Eco Analysis - China National People\'s Congress meeting preview (W. Yao)

ECONOMICS
ECO ANALYSIS
March 4, 2013

Eco Analysis - China National People\'s Congress meeting preview (W. Yao)

The annual plenary session of the National People's Congress (NPC) will convene on 5 March and close on 17 March. There is more to watch than just the routine Government Work Report and fiscal budget. New government leaders - including the President, Premier and top Ministers - will be appointed and formally take the helm. On the reform front, aside from affirmative rhetoric, we expect two concrete steps.

■ Cautious management of the short-term cycle

In the Government Work Report - China's equivalent of the State of Union speech, we expect little deviation from the theme of “making progress while maintaining stability” set at the Central Economic Work Conference in late 2012. “Prudent monetary policy” and “proactive fiscal policy” should be reiterated, but the tone is likely to be less dovish.

The authorities are also expected to stick to the 7.5% GDP growth and 4% CPI targets, but broad money growth may be lowered to 13-13.5% from 14%. Such a combination, if confirmed, will lend support to our projection of more pre-emptive monetary policies and thus less upside to the economic recovery than currently expected by the market (cf. On our minds today - China's monetary policy to twist and turn like a snake in 2013 , 15 February). Chinese policymakers may strike sooner, in anticipation of rising inflation and systemic risk. Normalisation of credit conditions seem to have begun in earnest, with the PBoC draining liquidity with open market operations. The State Council has outlined a five-point plan to tame renewed housing inflation, and concrete measures are expected to take shape in the coming months.

■ A bigger fiscal deficit doesn't mean a more aggressive fiscal policy

Local media in the past few weeks have garnered a few hints that the 2013 fiscal budget deficit is likely to be set at CNY1.2tn, CNY200bn more than that in 2012 and actually the highest ever. We caution not to interpret this as a green light for aggressive fiscal stimulus.

Given no changes to growth and inflation targets, Beijing probably assumes the same nominal GDP growth rate as for 2012 budget at 14%. A CNY 1.2tn deficit would then be just 2% of nominal GDP, which is also same as in 2012. More importantly, the growth-driving government spending (infrastructure investment) is to a large part not specified in the budget. One indication from the central government so far is the CNY650bn railways investment target, which is only 3.2% more than the realised amount in 2012.

■ More talks and some concrete steps of reforms

The new government will certainly continue to talk affirmatively on structural reforms at the NPC meeting. Given that the meeting is not the venue for specifics, real action will only follow later. However, there are two bills scheduled for votes, which, if passed, will add to the conviction that the leaders are sincere about change. One is the draft amendment to the land management law, which aims to lift considerably the share of land sale revenues that go to farmers. Second, it has been widely reported that Beijing may resume the “big department system” reform with a proposal to merge the troublesome Ministry of Railways into the Ministry of Transport.

Wei YAO