China NPC: Pivot towards Quality Growth
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15 March 2019
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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

  3. Do you think recent stimulus measures announced by Beijing such as tax cuts and increased bond issuance will be enough to prop-up growth? 
    Policy stimulus in China often goes beyond traditional monetary and fiscal stimulus which makes judgement of stimulus measures compared to historical stimulus rather difficult. Supply side capacity reforms or capacity cuts done in 2015-2016 is one such example, whilst property easing measures done in 2008-09 is another. Much of the fiscal easing in the past has been done outside of the government’s budget, via local government financing vehicle (LGFV), public-private partnership (PPP) projects and shadow banking credit.

    We also know that credit efficiency and fiscal spending impulse is falling. This means that it now requires more debt or spending to generate the same amount of growth given higher debt/GDP ratios. The interest payment burden is much higher than previous stimulus periods.

    Judging purely on the headlines and market expectations, estimates for reserve requirement ratio (RRR) cuts this year are expected to be in the same magnitude as in 2015-2016, but without the tailwind of benchmark rate cuts. The announced tax cuts amounting to RMB 2 trillion is similar in magnitude to 2018’s tax cut, so we do not see any additional stimulus from there. The increase in special local government bond issuance, an increase of RMB 800 billion is equivalent to 0.8% of GDP.

    While this appears small, we bear in mind that the government has given itself room to manoeuvre given no hard targets were set for shantytown redevelopment. For comparison, last year the government had spent RMB 1.74 trillion or 1.9% of GDP on these projects. We should expect that these and some of the other measures such as capacity reduction, will be used only as and when needed to help to cushion the economy from a sharp slowdown.

    Also, what has been announced has thus far has been shy on implementation details, and the government has stated that the main focus of fiscal policy will be on quality of growth rather than on quantity. So we should expect less emphasis to be placed on meeting the targeted GDP growth range of 6% - 6.5%, but instead the focus will be on quality of growth. 

  4. How has emerging markets (EMs) responded to some of the headline news and stimulus measures so far from Beijing? Are markets convinced that this isn’t a prolonged slowdown for China? 
    Market consensus appears to be that generally the announced targets and measures have been largely in-line with expectations, aside from the aforementioned few surprises. Also, as mentioned previously, policy stimulus often goes beyond the traditional monetary and fiscal targets, so it is too early to tell. We will need to see the extent and implementation of non-traditional policy measures.

    We believe that China has given itself sufficient policy options and leeway to react and help stimulate the economy, given that there were no targets set for capacity reduction nor shanty-town redevelopment. These or other forms of non-traditional policy stimulus could come into play should Beijing decide it is needed or required.

    We believe the market is very aware of this and are convinced that there will not be a sharp slowdown for China.

    China has also reiterated many times that they will be focusing more on quality of growth rather than quantity. This is a strong signal that the growth target is not a hard target for Beijing and that China will be focusing on promoting more sustainable growth. This implies less focus on secondary industries (manufacturing, infrastructure-related growth) and more towards tertiary consumption and services-oriented growth.

    Judging purely on the headlines and market expectations, estimates for reserve requirement ratio (RRR) cuts this year are expected to be in the same magnitude as in 2015-2016, but without the tailwind of benchmark rate cuts. The announced tax cuts amounting to RMB 2 trillion is similar in magnitude to 2018’s tax cut, so we do not see any additional stimulus from there. The increase in special local government bond issuance, an increase of RMB 800 billion is equivalent to 0.8% of GDP.

    While this appears small, we bear in mind that the government has given itself room to manoeuvre given no hard targets were set for shantytown redevelopment. For comparison, last year the government had spent RMB 1.74 trillion or 1.9% of GDP on these projects. We should expect that these and some of the other measures such as capacity reduction, will be used only as and when needed to help to cushion the economy from a sharp slowdown.

    Also, what has been announced has thus far has been shy on implementation details, and the government has stated that the main focus of fiscal policy will be on quality of growth rather than on quantity. So we should expect less emphasis to be placed on meeting the targeted GDP growth range of 6% - 6.5%, but instead the focus will be on quality of growth. 

  5. How has emerging markets (EMs) responded to some of the headline news and stimulus measures so far from Beijing? Are markets convinced that this isn’t a prolonged slowdown for China? 
    Market consensus appears to be that generally the announced targets and measures have been largely in-line with expectations, aside from the aforementioned few surprises. Also, as mentioned previously, policy stimulus often goes beyond the traditional monetary and fiscal targets, so it is too early to tell. We will need to see the extent and implementation of non-traditional policy measures.

    We believe that China has given itself sufficient policy options and leeway to react and help stimulate the economy, given that there were no targets set for capacity reduction nor shanty-town redevelopment. These or other forms of non-traditional policy stimulus could come into play should Beijing decide it is needed or required.

    We believe the market is very aware of this and are convinced that there will not be a sharp slowdown for China.

    China has also reiterated many times that they will be focusing more on quality of growth rather than quantity. This is a strong signal that the growth target is not a hard target for Beijing and that China will be focusing on promoting more sustainable growth. This implies less focus on secondary industries (manufacturing, infrastructure-related growth) and more towards tertiary consumption and services-oriented growth.
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TENG CHEE WAI

Managing Director
Teng Chee Wai is the founder of Affin Hwang Asset Management Berhad (Affin Hwang AM). Over the past decade, he has built the Company to be the fastest growing and only independent investment management house in Malaysia’s top three, with an excess of RM47 billion in assets under management as at 31 December 2018.​

​In his capacity as Managing Director / Executive Director, Teng manages the overall business and strategic direction as well as the management of the investment team. His hands-on approach sees him actively involved in investments, product development and marketing. Teng’s critical leadership and regular participation in reviewing and assessing strategies and performance has been pivotal in allowing the Company to successfully navigate the economically turbulent decade.

Teng’s investment management experience spans more than 20 years, and his key area of expertise is in managing absolute return mandates for insurance assets and investment-linked funds in both Singapore and Malaysia. Prior to his current appointments, he was the Assistant General Manager (Investment) of Overseas Assurance Corporation (OAC) and was responsible for the investment function of the Group Overseas Assurance Corporation Ltd.​

​Teng began his career in the financial industry as an Investment Manager with NTUC Income, Singapore. He is a Bachelor of Science graduate from the National University of Singapore and has a Post-Graduate Diploma in Actuarial Studies from City University in London.
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