China: NPC signals front-loaded policy support
- Spotlight is back on fiscal stimulus to achieve target growth of 5.5%
- Deficit-to-GDP ratio aimed at 2.8%, tax cuts and infrastructure spending frontloaded
- Expansion of M2 and social financing to match nominal economic growth
- Implications for investors: i) LGB spreads over CGBs to widen; …
- … ii) PBOC set to ease further; we expect LPR will fall by 5bp in the next fixing on 20 March
5.5% GDP growth target
Premier Li Keqiang delivered the Government Work Report (GWR) at the opening of this year's session of the 13th National People's Congress on 5 Mar. The government has set its 2022 economic growth target at “around 5.5%”, after an 8.1% expansion in 2021. A slower goal indicates an acknowledgment that the recovery faces a triple whammy of flagging consumer demand, supply chain snarls and weakening market expectations. The weakness in consumption is particularly worrisome, in our view. Average retail sales growth in 2H21 still halved compared to 2019. Big-ticket items such as auto sales remained sluggish, suggesting that the sporadic outbreaks continued to undercut confidence. Mirroring this is the persistent gap between household expenditure and disposable income growth.
Youth unemployment poses pressing challenges for policymakers as jobless rate amongst those aged 15-24, the main drivers of consumption, remained elevated. That explains why this year’s GWR has placed a greater emphasis on employment, stressing that “over 10 million students are due to graduate from college this year and we will give our graduates stronger policy support”. 2021’s report made no mention of graduates.
Consumers have become a bigger worry because strong export seen throughout 2021 is expected to taper off as competing countries recover production capacities. The yuan’s relentless rise is also making China’s goods more expensive at a time when the ongoing geopolitical crisis may hamper demand in Europe. Fast tracking stimulus to boost domestic demand is thus warranted. Tax and fee cuts for industries most impacted by COVID such as catering, tourism and aviation alike are expected to total RMB2.5tn, more than last year's RMB1.1tn.
No U-turn on property policy
Li called on property market to better meet reasonable housing demand for homebuyers and explore new models for housing development, including encouraging rental market. He also reiterated President’s Xi Jinping’s mantra that “houses are for living in, not for speculation’. It signals that policy U-turn is not in the offing as re-leveraging the real estate sector conflicts with the common prosperity doctrine.
Some policy fine-tuning have been deployed of late to help developers deliver on presold homes and to stimulate new purchases. Yet impact has been muted thus far. Leading indicators like growth in new floor space was in the red for the 9th straight month in December. Strain will linger in the face of mounting financial stress. Offshore market remains largely closed off, with the yield on property bonds staying prohibitively expensive.
Adding to the pressure is the decline in home sales. A continued drop in values failed to entice prospective buyers. Reports about developers’ heightened liquidity issues, ratings downgrades and auditor resignations would sap confidence further. That would worsen the financial position of many debt-saddled real estate companies, suggesting tepid property investment ahead.
Font-loaded fiscal spending
The budget deficit will be narrowed to 2.8% of GDP from 2021’s 3.2%. However, the fiscal impulse could be much stronger than headline figure suggests. The official deficit only refers to the general budget account, which excludes a considerable amount of liabilities that are ultimately the state’s responsibility. By taking off-budget financing and government funds alongside special local bond into consideration, our analysis indicates that fiscal impulse will be about 7.7% of GDP. Meanwhile RMB1.27tn in fund withheld from previous years by the central government could also be added to this year’s budget, meaning additional fiscal room of 1% GDP.
Historically, 1Q is never a peak season for new bond issuance. This year, local governments had already issued roughly a third of their RMB1.46tn advanced quota of special purpose bonds as of end-January. We expect bond supply to remain ample to utilize the pre-approved quotas, which equals to 40% of annual total (RMB3.65tn) by end-March, shifting the seasonal peak forward to the first quarter. This may add widening pressure to local-government bond spreads over central-government bond.
Front-loaded special bond issuance, a key source of public money to fund infrastructure projects, will bolster 1H growth. We project infrastructure investment to register a 7% YOY growth in 2022, after a lacklustre year amid Beijing’s push to cut wasteful spending. State Council recently urged faster implementation of 102 key projects outlined in the 14th five-year plan. Key areas include infrastructure developments, such as those in support of logistics and telecommunications as well as projects concerning food and energy security.
Accommodative monetary policy
Premier Li vowed to “step up implementation” of monetary policy. It affirmed recent signals coming from the PBOC’s social media post, in which the authority pledged to keep its monetary policy flexible and responsive to changing economic conditions. And ensuring sufficient liquidity is crucial amid looming municipal bond supply. The growth of money supply and aggregate financing are expected to be generally in line with nominal economic growth in 2022.
Austerity steps taken over the past year provide room for manoeuvre. The country’s macro leverage ratio has fallen to 272.5% in 2021, a decline of 7.7%ppts from 2020. Inflation is less of a concern at this juncture, with CPI remained subdued at 0.9% in January owing to sluggish domestic demand. While geopolitical risks and tight supply conditions will keep global commodity prices elevated, the yuan’s strength will mitigate some of the risk of importing inflation. Shunning energy intensity target this year would also improve domestic supply flexibility and price stability. All told, the GWR reinforces our view that PBOC’s monetary policy will remain supportive – with another 100-bp reduction in RRR and 20-bp drop in one-year LPR (to 3.50%). Next cut could come as soon as this month.
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