Implications of National People’s Congress (with David Chao, Global Market Strategist, Asia Pacific)
On 5th March, Premier Li Keqiang delivered the annual government work report to the National People’s Congress. We think that the GDP forecast is easily achievable and that the fiscal and monetary stimulus are measured and prudent. The government has intimated that it still has a variety of tools to use to combat a decelerating economy such as a PBOC interest rate cut later this year. We expect these stimulus measures to boost corporate earnings and the economy and expect growth to be stronger in the second half of 2019. We continue to remain bullish on the Chinese market and economy.
Economic implications:
- GDP forecast is easily achievable: The report reduced the GDP growth target for 2019 to between 6.0 – 6.5%, in line with market expectations – the government must hit a minimum of 6% GDP growth for 2019 and 2020 in order to meet its stated goal of doubling 2010 GDP by 2020 and to keep the labor market stable.
- Tax cuts to boost corporate earnings: Total tax cuts (including personal income tax and reduction in social security contributions) estimated around RMB 2trn in 2019 noticeably higher when compared to RMB 1.1trn in 2018; Value-added tax (VAT) cuts are greater than expected: corporate tax cut of RMB 800bn – benefitting the manufacturing sector the most and should boost corporate earnings.
- Increase in the probability of a PBOC interest rate cut: The report highlighted that monetary policy priority is to enhance transmission and facilitate liquidity to the private sector SMEs and pledged to use pricing instruments to support the economy.
Outlook:
- Room for upside on GDP forecast: This work report demonstrates that the Chinese government is laser-focused on buttressing the decelerating economy though active fiscal and expansionary monetary policy; we expect the economy to have a soft landing in the 1H19 and see a stronger 2H19 as these government policies start to boost consumer and company investment spending; overall we think that there is room for upside on the current government GDP forecast.
- Deleveraging plans may no longer be a priority: The Chinese economy’s high debt risk is no longer a government priority as deleveraging plans have been shelved for now.
- Plenty of tools to boost growth: We expect continued weak economic and corporate earnings data for the next few months that will lead to stock and bond market gyrations – however the Chinese government has more than its adequate number of tools left to combat economic deceleration, including what we think is a high probability of an interest rate cut from the PBOC – to smoothen out the economy and boost growth for the rest of the year.
Addendum:
- In-line deficit to GDP target: Increased deficit to GDP target of 2.8% (only +0.2% due to cuts in military spending) and unchanged inflation (CPI) target of 3% coupled with a RMB 2.1trn special local-government bond issuance target – in line with our expectations.