Focus on growth and reforms: Preview of 2019 NPC & CPPCC sessions

The sessions of the National People’s Congress (NPC) and Chinese People’s Political Consultative Conference (CPPCC) will open on March 5 and March 3, respectively. The Premier will announce the economic and social development targets and fiscal and monetary policy stances for 2019 in his government work report delivered on March 5. We expect the Chinese government to continue policies aimed at keeping economic growth in a healthy range. In terms of fiscal policy, we expect the government to raise the budget deficit ratio, substantially increase the issuance of special local government bonds, and further cut taxes and fees. In terms of monetary policy, we expect the government to keep liquidity reasonably ample and market interest rates stable at a reasonable level. As stabilization of the macro environment will create favorable conditions for deepening reforms, we expect the government to further advance reforms of the fiscal & taxation system, the financial sector, and state-owned enterprises etc.

We expect the Chinese government to continue policies aimed at keeping economic growth in a healthy range. According to local government work reports, 23 provinces and municipalities lowered their GDP growth targets for 2019. The median 2019 growth target of provinces and municipalities is 0.25ppt lower than 2018. We think the national economic growth target for 2019 may be 6-6.5%, down from 6.5% in 2018. We expect China’s actual GDP growth in 2019 to be 6.4%, near the high end of the target range. We expect the government to maintain the guideline of making progress while ensuring stability and continue policies aimed at keeping economic growth in a reasonable range.

In terms of fiscal policy, we expect the government to raise the budget deficit ratio, substantially increase the issuance of special local government bonds, and further cut taxes and fees. We think the 2019 budget deficit ratio is likely to rise from 2018’s 2.6%, but is unlikely to exceed 3%. We think the issuance of special local government bonds may increase substantially from Rmb1.35trn in 2018 to over Rmb2trn in 2019, to make up for the government-managed fund deficit. Taking into account both general public budget and government-managed fund budget, the broad budget deficit ratio for 2019 may rise by more than 1ppt over last year. The new individual income tax law which came into effect on January 1, 2019 introduced six additional tax deductions and should significantly reduce the household tax burden. We think the government is likely to implement greater tax and fee cuts this year, including a 2ppt cut to the value-added tax rate for the top bracket and a potential cut to the corporate income tax rate.

In terms of monetary policy, we expect the government to keep liquidity reasonably ample and market interest rates stable at a reasonable level. The growth of total social financing (TSF) in 2018 was dragged down by the decline in off-balance sheet financing. As the decline in non-standard financing may slow in 2019, we expect TSF growth to stabilize and rebound. Financial conditions have improved significantly thanks to the easing of renminbi depreciation pressure since end-2018 and the strong growth of credit and TSF in January. The necessity and possibility of a cut to the reserve requirement ratio and benchmark interest rates have been reduced in the short term. While this round of credit recovery may be weaker and shorter than those in 2008-2009 and 2016-2017, monetary policy should keep interest rates in the interbank market basically stable.

Stabilization of the macro environment should create favorable conditions for deepening reforms. Thanks to the government’s counter-cyclical policy measures, China’s economic growth has begun to stabilize since 2H18 and downside risks have eased, creating favorable conditions for deepening reforms. In terms of fiscal and taxation system reform, we believe China will accelerate the establishment of a modern fiscal system, rationalize the fiscal relations between central and local governments, and improve the taxation system. In terms of financial reform, we believe China will improve the multi-level capital market system, increase the proportion of direct financing, promote equity financing, strengthen financial services for the real economy, and further control financial risks. In terms of SOE reform, we believe China will advance mixed ownership reform and introduce competition to stimulate the state-owned sector. The China-US trade negotiations are moving in a positive direction and the two countries are likely to reach an agreement in the near term. We expect China to further open up markets, lower entry barriers, reduce tariffs and increase imports.