Watch the NPC for Policy Clues

Aidan Yao, Senior Emerging Asia Economist at AXA Investment Managers (AXA IM), summed up what to expect in the upcoming annual National People’s Congress meeting in China.

The annual National People’s Congress (NPC) will be held on 5 March and will run for the entire week. During the week-long meetings, the Congress will approve and release a number of reports from the State Council (the government work report), the Ministry of Finance (central and local government budgets), the NPC Standing Committee and the Supreme Court. For the market, two things will be of focus: 1) the 2017 economic targets, particularly that on GDP growth, and 2) any signals from the government on policy priority and direction. Below are some details on the two points and our expectations:

• Economic targets to be kept broadly the same. The GDP growth target is always the most scrutinized number in the set, given its importance in guiding the economy and official policies. We think that the government may tweak the wording of the target to be “around 6.5%” from “6.5-7%” in 2016. Recent rhetoric from senior leaders, including President Xi Jinping, has signaled a greater tolerance for slower growth in exchange for more supply-side reforms. Reflecting this in the new growth target is entirely possible. For investors, this wording twist should not be seen as a substantial change in the official stance, as maintaining economic stability remains the policy priority. We also do not expect major market reaction to the change, as the consensus is already pricing in a further growth slowdown to 6.4%, from last year’s 6.7%.
• Policy stance to hold steady. We expect no change to the policy combo of “active” fiscal policy plus “prudent” monetary policy. Last year’s shift towards fiscal stimulus has worked well in stabilizing the economy and market sentiment. However, economic fragility remains and continued fiscal supports are required to nurture the recovery. We think a further small increase in the fiscal deficit (to 3.5%) is possible, but the powerful channel of stimulus remains hidden off-the-government-balance-sheets, in the form of quasi-fiscal spending via policy banks and local government vehicles. On monetary policy, a shift towards risk management has become apparent by the recent changes in the People’s Bank of China’s (PBoC) macro-prudential framework, the tightening of shadow banking regulation, and the hikes of interbank interest rates. We think the NPC will reiterate the commitment to deleverage the financial system, curb debt growth, and manage asset bubbles.
• A firmer stance on reforms. The combination of tolerating slower growth and committing to faster reforms could deliver a positive surprise to the market. Recent actions from the government have hinted at an acceleration of reforms, particularly in areas of restructuring the State Owned Enterprises, SOE (with the State-owned Assets Supervision and Administration Commission, SASAC, signaling a speed up of mixed ownership reforms), over-capacity reduction (the National Development and Reform Commission, NDRC, indicating a broadening of capacity reduction across industries), economic opening-up (easing restrictions on foreign direct investments, and encouraging mergers and acquisitions in the services sector), and financial liberalization (improving bond market infrastructure – by allowing foreign investors to hedge FX risks – in a bid for index inclusion). Optimism on SOE reforms has been reflected in the equity market, resulting in very strong A-share performance year-to-date.
• How China views the Sino-US relations. One of the highlights of the NPC is the press conferences held by various ministries, but the key one to watch will be the closing one hosted by Premier Li Keqiang on 11 March. At the conference, the Premier is expected to answer questions from local and foreign media covering many topics, potentially including the CN-US relations, geopolitics in the South China Sea, One Road One Belt, and much more. The Premier’s comments on the new US administration will be of particular interest to gauge China’s stance on various policy proposals from Trump. Even though the recognition of “One-China Policy” has eased the tension, China remains alert on trade protectionism and US’ FX policies. On the former, we think that China will retaliate against any measures from Trump that violate World Trade Organization (WTO) rules, and this view appears to be endorsed by recent comments from China’s Commerce and Trade ministers.