China Markets Research Archive

What to Watch at the NPC

The annual National People’s Congress (NPC) at the beginning of March will set key growth targets and policies for 2019 in response to a much slower economy in 2018. While the annual event is staged and formulaic, there are several important elements to watch this year, including China’s new foreign investment law, the scale of fiscal stimulus, China’s response to trade tensions, and the potential for a new plan to bail out local government debt.

The 2019 GDP Drop: How Slow, For How Long?

China’s economy in 2019 will be weaker than in 2018: the questions are how much and for how long. Bad short-term news would be good in the long-term: this slowdown is the most broad-based and systemic in decades, and the only effective long-term response is accepting reforms that bring a deeper near-term dip. But Beijing remains averse to letting markets run their course, and appears intent on sustaining the status quo. Indicators will be massaged to present a stable picture even if adjustments do occur. We unpack the components of Chinese GDP objectively to shore up our expectations.

• We expect 5.5% GDP growth in 2019. After claiming 6.6% growth in 2018, this would seem a massive fall, by Chinese standards. We suppose actual growth in 2018 slowed by a larger margin, so 5.5% this year is just a little weaker still. Capital stock investment growth will continue a multi-year descent from unsustainable highs.
• Household consumption represents the key downside risk for China’s economy this year. Consumer indicators have generally tracked a slowing property sector, and softer income growth appears to be impacting household purchases.
• Trade tensions likely keep pressuring net exports. Tariffs imposed by the United States along with weaker cyclical demand in other developed markets darken the exports picture. Commodity prices determine China’s import bill, and the overall trade balance.
• Government spending will be more supportive. Additional local government special revenue bond issuance and a higher formal fiscal deficit will provide some countercyclical support to infrastructure investment at the local level.

Restructuring Dilemmas, Part 2: Local Governments Seeing Red (Lines)

Pressure from local government debt is forcing Beijing into a dilemma between stabilization of the economy and structural adjustment.  While media discussion of fiscal stimulus is growing, the vast majority of China’s provinces already exceed government-established “red lines” of indebtedness as of 2017. Local governments have frozen infrastructure investment projects to control debt, which has contributed to the current economic slowdown. China has some fiscal space for counter-cyclical policy but cannot use it without exacerbating the debt problem. In the short run, Beijing is likely to combine permitting defaults and bailouts to manage local financial stress, but any large fiscal stimulus package is off the table.