China Update: a preview of the Two Sessions commencing this weekend China Update: a preview of the Two Sessions commencing this weekend China Update: a preview of the Two Sessions commencing this weekend

China Update: a preview of the Two Sessions commencing this weekend

Macro
Redmond Wong

Chief China Strategist

Summary:  China is holding the Two Sessions starting this weekend. Investors will watch closely the Government Work Report delivered on 5 March, in which the focus will be on the GDP growth target of 2023. Expectations are for something between 5% and 5.5%. The Two Sessions will also decide on the 2023 fiscal budget and bond financing quotas. Much interest will also be in the decisions on leadership reshuffle at the State Council, ministerial offices, and regulatory bodies as well as reform of state institutions


The GDP growth target is likely to come between 5% and 5.5%

China is holding the national committee annual sessions of the National People’s Congress ("NPC") and the Chinese People’s Political Consultative Conference ("CPPCC"), which together are known as the “Two Sessions, this weekend. The National People’s Congress meeting will start on 5 March and the outgoing Premier Li will deliver his last Annual Government Work Report on the first day of the meeting. The market’s focus will be on the GDP growth target for 2023 contained in the report.

The weighted average of provincial GDP targets released was around 5.6% and it is quite typical for the national target to be set at 0.5% below the provincial average. Therefore, economists are expecting a national target most likely to be set at “above 5%” or “around 5.5%”, higher than the actual GDP growth rate of 3% in 2022 but much lower than the average growth rate of 7.3% during the 10 years preceding the pandemic from 2010 to 2019.

Investors will also pay attention to the fiscal deficit target and quota for bond financing. In addition, investors will pay close attention to the leadership reshuffle at the State Council and other top government bodies. It is widely expected that Li Qiang will be the new Premier and He Lifeng will be one of the Vice Premiers and given the portfolio of economic and financial affairs.

Fiscal budget deficits and bond financing quotas are likely to be moderate

The Annual Government Work Report presented for the NPC’s deliberation will include the government budget for 2023 and the quota of government bond financing. Economists in general are expecting China’s fiscal deficit target to rise to 3%-3.2% of GDP or around RMB 4 trillion in 2023 from the around 2.8% target (actual 4.7%) last year.

The Annual Government Work Report will propose quotas for the issuance of central government general bonds and local government general bonds. Expectations are the quotas will be moderately but not a lot higher than RMB2.65 trillion and RMB 0.72 trillion in 2022.

Stimulus policies may be measured

As the fiscal budget deficits are likely to be constrained, fiscal spending to stimulate the economy will also be measured. With a still sluggish property market, local governments’ budgetary conditions are dire in the absence of land sale revenues. Policies aiming at encouraging household consumption will be an important feature of China’s attempt to boost the economy in 2023.

Investors however will continue to watch closely for indications from the NPC for any new initiatives to expand infrastructure construction and in what industries. Infrastructure spending will remain, after consumption, a key driver for growth this year.

The monetary stimulus may be oriented to structurally support China’s industrial policies and ensure stability in key sectors of the economy rather than injecting liquidity into the economy en masse. China’s central bank, the People’s Bank of China, said in its Q4 Report on the Execution of Monetary Policy released recently that the primary objective of countercyclical monetary policy was to smooth the volatility in aggregate demand so as to avoid the destructive effects of excessive fluctuations of aggregate demand on the factors of production and the wealth of the society. The report emphasizes that the force of monetary policy must be stable and not bring about excessive liquidity that induces excessive investment, a surge in debts, and asset bubbles. In support of the real economy, the Q4 Report emphasizes stability and sustainability of credit growth but omits the stronger wording of “more forceful” and “increases of credit support” that were in the Q3 Report.

Reform of the state institutions to deepen the Party’s leadership

The second plenary session of the Chinese Communist Party’s 20th Central Committee (the “Second Plenary Session”) that took place between 26 and 28 February discussed and adopted a draft plan for the reform of party and state institutions. Part of the draft plan, believed to be the portion of the plan that is about state institutions, will be presented to the NPC for deliberation and adoption. The last reform to the state institution was in 2018 and has made extensive changes to the organization of the State Council, ministerial institutions, and the governance structure.

The readout of the Second Plenary Session emphasizes the need to deepen institutional reform in key areas of state institutions and optimize the Chinese Communist Party’s leadership in the institutional setup, the division of functions, and governance.  Market chatters are focusing on a potential shakeup of the regulatory, organization, and leadership in the financial system of China. For example, according to media reports, the top regulatory authority over the financial system may be transferred to a re-established Central Financial Work Commission, which would be led by Ding Xuexiang, a CCP’s Politburo Standing Committee member while the State Council’s Financial Stability and Development Committee under Vice Premier Liu He may be abolished. He Lifund, a Politburo member is reportedly to be appointed Vice Premier and concurrently party secretary of the People’s Bank of China.

Reforming governance of SOEs

On top of an ideological preference for ensuring a strong state-own sector in the economy, China has been increasingly relying on SOEs to implement its industrial policies, including but not limited to developing strategic industries in technology, infrastructure, energy, and materials, which are key to the internal circulation and self-reliance notions of the new development pattern.

Besides the reform of ministerial departments and regulatory bodies, China may at the Two Sessions pursue to further reform in the governance of state-owned enterprises (“SOE”). Since 2013, the role of the CCP, through party committees established within SOE, has been strengthening. Party committees have pre-decision powers over the “three importants” and “one large” decisions including important decisions in strategies, appointments, and projects as well as large-scale capital decisions. Party secretaries are often the chairmen of the board at the SOEs.

The SOE Reform Three-year Action Plan (2020-2022) rolled out in September 2020 took the implementation of this approach into high gear. As the Action Plan came to an end in 2022, the NPC will set out some directions for further reform of the governance of SOEs including further strengthening party leadership at the call from the Second Plenary Session.

The Two Sessions conclude on 13 March

After the delivery of the Annual Government Report on 5 March, the NPC will continue to convene to discuss and approve the Annual Government Report, personnel reshuffles, reform of state institutions, and relevant laws and rules through the week of 6 March. The announcement of the personnel changes will come during the week. The CPPCC will conclude on Saturday 11 March and followed by the NPC on Monoday 13 March. 

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