Wang Tao: Takeaways From China’s Government Work Report
As we had expected, China set this year’s GDP growth target of "around 5%" in the Government Work Report at the annual National People’s Congress (NPC) meeting on Sunday.
Consistent with the Central Economic Work Conference (CEWC), the report reiterated this year’s priority of supporting growth amid headwinds from “demand contraction, supply shock, and weak expectations.” The macro policy tones from the report are also in line with the CEWC, with a slightly larger budget deficit and special local government (LG) bond quota than last year.
The report also vowed to boost consumer and business confidence to help ensure a solid economic recovery, but did not spell out detailed policy measures for doing so. More details on these and other areas may still come out later after the new government leaders are in place. Both the growth target and policy tone are in line with our baseline assumption, but may disappoint some market participants who had hoped for more.
Smaller broad fiscal expansion, but larger multiplier effect
As expected, the government announced a headline general fiscal budget deficit of 3% of GDP, 0.2 of a percentage point higher than 2.8% last year. We estimate that the actual general fiscal budget deficit on a cash basis is likely 0.2 of a percentage point smaller. The latter includes spending financed by funds from previously unspent local surplus funds and local state capital budgets (1.18 trillion yuan), transfers from the central budget stabilization fund (150 billion yuan), central state capital budgets (75 billion yuan), and the government funds budget (500 billion yuan), and is expected to be 4.5% of GDP.
In particular, the report only mentioned that some necessary tax and fee cut measures could be extended, which is clearly much more deemphasized than the significant tax and fee cuts of 3.46 trillion yuan ($499.6 billion) in 2022. The fiscal budget for 2023 planned to increase fiscal transfers to local governments (by 4% to 1 trillion yuan).
Slightly larger new quota of special LG bond issuance
The government plans to issue 3.8 trillion yuan in new LG special bonds, as expected, to help finance spending covered in the “funds budget.” The latter also has 739 billion yuan from unspent central government fund revenue. We estimate the combined general fiscal budget and government funds budget deficit on cash basis could be 7.5% of GDP, based on the budget plans, or 0.1 of a percentage point larger than in 2022.
We expect the Augmented Fiscal Deficit (AFD), which includes both the general government and funds budget, as well as quasi-fiscal spending through policy banks and some LGFVs, to expand by 0.4 of a percentage point in 2023 after the 2.7 percentage point increase in 2022. However, last year’s expansion of the broad fiscal deficit was mainly a result of significant revenue shortfalls due to the sharp property market downturn and a weaker economy. We estimate the cyclically adjusted fiscal impulse was only 0.2 of a percentage point of GDP.
Moreover, the government focused on corporate tax cuts and tax rebates as the main channels to support the economy in 2022, but such tax measures tend to have an extremely low multiplier effect during an economic downturn. On the expenditure side, the increase in infrastructure spending was partially offset by the cut in general government spending and public consumption.
In 2023, the fiscal expansion is much less about tax cuts, and more about supporting infrastructure and consumption, which both have a higher multiplier effect. In addition, the report also called for reducing local debt risks by refining term structures, lowering the interest burden, containing new implicit debt and resolving existing debt.
The report continued to call for more support for infrastructure investment in 2023, and increased the central government’s budgetary spending on infrastructure by 6.3% to 680 billion yuan. The planned increase in special LG bond issuance, and the leftover funding from last year should help support infrastructure investment.
However, these are only a small part of infrastructure financing — supplementary funding from local governments and both the private and state-owned corporate sectors may not grow strongly this year, given the state of their finances.
Our baseline forecast is for infrastructure investment growth to moderate from 11.5% in 2022 to 6% in 2023. That said, there is potentially more support for infrastructure investment in the form of greater policy bank and commercial bank lending.
The report called for better coordination between monetary and fiscal policy, and the NDRC report specified that more of the LG special bonds will be used as “capital” for projects, and that fiscal and policy bank funding should be more effectively linked. We think the latter may mean increased policy bank lending, though the specifics are yet to be verified.
Accommodative monetary and credit policy
As expected, the report reiterated a “prudent” monetary policy stance with “accurate and effective” measures. It also reiterated calls for a “reasonable and abundant” liquidity condition, broad money and total social financing (TSF) credit growth to be compatible with nominal GDP growth, and lowering the actual funding costs for the real economy.
We expect the People's Bank of China (PBOC) to rely more on on-lending and other liquidity facilities to provide liquidity, though one reserve requirement ratio (RRR) cut is also probable. We do not expect the PBOC to cut the rate of the medium-term lending facility (MLF) and or repo rates, but may continue to guide banks to lower deposit rates and overall funding costs. This could provide room for banks to lower the loan prime rate (LPR) a bit (about 10 basis point) and cut actual mortgage rates further.
We expect adjusted TSF credit growth to rebound to 10% at end-2023. Property related credit will likely pick up due to policy support, while consumer credit is also expected to recover somewhat. Corporate bond issuance is set to expand from the very weak level in 2022, and government bond issuances will increase. Increased policy bank lending will also contribute to credit expansion.
While the government reiterated the need to control financial risks including those from property developers and local government debt, we think the limited inflationary pressure despite a rapid reopening is unlikely to trigger the PBOC’s policy normalization very soon. We expect China’s debt-to-GDP ratio to rise by another 6 percentage points in 2023 after the 9-10 percentage point increase in 2022.
Other policy takeaways
Boosting consumption is the key focus, but without major consumption stimulus or income subsidies. While the report said “reviving and expanding consumption” is a key focus, specific policy stimulus seems limited.
The report didn’t announce any major nationwide consumption stimulus or income subsidies, only pledging support through improving social protection. It encouraged local governments with the resources to provide subsidies or interest subsidies for consumption of green and smart home appliances, green materials and electric vehicles. It is possible some more specific measures will be announced by more local governments later.
The NPC promised more support to the private sector and internet platform companies. The report reiterated the government’s “unwavering” support to the private sector including foreign businesses. Specifically, the government called for comprehensively reviewing and revising related corporate rules and regulations to reduce and remove entry barriers for the private sector.
The report also highlighted the plan to normalize regulations of platform companies following tightening in recent years, and pledged support for their further development. The report also called for accelerating the development of the digital economy, especially the integration of digital technology and the real economy. We think some more specific measures and demonstrations of support may be coming in the coming months.
Upgrade China’s growth forecast
We have upgraded our China GDP growth forecast for 2023 and 2024 to 5.4% and 5.2%, respectively, from the current 4.9% and 4.8%.
The economic reopening is proceeding better than we had expected earlier. Although transport, travel and other consumer activities remained poor or even fell immediately after China exited from the “zero-Covid” policy last December, they started to improve in January and recovered more notably in February. The feared “second-wave” of Covid around the Lunar New Year did not materialize and there have been few signs of supply disruptions this year.
Both subway passenger traffic and the urban traffic congestion index have climbed above the 2019 level recently. In the past two weeks, the daily property sales in 30 large cities have not only surpassed last year’s level but also moved close to the 2019 level for the same period after the Lunar New Year. While we still need confirmation from the national data, this suggests property sales may have bottomed one month earlier than we had originally expected.
While the NPC report announced growth targets and policy tones in line with our earlier baseline expectations, we think there is potential upside from increased quasi-fiscal policy support, including more lending from policy banks.
We expect the recovery to continue into 2024 and have upgraded our 2024 GDP growth forecast from 4.8% to 5.2%. Our recent analysis on China’s excess saving and UBS Evidence Lab consumer pulsecheck suggests that excess savings are likely to be gradually released this year and next, with a recovering economy boosting consumer confidence. UBS also expects the ongoing tech down-cycle to bottom out later in the year, which should mean some export recovery in 2024.
We revise down China’s 2023 consumer price index forecast lower from the current 3% to around 2.5%. January inflation came in much lower than expected, as there were no supply disruptions, and pork prices surprisingly declined in the traditional peak consumption season. Our agricultural team now expects pork prices to be less strong (though they will continue to rise in the second half) than earlier thought. We still expect services prices to move higher in the coming months, but see inflation averaging around 2.5% this year.
Wang Tao is the head of Asia economics and chief China economist at UBS Investment Bank.
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Wang Tao is the head of Asia economics and chief China economist of UBS Investment Bank.
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