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.