Emerging Markets Economist
China’s latest government work report saw a bias towards further stimulus but runs the risk of exacerbating existing imbalances.
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Chinese Premier Li Keqiang delivered the annual Government Work Report at the opening of the National People’s Congress on Saturday.
This was the longest such report on record and it offered few surprises, given the clear telegraphing in previous months.
There is an evident bias towards stimulus with an increase in the money supply growth target, the fiscal deficit target, and only a modest reduction in the economic growth target, which was announced as 6.5-7% for 2016.
Though the government is somewhat constrained in its choice of growth targets, given its promise to double incomes in 2020 from 2010 levels, we would actually prefer a lower target.
We are of the view that the level of stimulus needed to hit a level of growth in excess of 6.5% will only exacerbate existing imbalances.
In particular, China’s debt problem will worsen, and the risk and impact of a financial crisis will both rise.
A growth target of 5-6%, though it was never going to be announced, would have made us much more comfortable.
In addition to the increased money growth and fiscal deficit targets (both are lower than was realised last year, but exceed last year’s targets, and we expect similar overshooting this year), a large increase in local government bond issuance was announced, nearly double the RMB 600 billion quota of last year.
In sum, this all sounds very growth supportive, but we note also the planned reductions in spare capacity.
This is likely to be growth negative, and so much of the increased stimulus will be channelled into offsetting that drag on growth – RMB 100 billion funding support has been announced for potential unemployment increases.
In short, we do not expect an acceleration in growth on the back of what has been announced.