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.
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.
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.