Beijing’s restrained COVID-19 response at annual meeting keeps gunpowder dry

Beijing’s restrained COVID-19 response at annual meeting keeps gunpowder dry

Beijing’s targeted measures introduced at its recently-concluded annual legislative meeting were seen as the first responses to COVID-19 lockdowns. David Chao analyzes the macro outlook.

China’s parliament, the National People’s Congress (NPC), has just concluded its annual legislative meeting. The two biggest takeaways from the NPC were 1) policymakers decided to abandon a 2020 GDP growth target and 2) announcing additional fiscal stimulus measures that amount to a total of around 4.5-5.0% of GDP1.

Focus on job creation

Although I’m not entirely surprised that policymakers did not set a growth target, it makes sense that the government’s focus for the rest of the year is on creating jobs and improving people’s livelihoods. I think that the government’s target of creating 9 million new urban jobs2 (vs the 13.5 million in 20193) is achievable. Despite the year-on-year decline in new gross jobs (that are mainly taken up by fresh graduates), it still signifies that consumption should continue to recover.

China’s fiscal stimulus response to COVID-19 continues to be much smaller when compared to other countries, such as the US (about 15% of GDP), Japan (about 20%) or Germany (about 60%)4. China plans to stabilize the economy through issuing around a total of RMB 3.6trn in special bonds at the central and local government levels5. In addition, the government has earmarked reductions in taxes and other fiscal spending on infrastructure and the digital economy to get the economy back on track.

I now expect infrastructure investment to grow by around 10% in 2020. This should benefit the construction and commodities sector. Even though China has done a good job in getting the supply and production side of the economy back to normal, expected continued weakness in domestic and global demand are dimming expectations for a V-shaped economic recovery starting in Q2 or even in the 2H 2020.

Beijing keeps its gunpowder dry

The additional fiscal stimulus measures announced at the NPC meeting appear to be calibrated. Premier Li Keqiang remarked during the NPC, “we have been saying that we won’t flood the market [with excess liquidity]. It is still the policy6.” In comparison, China issued a similar sized fiscal package during 2008, however the focus then was a government debt-fueled infrastructure spending spree that continues to leave China with a debt overhang. This time around, the stimulus package will focus on “ensuring employment, people’s livelihoods and helping market entities.6”      

The biggest worry now for Chinese policymakers is how long this weakness in demand persists because if it does, then it’s likely that there could be a wave of businesses collapsing and bankruptcies to come. For example, just think about the number of downward GDP revisions that we’ve seen around the region and the number of extra fiscal stimulus measures announced in places like Singapore and Hong Kong. Thus, it makes sense that Beijing policymakers have been restrained so far in order to keep their gunpowder dry in the face of continued global economic uncertainties.

On the monetary policy side, policymakers will continue injecting liquidity into the market by way of total social financing (TSF)7 credit growth of around 14% in 2020. I expect bank lending to remain robust in order to increase credit support. I also expect that the pace of deleveraging in the shadow banking segment to slow in order to help funnel credit to small- and medium-sized enterprises (SMEs). I expect that we will see a 50bps cut to the central bank’s reserve requirement ratio (RRR), 20bps cut to the medium-term lending facility (MLF) and 20bps cut in the deposit rate in the 2H of the year.

Investment implications

I continue to remain constructive on Chinese equities for both the medium and longer term. Chinese equities appear to be fairly valued at historical multiples and undervalued when compared to DM. Longer term, it’s possible that we will start to see some genuine state-owned enterprises and hukou (household registration) reform by the end of this year, which should provide another meaningful propeller of economic growth. That being said, Chinese equities have rallied strongly since March and the recent NPC did not offer many upside fiscal stimulus surprises. In the short-term, market risks appear on the horizon, as geopolitical tensions start to heat up between China and the US, while global demand could still remain weak as resumption of normal economic activity post COVID-19 lockdown continues to be uneven and tentative at best.  

David Chao is Global Market Strategist for Asia Pacific.

^1 Invesco’s calculation as of May 29, 2020 based on announced fiscal stimulus policies.
^2 Source: “China firm on achieving development goals of 2020, though setting no specific growth target”, Xinhua News Agency, published May 22, 2020.
^3 Source: China’s State Council, WING and Nomura Global Economics, as of May 29, 2020.
^4 Source: Invesco calculations, Breugel Datasets, as of May 29, 2020.
^5 Source: “China’s stimulus sceptics need not fear side-effects this time”, Financial Times, published June 1, 2020.
^6 Source: “China pledges largest-ever economic rescue package to save jobs and livelihoods amid coronavirus”, South China Morning Post, published May 28, 2020.
^7 TSF refers to the aggregate volume of funds provided by China’s domestic financial system to the private sector of the real economy within a given timeframe.