China: The key take-aways from the 2020 government work report

• A key to watch during the Two Sessions is the State’s Council’s Government Work Report. This year, the announcement has become more important as it sets a guideline for China’s policy path in the aftermath of the Covid-19 outbreak.
• The first message, as we expected, is no specific growth target for 2020, which is not surprising given the difficult situation happening at the beginning of the year (Chart 1). The priority has been shifted to employment. The target for urban unemployment rate was set moderately upward to 6% versus 5.5% last year (Chart 2). That said, the targets of economic growth and employment are complementary, as firms’ demand for labor still requires support from economic growth. As such, the shift of targets is to allow the government with more flexibility to adjust policies along with the evolving situation.
• Within the context, Chinese government has endowed fiscal policies with greater responsibility. The central government announces to raise the general public deficit target to at least 3.6% of GDP and issue another one trillion yuan new “special treasury bond”, with the latter particularly focusing on supporting local government public expenditure. The report also announces to increase the local government special bond issuance quota to 3.75 trillion yuan to enhance infrastructure investment (including the digital infrastructure) and facilitate the process of urbanization, which will give immediate boost to the economy.
• On monetary policies, the government makes clear that it will continue to cut RRR and interest rate and ensure that the growth rates of the broad money supply and total social financing are higher than those of last year. This will guarantee financial liquidity and lower funding cost to support the real economy. The government will also strengthen financial support by extending loans and making special repayment schedule to help the small-sized firms.
• The above stimulus policies come, however, not without a cost. The mirror of additional stimulus is more leverage, especially for the public sector due to its responsibility to support the economy. The good news, though, is that most of China’s debt is internal and it still has excessive saving to serve for the debt in case of any negative shock. That said, a rising debt still has implications for long-term growth especially if the additional funding is not used in the most productive field.
• Another important take-away regards foreign trade and investment. To dispel doubts over the phase-one US-China trade deal, the Chinese government confirms its willingness to implement the deal. It also promises to maintain the world’s multilateral trade system, participate in WTO reform and push for a regional special trade agreement with Japan and Korea. As a good gesture to attract foreign capital, the government also announces to further shorten the negative list for foreign investment and carries out more policy experiments for opening up the service sector.
• All in all, although the Chinese government has not offered a specific growth target for 2020, it nonetheless shows determination to stabilize the economy, with special focus on employment. The next key to watch is the policy implementation, especially on how to channel the additional funding to the most productive field. The latter is crucial as the return on investment has been sluggish in China over the past few years, and sustainable productivity growth has become a key factor for long-term economic growth.

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