- The policy themes on the macroeconomic stance and structural issues presented at China’s National People’s Congress are in line with our expectations. They indicate no major change in thinking about the macro stance or in the direction or speed of reforms.
- The (outgoing) Premier Wen Jiabao, the National Development and Research Commission, and the Ministry of Finance submitted work reports containing the government’s view on the economy, and the objectives and plans for economic policy in 2013.
Key Macro Numbers
As we expected, the official GDP growth target remained at 7.5%. This is a soft target. We think it should be easily achieved and that in reality the government expects growth to be higher.
Indeed, despite the increased emphasis on the quality of growth and adjustment of the pattern of growth, the PM’s report underlines the continued need for “development”, as in growth.
Interestingly, the Premier’s report noted that “we must ensure that economic growth is in accord with the potential growth rate . . . and the bearing capacity of resources and the environment.”
This sensible statement could be interpreted as a warning not to aim for unrealistically high growth, but also not to aim too low. As a benchmark, in our view, China’s potential growth is now around 8.5%, to moderate to around 7% in 2020.
The target for CPI inflation was set at 3.5%, after 4.0% in 2012. Despite a pick-up in CPI inflation because of higher food prices, the work reports did not signal major concern about this.
While we are ourselves not worried about excessive inflation, we would have expected more concern about it among policymakers.
In the government’s terminology, fiscal policy will remain “proactive” and monetary policy “prudent” in 2013. This terminology has been misleading recently, in our view.
According to the government, China has had a “proactive” fiscal policy and a “prudent” monetary policy in recent years, even though actually fiscal policy has remained conservative, with official deficits never exceeding 3% of GDP, while the monetary policy stance has been expansionary in that broad monetary aggregates have grown very rapidly in recent years.
Nonetheless, as we expected, in 2013 the evolution of the actual policy stance seems to go in the direction of a somewhat larger reliance on pure fiscal policy to support growth. The overall fiscal deficit is budgeted to rise by half a percentage point of GDP to 2% of GDP under conservative revenue estimates, giving the government some flexibility.
The motivation for the fiscal expansion is interesting. The Premier’s report notes that higher fiscal spending is needed to “ensure and improve people’s well-being and maintain support for economic growth and structural adjustment.”
A more technocratic additional reason is that China’s central government is still in a fairly strong fiscal position, with space to increase its debt, while on the monetary side there is less room for further expansion of broad monetary aggregates.
The work report confirms a change in the composition of government expenditures “to give priority to spending on education, medical and health care, social security and other weak areas that are important to people’s well-being,” with spending in health, education, and social security budgeted to go up by 13.2%, 8.8% and 13.9%, respectively.
Specific measures include higher subsidies for health insurance and a 10% increase in urban pensions as well as urban and rural subsistence allowances.
Reflecting the need to be seen as adjusting the composition of government spending despite a traditional desire to expand infrastructure, the Premier’s work report states that investment from the central government budget will be mainly made in:
- government-subsidized housing projects
- infrastructure projects related to agriculture, water conservancy and urban utilities networks
- social programs and other projects to improve people’s well-being
- energy conservation, emissions reduction and environmental protection
In our view, however, with most of the funding of infrastructure sourced locally, it is not clear how significant the shift in the composition is going to be.
Reflecting concerns about it, the government plans to strengthen the “management of local debt.”
Repeating a message from the Central Economic Work Conference of December 2012 on the macro stance, the Premier’s work report says that the government should “expand aggregate financing for the economy by an appropriate amount.”
Nonetheless, amidst more attention in Beijing to risks in the rapidly expanding non-bank financial sector, the report puts more emphasis on financial risks.
It states that “we will resolutely guard against systemic and regional financial risks” and “we will tighten oversight over financial risks in certain sectors and regions and risks related to the off-balance sheet activities of financial institutions, and thus make the financial sector’s support for economic development more sustainable.”
Rebalancing and Restructuring
The Premier’s work report includes quite a bit of language on “accelerating the change of the growth model” and “improving the quality and performance of economic growth,” confirming that these issues have become more prominent on the policy agenda in order to “achieve sustained, healthy economic growth and social harmony and stability.”
However, amidst the calls for rebalancing the pattern of growth away from investment and industry towards consumption and services coming from various quarters and included in China’s 12th Five Year Plan, what does the government currently consider to be the focus?
It is difficult to generalize or be exact but, looking at the assessment in the reports of recent developments and the key tasks seen as outstanding by the government in this area, the emphasis appears to be on:
- increasing domestic demand, in a context of subdued global demand and limits to rapid export expansion
- transforming and upgrading the industrial structure, preserving an important role for the government in guiding this, although also acknowledging the need for a role of market forces
- relatively little emphasis on moving from investment to consumption and from industry to services
Thus, while many observers and the 12th Five Year Plan stress the need for China to reduce the investment-heavy nature of the pattern of growth, the Premier’s work report seemed to stress the need for more investment as much as the need for more consumption.
Although it includes language on how to expand household consumption (“keep expectations stable”, “boost the desire to consume”) and notes the need to “optimize the structure of investment and improve its performance and returns”, the report stressed that “in the current stage, the role investment plays in promoting economic growth cannot be underestimated.”
Also, the Premier’s work report put the calls for accelerating the change in the growth model and adjusting the economic structure in context by underlining that “development [as in growth] is still the key to solving all our problems.”
Specific Areas of Reform
The work reports touch several important specific areas of reforms, although, as we expected, they do not signal a lot of concrete measures or new directions:
- The reports seem to give a further mandate for financial reform, with the important qualifier that it “supports development of the real economy” and implying no change in language from earlier documents.
- There is no sign of movement on leveling the playing field between state-owned enterprises (SOEs) and other companies.
- In the area of pricing and taxation, the National Development and Research Commission work report commits to further reform of pricing of tariffs of electricity, water, and natural gas.
- The principle of improving the income distribution is noted, but no specifics are included.
- On the need to facilitate more migration and to guide urbanization along more balanced lines, with migrants getting access to public services and affordable housing, the Premier’s work report suggests some caution (registration of “eligible” rural workers as permanent urban residents should go “in an orderly manner” and coverage of basic public services in urban areas to all their permanent residents should be expanded “progressively”).
- On the associated need for change in the intergovernmental fiscal system, the Premier's work report seems to include clearer, more specific language than before with a call to “quicken reform of the fiscal and taxation systems, and adjust relations between the central government and local governments concerning financial resources and powers . . . and]. . . institute a system of local taxation”.
- The reports signal no quick movement on rural land reform and population policy, two areas where philosophical and heritage issues tend to reduce the speed of change.
We expect the government to focus more on reform in the coming six months and to have a better understanding of the reform directions of the new leadership at the time of the third plenum of the Communist Party of China, likely in October this year.
About the Author
This article is excerpted from “Top View: Asia,” a report by Royal Bank of Scotland and affiliated companies that was published on 7 March 2013. It has been re-edited for conciseness and clarity.