China NPC: Pivot towards Quality Growth

China’s annual National People Congress (NPC) comes to a close soon after a 2-week parliamentary session. In the following interview Huang Juin Hao, Senior Portfolio Manager of Affin Hwang AM gives a rundown what happened in the NPC and market implications

1) What were the key takeaways of China’s NPC this year?

At the NPC, the government work report targets for 2019 have been announced and most of the targets have been largely in-line with market expectations. The keys numbers were for GDP growth to come in between 6% – 6.5%, which would represent a slowdown from 2018’s 6.6% growth.

The government has placed particular emphasis on creating 11 million new urban jobs and keep registered urban unemployment rate within 4.5%. Tax cuts in VAT (value-added tax), corporate and households would also provide relief amounting to RMB 2 trillion, which was the same as 2018’s prior announced business tax shift to VAT.

2)  Were there any surprises this year that went against market expectations?

There were 5 surprises which differed from market expectations

i.The fiscal deficit which the government expected to come to 2.8% of GDP. Market expectations were for the deficit to be at 3.0%, given tax cuts of RMB 2 trillion, planned fiscal spending of above RMB 23 trillion and a deficit of RMB 2.76 trillion. This implies fiscal revenue of RM 20 trillion, which is 10-12%, higher than 2018.

ii.China also plans to issue RMB 2.15 trillion of special local government bonds, compared to last year’s issuance of RMB 1.35 trillion.

iii.More discretion was given to local governments. For example, Premier Li called for more substantial cuts to the social security tax rates. Specifically, the employer’s contribution rate for pension insurance will now be allowed to be lowered to 16% at the local government’s discretion.

iv.There was no mention of targets for shantytown redevelopment targets and industry overcapacity reduction. However the government noted that both programs will continue.

v.Lastly, the phrasing of “promoting stable foreign investment growth” in last year’s report has been reworded to “increasing the attraction to foreign capital”; and Premier Li promised to further open the market to allow for the operation of wholly foreign-owned enterprises in more industries. This suggests China is determined to have a more open attitude towards foreign capital.

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