JAKARTA - Chinese Premier Li Keqiang on March 5 presented China’s 2017 Government Work Report at the annual meeting of the National People’s Congress. The Ministry of Finance and National Development and Reform Commission simultaneously issued reports on budgeting and economic planning for the year ahead.
In line with expectations, Li’s report confirmed a target of “about” 6.5% GDP growth in 2017, adding that higher growth should be sought, if possible, to ensure sufficient labor demand, Brian Jackson, China Economist, IHS Global Insight, said.
Following is IHS Global Insight analysis and comments:
- In our analysis, we would be surprised if growth deviated from the 6.5% center point by more than a tenth of a percentage point in either direction. This is partly in recognition of the many economic policy levers the government has at its disposal, with fiscal policy clearly favored last year and in 2017. In addition, China’s growth is increasingly driven by ‘other services’, which in 2016 accounted for 27% of real growth, compared to only 13% in 2011. While there is little doubt that sectors like healthcare, education, and information technology are growing faster than average, whether that growth is enough for ‘other services’ to bridge the gap to headline growth targets is another matter.
- Supply side reform remains the headline policy goal of 2017. China plans to eliminate 50 million tons of excess steel capacity and 150 million tons of excess coal capacity, compared to the latest reports of 65 million tons of steel and 290 million tons of coal actually closed in 2016, both well above target. Adequate support for downsized workers is emphasized, and is likely to continue in the form of subsidized transfers into other sectors or early retirement. This partly explains the continued deficit target of 3% of GDP despite plans for stagnant or contracting investment in some infrastructure categories.
- Debt reduction remains a priority, but with scant details. Debt and financial risk has been a headline concern among Chinese officials since 2010, when the results of mega-stimulus via monetary policy were becoming evident. Lowering the leverage ratio among corporates is “the highest priority” in 2017. Recent policy experiments like asset securitization and debt for equity swaps are reaffirmed, but the only novel point on debt reduction is a new emphasis that debt ratios will be controlled especially among state-owned enterprises.
- Premier Li reported that in 2016 local governments saved around CNY 400 billion in interest payments, following the debt restructuring process that began in 2015. In GDP data, such programs act as a transfer from the financial sector (who expected to receive the payments in full) to the public sector, or potentially the non-financial SOE sector in the future. A separate, but related development noted in the report was the omission of a growth target for total social financing, which was targeted at 13% in 2016, as well as the lowering of the broad money supply target. This, combined with, a budgeted projected of 9.1% nominal GDP growth (up from 8.0% in 2016), implies that the government will take a slightly more aggressive stance towards debt accrual in 2017. While a complete reversal of debt growth is unlikely within the year, a slower pace of accumulation would be a positive start.
- Reform continues to receive ample policy rhetoric, although our expectation is for implementation to remain gradual until 2018. Reform priorities remain mostly unchanged, with red-tape cutting, tax reduction, financial sector and monetary policy, and state-owned enterprise reform all receiving ample rhetoric. This is not particularly different from past years, which saw modest but positive changes in many of these areas; unfortunately, in most cases the changes were also short of market expectations in speed and depth. While momentum may pick up in some areas in the second half of this year, implementation is more likely to leave a strong impression in 2018, after president Xi has had an opportunity to further consolidate political power at China’s 19th party congress in late-2017.
Outlook:
China’s decision to lower its growth target to about 6.5% is a positive one, reflecting a reluctant acceptance of a downward momentum in the economy and the need to better control debt trends. An even lower growth target, or elimination of the growth target, would have been healthier and allowed for a more cohesive push to address China’s imbalances, but such a radical move is not yet politically feasible in China. (*)