability and people’s livelihoods, instead of pursuing short-term growth.

To do that, the top priority is set on maintaining employment. The government has pledged to create over 9 million jobs this year, which is a bit lower than last year’s target of 11 million. Based on the fiscal numbers released in the Government Work Report, we estimate the government is still aiming at a nominal GDP growth rate of about 5.4% this year.

Fiscal policy is expected to play a major role in supporting economic growth, especially through investment in three areas: new infrastructure, new urbanisation and major construction projects such as transportation and water conservancy.

We also expect more monetary easing in the near future as the government calls for further growth in money supply and total social financing, a measure of total liquidity to the economy, to levels significantly higher than last year's.

Alicia García Herrero, chief economist for Asia Pacific

Growth will remain subdued (below 2%) for the rest of the year, even after the announcement of a big stimulus package (especially fiscal) at the NPC meeting in the weekend.

While this yearly event is always important, this year’s was crucial as 2020 marks the end of two key cycles of economic planning: the current Five-Year Plan, and the end of the 10-year period during which the country aimed at doubling its income. Expectations were running all the higher that the Chinese economy is reeling from unprecedented levels of uncertainty due to the coronavirus epidemic.

The NPC has made it clear that monetary policy will push rates lower, and that local government bond issuance will be double that of last year. Still, the stimulus will find it hard to drive growth above 2% due to the poorly devised transmission mechanism, increasing decoupling from the US (and the West more generally) and the very negative sentiment.

China’s leadership opted not to set a growth rate this year because it would have been unachievable or too low, so they preferred to have more flexibility versus guiding expectations as in the past. This also suggests rather low expectations for economic activity this year and probably the next, as unemployment rate rose to 6% in April.

Chen Dong, senior Asia economist
Pictet Wealth Management

Chen Dong

We believe that the worst part of the Covid-19 shock to the Chinese economy is already behind us. The economy is on track to recover from the slump in the first quarter.

We expect the growth rate to gradually pick up throughout the year, and by year-end, the economy may reach its trend growth. Our 2020 GDP growth forecast for China stands at 1.2% for the time being. The key challenges are weak external demand due to the pandemic and a slow recovery of the services sector.

The first set of measures, including tax breaks and loans, aim to help small and medium-sized enterprises to get by without going bankrupt. After Covid-19 is brought under control, the priority is to phase out various quarantine and social distancing measures so that the economy can get back on track. We see that this is happening, and this is the most important step for recovery.

Given the weak external demand, the government has to boost domestic demand. Infrastructure investment is the most obvious option. The quota for local government special bonds issuance increased by Rmb1.6 trillion ($223.5 billion) in 2020 from last year, which specifically targets infrastructure investment. There are also measures boosting consumption, for example, of automobiles.

Wang Qian, chief economist for Asia-Pacific

Wang Qian

We think the targets set in the Government Work Report delivered during the Two Sessions focus on protecting its economic growth and job market, rather than generating significant upside as per previous easing cycles.

The bottom line is ultimately social stability, and there are many ways to achieve this, such as strengthening the social security network and providing financial relief to affected corporates and individuals. This way, even if economic conditions place strains on the labour market, government subsidies can help offset a large part of that decline and keep its people satisfied. 

As a result of this higher tolerance of slower growth, we have seen a structural change in China’s policy reaction function. While there is an encouraging ramp-up in the size of fiscal and monetary stimulus announced, it still pales in comparison with previous easing cycles. This suggests that China is unlikely to be able to save the global economy again as happened in the post-2008 global financial crisis period.

We maintain our 2020 GDP forecast at around 2%, with the downside risks from a potential second wave of Covid-19 and renewed US-China tensions cushioned by the flexibility provided by fiscal and monetary policy.

David Chao, global market strategist for Asia Pacific ex-Japan 

David Chao

Even though China has done a good job in getting the supply and production side of the economy back to normal, expectations for a V-shaped economic recovery starting in the second quarter or even in the second half of 2020 are becoming less likely due to continued weakness in domestic and global demand.

China’s fiscal stimulus response to Covid-19 is smaller than those deployed in other major economies such as the US (around 15% of GDP), Japan (around 20%) or Germany (around 60%), but I’m not surprised by Beijing’s calibrated measures because the biggest worry now for Chinese policymakers is how long this weakness in demand persists. 

Even with the additional fiscal stimulus, easing monetary policies and wage subsidies, there still could be a wave of businesses collapsing and bankruptcies to come. For example, just think about the number of downward GDP revisions that we’ve seen around the region and the number of extra fiscal stimulus measures announced in places like Singapore and Hong Kong.

Thus, it makes sense that Beijing policymakers have been restrained so far, in order to save a few more bullets in the face of continued global economic uncertainty.

Celeste Tay, macro strategist  
Loomis Sayles

We expect a rebound in activity in the second quarter after a record contraction in first three months of the year. High frequency indicators suggest that production has bounced back significantly.

While consumption remains patchy, there has been some incremental improvement in auto sales on policy support and some service sector recovery towards the later part of April, into May. The sustainability of the recovery, however, needs to be watched as patchy consumption, a weak labour market and poor external demand are major headwinds to sustainability of the recovery. 

It appears Beijing has identified two key areas to tackle. The first is employment, which it plans to underpin in order to support consumption; the second is support for small and medium-sized enterprises, which are the backbone of the economy, by allowing for the viability of these firms through liquidity support. We expect both fiscal and monetary support, though expect these supports to be targeted as Beijing remains cognisant of financial stability risks. 

Given the uncertainties surrounding the external outlook, we think Beijing correctly took the opportunity to walk away from a GDP growth target. The growth target has at times conflicted with the other facets of stability that Beijing has increasingly emphasised. At this juncture, employment stability has been placed on the front-burner. We expect a small contraction of 1% for 2020.

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