China’s National People’s Congress (NPC) got underway over the weekend, with the government setting its 2017 GDP growth target at around 6.5%, taken by many as a downgrade on the 6.5% to 7% target issued the year before.
The target is in line with what many expected, but the question everyone is now asking is what does it mean for the world’s second largest economy as well as the global economy.
HSBC’s China economic team, comprising Qu Hongbin, Julia Wang and Ma Xiaoping, take the view that while the Chinese government has slightly lowered its 2017 growth target, its pledge to “aim to do better in practice” suggests it’s not a ceiling but a floor, hinting that the government will not dial back policy easing significantly compared to the levels of a year before.
This table from HSBC provides a neat synopsis of the government’s newly-pledged targets for GDP, monetary growth, government expenditure, employment growth and capacity cuts to sectors still plagued by overcapacity, comparing them to the targets set last year along with how the government performed in practice.
“To support growth, the fiscal deficit target is being set at 3% of GDP. Although slightly smaller than our expectation, it is sufficiently supportive of economic growth at the current juncture,” says HSBC.
“Compared with 2016, the fiscal policy mix points to a bigger focus on cutting corporate taxes and fee charges to revive private business investment.”
HSBC says that if the fiscal policy mix can reinforce or even speed up the recovery in business investment “it will arguably be more helpful for growth at the current juncture, even if the overall deficit remains unchanged”.
From a monetary policy perspective, the bank says that while the government lowered its targets for monetary growth — M2 and total social financing (TSF) — it doesn’t see that as a policy tightening signal from the People’s Bank of China (PBoC), noting that both targets are at “accommodative levels and should prove sufficiently supportive in 2017”.
As such, HSBC says that monetary policy will remain neutral and focus on financial stability in 2017.
It’s an outcome many will watch carefully given the widespread view that easy fiscal and monetary policy last year assisted near-term growth by simply adding to the nation’s debt burden, pushing financial stability concerns into the background.
Related to financial stability in the nation’s corporate sector, HSBC said that the government also outlined further capacity reduction targets while emphasising a more market-driven approach in order to retire more “zombie” companies.
That was seen in the government’s targets to further reduce steel and coal production capacity this year, a factor that will stir up more interest than usual in Australia given these moves last year led to enormous price gains in Australia’s two largest goods exports by dollar value, iron ore and coal.
The government announced capacity cuts of around 50 million metric tonnes for steel and around 150 million metric tonnes for coal in 2017, on top of the targets of 45 million and 250 million respectively that were exceeded a year earlier.
Compared with 2016, HSBC said there was more government emphasis on “market mechanism” rather than administrative measures, suggesting to the bank that this could mean “capacity reductions will be more driven by identification of zombie companies and can result in more debt restructuring and write-off”.
On the housing market, which assisted the economic recovery in the latter parts of last year, HSBC said that a differentiated approach has been adopted by the government this year with policies in tier 3 and 4 cities — the smallest in the nation — focused on de-stocking.
On the other hand, it says that policies in China’s largest cities are centred around encouraging an increased supply of residential land and to better regulate development and sales activity, coming on top of previously announced restrictions to reduce demand.
HSBC also said the government’s reforms to the financial sector will focus on strengthening the ability of firms to serve the real economy.
“(The government) also discussed the need to monitor financial stability risks, related to non-performing assets, bond defaults, shadow banking, and internet finance,” it said.