China’s annual legislative meeting will preview fiscal and policy responses to COVID-19 recovery

China’s annual legislative meeting will preview fiscal and policy responses to COVID-19 recovery

All eyes are on Beijing as Chinese leaders sit down on Friday 22nd May for the annual meeting held by China’s national legislature, the National People’s Congress (NPC). After being postponed for more than two months due to COVID-19,  this highly-anticipated meeting will be chaired by Premier Li Keqiang, who will deliver a work report that contains a blueprint for the path forward for China’s economy in 2020.

Premier Li’s report will  include the two most important pieces of news to watch for: (1) numerical GDP growth forecast for 2020, if any; and (2) additional fiscal stimulus to support the pandemic-impacted economy. In addition to these two pieces of information, I expect Premier Li’s work report to comprehensively outline how policymakers plan to revive the economy. The economic blueprint is expected to include policies on production resumption, growing consumer demand, spending targets, as well as goals for inflation and jobs.

Spotlight on China’s GDP growth target

The conventional practice is for policymakers to announce a GDP growth target at this meeting. This target range is important because it is used to also measure fiscal budget and borrowing.

China’s tightly-managed economy has almost never missed its growth targets. However, COVID-19 seemed to make it more challenging this year, with China recently reporting a -6.8% y/y GDP growth in Q1 – its worst in over 40 years1. 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. While it’s possible that Chinese leaders may choose to scrap the growth forecast altogether, I think it’s more likely that they will either guide to a 2020 growth forecast of 2-3%, or give an alternative forecast such as desired 2020 growth levels or targeted growth for fiscal spending, household income or aggregate financing. I think it’s interesting to note that a recent news article from state-run China News Service reported that Sichuan province’s initial 2020 GDP growth target is “2 percentage points higher than the national GDP average”2 while, Yunnan province also set its 2020 growth target to be “above the national average.”3 This tells me that a national growth level has already been set and communicated internally.     

Budgeting for possible fiscal stimulus

The second most important news to watch for is the additional fiscal stimulus package and how the government plans to pay for it. Beijing’s fiscal and monetary response to COVID-19 has, until now, been considered benign, when compared to other countries. Its fiscal stimulus commitment so far has been around 2.5% of GDP4  – as measured by direct fiscal spending, with no indirect stimulus measures. China’s fiscal response appears mild when compared to other countries, such as the US’ (around 15% of GDP), Japan (around 20%) or Germany (around 60%)5 (see charts below). 

“Fiscal Impulse” refers to direct fiscal spending. “Deferrals” refer to temporary delays in tax filings and payments, and other fees to governments. “Guarantees” refer to loan guarantees and related vehicles. Indirect refers to measures that do not involve direct fiscal revenue or spending, including guarantees, deferrals and other measures. Sources: Invesco calculations, BreugelDatasets (left-side chart), International Monetary Fund (right-side), as of April 27, 2020.

I think it’s likely that Beijing will set its budget deficit target to be around 3.5% of GDP or slightly higher – up from the 2.8% in 2019. I also expect that overall fiscal stimulus measures will amount to around 5% of GDP, with a strong possibility of it being higher as the global economic situation deteriorates. I anticipate that the bulk of the fiscal stimulus measures will go to infrastructure projects, financial relief measures and to a lesser extent, digital infrastructure initiatives. If China’s 2H 2020 economy underperforms, Beijing may then consider measures to stimulate the property sector – which policymakers are reluctant to do at the moment.     

These measures will complement the People’s Bank of China’s (PBOC) monetary easing measures to inject liquidity into the system and funnel loans to small and mid-size enterprise (SMEs). I expect the PBOC to inject more liquidity via cuts to the reserve requirement ratio (RRR) and medium-term lending facility (MLF) in the near-term.

I expect the renminbi (RMB) to strengthen during the NPC meeting – as it has done historically – and view RMB currency risk as relatively manageable, given that the Chinese yuan has historically been one of the least volatile currencies against the USD. I think investors will also be drawn to the RMB and Chinese assets as the country is the first to emerge from COVID-19, and as additional “catch-up” fiscal and monetary stimulus measures are announced over the next few days in order to get the world’s second largest economy back on track.   

1  Source: Bloomberg, as of May 21, 2020.

2  Source: “Sichuan’s 2020 GDP growth target is higher than national average by 2 percentage points”, China News Service, published May 9, 2020. 

3  Source: “Yunnan’s GDP target for 2020 higher than national average”, China News Service, published May 10, 2020.

4  Sources: Invesco calculations, Breugel Datasets, International Monetary Fund, as of April 27, 2020.

5  Sources: Invesco calculations, Breugel Datasets, International Monetary Fund, as of April 27, 2020.