【Economic Perspectives】China Economy – Takeaways of 2020 Government Work Report

  • GDP target was not specified explicitly, so as to concentrate efforts on the “six stabilizes and six guarantees” and prevent distortions that may be caused by merely achieving growth target. We view this as a pragmatic move. Not specifying GDP target does not imply growth or policy boost is trivial. In fact, the “six stabilizes and six guarantees” take as prerequisite healthy growth of the economy and firms. Our forecast range of annual GDP growth is 2.8%-3.5% in 2020E.


  • Employment priority. Due to COVID-19 disruptions, the Report lowered employment targets in 2020 – urban new employed population to increase 9 million, urban surveyed/registered jobless rate to stay around 6.0%/around 5.5% (vs. 2019 target of 11million, around 5.5%, within 4.5%). The Report vowed for all-rounded measures to stabilize employment, including job support for affected populations, low-income people, providing professional training to 35 million people, etc.


  • Fiscal expansions. 1) to raise target fiscal deficit ratio to 3.6% (of nominal GDP) from 2.8% in 2019, which represents net deficit increment from 2019 of RMB 1tn. 2) To issue RMB 1tn special treasury bond (vs. our estimate of RMB 1.5tn). The RMB 2tn increment in 1) and 2) will all be transferred to local authorities to guarantee employment, people’s livelihood and market participants. 3) RMB 2.5tn tax and fee savings for corporates. These savings come from VAT tax rate cuts and pension rate cuts (RMB 500bn), temporary reductions of VAT tax and fees for SMEs as well affected industries towards YE20, and corporate tax deferrals for SMEs and self-employed merchants. 4) To arrange RMB 3.76tn local government special bond (> our estimate of RMB 3.35tn and RMB 2.15tn in 2019). Overall speaking, the magnitude of fiscal stimulus is in line with our expectation. Although the amount of special treasury bond issuance fell short of our estimate, fiscal deficit and LGSB exceeded our forecast.


  • Monetary policy - more flexible. 1) To promote combined use of RRR cut, interest rate cut and relending programs. 2) M2 and TSF growth will significantly outpace last year, as monetary easing steps up supporting the real economy. We peg M2/TSF growth forecast at 11%/11.8% YoY in 2020E. Our forecast implies a net increase of RMB 29tn TSF compared to 2019. 3) The Report also mentioned policy tool innovations that could effectively channel funding to the real economy and lower lending rate. 4) Financial support for SMEs will step up, for example the Report required inclusive loan balance of large commercial banks to increase at least 40% by YE20.


  • Expand domestic demand. 1) Boost recovery of consumption via employment and job support and support for most-affected service sectors, elderly and child care, rural consumption, etc. 2) Enlarge effective investment. For example, local government special bonds are primarily designated for new infrastructure, new urban construction projects and key projects of transportation, water conservancy, etc. (“两新一重”). 


  • Reform and open-up to revitalize the economy, including reforms to ensure market-based allocation of factors, SOE reforms, manufacturing upgrade, technology innovation. The Report also outlined measures to shorten the negative list of foreign investment and etc.


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