©Reuters. People walk on a pedestrian bridge in the central business district (CBD) during the morning rush hour, before the opening of the National People’s Congress (NPC), in Beijing, China, February 29, 2024. REUTERS/Florence Lo
By Kevin Yao
BEIJING (Reuters) – China’s parliament is expected to unveil moderate stimulus plans to stabilize growth at its annual meeting starting on Tuesday, but may disappoint those calling for a detailed roadmap of bold policies to correct the country’s deep structural imbalances.
Premier Li Qiang will set economic goals for this year and deliver his first work report to the National People’s Congress (NPC), China’s legislative body, in the giant Great Hall of the People on the west side of Tiananmen Square.
A housing crisis, deepening deflation, collapsing stock markets and growing local government debt problems are putting enormous pressure on China’s leaders to make landmark policy decisions that will put the economy on solid long-term footing.
But analysts and political consultants expect the NPC’s agenda to focus more on short-term support for the faltering economy after the post-pandemic recovery quickly faltered.
Li could approve measures to improve the business environment and changes to promote technological innovation, but is unlikely to initiate major reforms that would need the green light from the Chinese Communist Party, they said.
“The top priority is to stabilize the economy,” said Zong Liang, head of research at the state-owned Bank of China.
Li is expected to set a growth target of around 5% for 2024 – the same as last year – to keep China on track towards President Xi Jinping’s goal of roughly doubling the economy by 2035 and achieve “Chinese-style modernization.”
This will require more fiscal stimulus, as last year’s 5.2% growth rate was likely greatly flattered by comparison with a COVID-hit 2022.
“We will face more pressure to reach the 5% target this year,” said a policy adviser who spoke on condition of anonymity.
China is expected to set a budget deficit target of 3% of economic output, but more importantly, it will announce plans to issue 1 trillion yuan ($139 billion) in special off-balance sheet sovereign bonds that could be used to finance strategically important sectors such as the food sector. and energy.
Citi analysts said the planned special bonds – along with the 3% deficit and a fixed issuance quota for local governments at 3.8 trillion yuan – would contribute about 1 percentage point to GDP growth.
At the end of 2023, China issued 1 trillion yuan in sovereign bonds to stimulate growth, which were included in the annual budget.
With spending on roads, rails and bridges producing increasingly low returns, investment spending could lean more towards “new infrastructure” such as 5G telecommunications, artificial intelligence and big data, policy consultants say.
China will continue to invest resources in technological innovation and advanced manufacturing, in line with Xi’s push for “new productive forces.” Some analysts have criticized this policy, however, saying it exacerbates industrial overcapacity, worsens deflation and heightens trade tensions with the West.
The People’s Bank of China, which on February 20 announced the largest-ever cut to its mortgage benchmark rate, is expected to continue gradually easing monetary policy, fearing that more aggressive moves could spur further capital outflows and exert greater pressure on the market. yuan currency.
But the central bank is expected to expand its promised supplementary lending (PSL) program to support the real estate sector, which will be vital to stabilizing the economy.
Overall, the additional stimulus would pale in comparison to measures taken after an earlier episode of market turbulence in 2015 and during the 2008-2009 global financial crisis, which ultimately healed the economy but left a mountain of debt. Larger moves could pose a threat to financial stability.
“Fiscal policy will undoubtedly be more proactive, but there is still limited appetite for bazooka-like stimulus,” analysts at Société Générale (OTC:) said in a note.
DEBATE ON REFORM
Reform advocates, concerned about record declines in consumer confidence and plummeting investor and business confidence, want China to return to a path of market-friendly policies and find ways to stimulate household demand.
The proposals include a relaxation of urban residency permits to free up the spending power of rural migrant workers; clipping the wings of large state-owned companies to help the struggling private sector compete; and redesign the tax system to address the root cause of rising municipal debt.
“Stimuli can only help solve short-term problems. We need to accelerate reforms. The economic situation may force the authorities to push for reforms,” the political adviser said.
The NPC is not the traditional venue for abrupt policy changes, which are usually reserved for events known as plenums, held by the Communist Party between its five-yearly congresses.
One such plenum was initially planned for the final months of 2023. The fact that it has not yet been scheduled has fueled investor concerns about political inaction.
Two political sources said it could happen by the end of the year if top leaders reached a consensus on steps to take.
Last week, a meeting of the party’s Central Commission for Comprehensive Deepening of Reform, chaired by Xi, pledged to “use the key tactics of reform and opening up to solve development problems.”
However, Beijing’s concerns about national security and social stability, as well as renewed uncertainty about what a potential return of Donald Trump to the White House might mean for China, weigh against bold moves.
“Reforms are very urgent, but we need to reach a consensus,” said a second political adviser.
($1 = 7.1949 renminbi)