China puts investors on edge by skipping formal GDP target
The Chinese government abandoned its decades-long practice of setting an annual target for economic growth amid the storm of uncertainty unleashed by the coronavirus pandemic, and said it would continue to increase stimulus.
Speaking Friday morning at the National People’s Congress in Beijing, Premier Li Keqiang delivered an annual policy address that laid out a renewed focus on maintaining employment and investment. Against a backdrop of escalating tensions with the U.S., Li said Beijing remains committed to implementing the terms of the ‘phase one’ trade deal.
With more than US$500 billion in infrastructure bonds to be issued this year and more monetary easing on the horizon, China is trying to cement a fragile domestic recovery without indulging in the kind of debt blowouts seen in the U.S. and Europe. The world’s largest exporter is therefore still reliant on other countries reining in the pandemic and on a reboot of global trade.
“We have not set a specific target for economic growth this year,” Li said, speaking in the Great Hall of the People. “This is because our country will face some factors that are difficult to predict in its development due to the great uncertainty regarding the COVID-19 pandemic and the world economic and trade environment.”
Shifting away from a hard target for output growth breaks with decades of Communist Party planning habits and is an admission of the deep rupture the pandemic has caused. Economists surveyed by Bloomberg expect China’s economy to expand just 1.8 per cent this year, its worst performance since the 1970s.
At the same time, Li gave a precise figure for the targeted budget deficit, widening it to more than 3.6 per cent of gross domestic product. Including the issuance of special bonds, that brings a broader measure of the deficit to more than eight per cent, according to Bloomberg Economics.
Analysts including Goldman Sachs Group Inc. economist Yu Song said the package was less aggressive than expected. Market sentiment was overshadowed by the announcement Friday that Beijing would impose national security legislation on Hong Kong, risking further confrontation with the U.S.
The CSI 300 Index fell 2.3 per cent on Friday, its worst reaction to the opening of the country’s annual National People’s Congress since the stock benchmark started in 2005.
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“Setting a target in such an uncertain economic environment would have been risky. Abandoning the decades-long tradition relieves the government of the straitjacket the annual target placed on economic policy. The challenge now will be to effectively guide expectations in the absence of the GDP target.”
Chang Shu and David Qu, Bloomberg Economics
Li said the government is setting a target for urban job creation of more than 9 million jobs, lower than the 2019 target of around 11 million, and a target for the urban surveyed unemployment rate of around six per cent, higher than 2019’s goal, according to the document.
The government’s official measures don’t capture the full extent of unemployment caused by the pandemic, which has hit both manufacturing and services hard. With jobs and income growth vital for the unelected Communist Party’s political legitimacy, stabilizing employment has become Li’s first priority.
“We will make every effort to stabilize and expand employment,” Li said. “We will strive to keep existing jobs secure, work actively to create new ones, and help unemployed people find work.”
Reflecting recent controversy over the ‘phase one’ trade deal with the U.S. signed earlier this year, before the pandemic broke out, Li said China will work with the U.S. to implement the agreement.
The wider budget deficit target implies a significantly larger shortfall than 2019’s target of 2.8 per cent. Greater spending on efforts to restart the economy and control the spread of coronavirus will be funded by issuing 1 trillion yuan (US$140 billion) in sovereign debt.
To help finance infrastructure investment, local governments will issue 3.75 trillion yuan in local special bonds this year, up from 2019’s quota of 2.15 trillion. Economists had forecast issuance of as much as 4 trillion yuan.
The government’s language on monetary policy was kept basically unchanged, with the stance remaining “prudent,” as well as “flexible” and “appropriate.” The English-language report said new monetary policy tools would be developed to “directly stimulate the real economy.”
“It is crucial that we take steps to ensure enterprises can secure loans more easily and promote steady reduction of interest rates,” according to the report. Li added that money supply will be guided “significantly” higher this year and that reserve ratios and interest rates will continue to be cut.
Key leaders sat in two rows behind Li’s podium, well spaced and without face masks. Officials behind were more closely packed and wearing masks, as were the hundreds listening in the hall. The Congress represents the centerpiece of China’s political calendar, though it has a rubber-stamp role. The meeting was delayed more than two months by the virus shutdowns.
Li detailed measures including continued implementation of VAT cuts, and a further 500 billion yuan in tax and fee reductions. The target for consumer price inflation was set at 3.5 per cent, higher than the usual ceiling and a reflection of continued high food-price gains.
Analysts said that while more stimulus was announced, the government’s ambitions for growth remain limited given the dangers of another run up in debt. China borrowed heavily to stabilize the economy after the 2008 crisis, and is taking a markedly different tack this time. At the same time, rising unemployment may force the government’s hand.
“I think the central government would like local governments to play a much more active role in relieving domestic unemployment and boosting domestic consumption,” Michael Pettis, a finance professor at Peking University, said Friday on Bloomberg Television. “The problem is, local governments are indebted up to their eyebrows. There’s really not much room for them significantly to increase debt.”
--With assistance from Miao Han, Lin Zhu, Yinan Zhao, Michelle Jamrisko, Jiyeun Lee and Michael S. Arnold.