Yesterday and overnight, China sensitive stocks took off again on hopes that China’s National Party Congress signaled a renewed push for growth. HSBC has wrap on proceedings:
Premier Li on policy easing, growth slowdown and reforms
Premier Li said today that Beijing has sufficient policy ammunition to counter disinflationary risks and maintain GDP growth above the bottom line at a NPC press conference. We believe this implies more easing measures will be deployed in the coming months. The Premier emphasized that the debt problem can be solved through ongoing fiscal reform and restructuring. More individual defaults would be allowed provided that they do not trigger systematic risks. He also noted that China currently ranks around 80th in the world on the basis of per capita income and still needs to grow at a reasonable pace. Reducing red tape remains on top of the reform agenda, and is expected to play the dual role of giving market forces a bigger role and stabilising the labour market.Policy ammunition
Although the growth target is lowered to around 7% in 2015, Premier Li assured the audience that policy makers have sufficient ammunition to maintain economic growth within a reasonable range. As we have highlighted since 2014, Beijing has a lot of manoeuvring room on the monetary as well as fiscal fronts. We believe the growth target of 7% for 2015 mostly likely represents Beijing’s bottom line on growth. As economic activity data have weakened further in 2015 and growth is likely already close to the bottom line, more policy easing, most likely monetary policy easing will be delivered in the coming months, if not weeks (see China February Activity: Further weakness in early 2015, 11 March 2014).Financial risks
On the question of debt, Premier Li said that China’s overall debt level is manageable. China has a high domestic saving rate of around 50% of GDP, and more than 70% of local government debt is used to fund investment, rather than consumption. Many investment projects have returns. This is in line with our long-standing view that, first and foremost, the risk in China’s local government debt is duration mismatch. There is a closely related issue of moral hazard (due to implicit guarantees) in many ‘backdoor’ financing, which is in the process of being addressed by fiscal reform (see China NPC V: A new QE plan in China? 11th March 2015).Premier Li also stated that the government will allow individual cases of defaults to occur, and these will be settled by market mechanisms. The government will closely guard the bottom line on systematic stability through introduction of deposit insurance scheme, and the development of direct financing (equity and bond market) to support growth.
Developmental focus
As we have highlighted in our note on this year’s government work report, the focus on China’s development over the medium term is being given a more prominent position (see China NPC: Government Work Report lowers growth target, signals more easing, 5 March 2015). Premier Li discussed China’s low per capita GDP, which ranks around 80th in the world. There are 200 million people still living below the poverty line as defined by the World Bank. This means there is still a long way to go. It also means that it is necessary to maintain a relatively strong pace of economic growth over the medium term. The reforms and the ‘structural upgrading’ serve the purpose of building a more sustainable foundation for development in the next decade.Environmental regulations
The main objective in 2015 is stricter enforcement of environmental protection laws and regulations. Premier Li said that the penalties for companies which disregard or breach rules should be high enough to act as an effective deterrent. The central government will ensure the environmental agencies have the necessary ‘teeth’ to enforce the rules. Pollution reduction targets are very high up on the agenda in 2015, and will cover changes to industrial structure as well as the quality of petroleum products.The emphasis on enforcement suggests that the government is aware of one of the fundamental reasons behind China’s pollution problems, which is that environmental agencies are often overruled or disregarded by other economically more powerful players. Given the regulations more ‘teeth’ can potentially be a very effective way to reduce the levels of pollution, while maintaining a necessity pace of economic development.
Reforms
Reducing red tape is still on top of the government’s reform agenda in 2015. This serves the dual roles of giving market a bigger role and acting as a stabilizer on employment.Premier Li reiterated his long-standing support for entrepreneurship and reflected on the important roles played by the Household-Responsibility system and urban migration in China’s rapid development over the past decades. The government has already achieved its five year target of reducing one third of all administrative approvals within two years of coming to power. In 2015 the central government will remove 200 out of 1200 supervisory rights previously delegated to local governments. It will also make public lists of power and responsibilities for all provincial levels of governments in 2015 to create a level playing field for businesses. The government will further relax market access, and provide favourable rent, seed capital and tax treatment for small start-ups.
Cutting red tape also matters for employment as it gives businesses more room to grow. As we have said many times, the labour market will remain a key factor to watch in 2015. Although high frequency data points are rare, we do track a combination of wage, income growth as well as the employment indices within the HSBC Manufacturing and Services PMIs. These corroborate with the headline economic activity data and suggest that more counter-cyclical easing measures are warranted at the current juncture.
There is nothing new here. This is steady as she goes structural reform with support for the glide slope to slower and less commodity-intensive growth. I didn’t even bother reporting Li’s comments yesterday for that reason.
