The National People's Congress (NPC) and Chinese People’s Political Consultative Conference (CPPCC) held their annual sessions this week. The “Two Sessions”, as it is sometimes referred to, marks the most important event in China’s political calendar. At the start of the event, Premier Li Qiang reviewed his first government work report and examined the report on the annual plan on national economic and social development for 2024. Targets for 2024 are announced during this speech (Table 1).
- Growth: The real GDP growth target was left unchanged at 5.0%, in line with the average of all provincial targets, which was released earlier in February. This was widely anticipated and does not constitute a surprise. However, we note that the 5.0% target will be more difficult to achieve this year. Although growth reached 5.2% in 2023, much of that upside came on the back of a favourable base effect (Shanghai lockdown). Stripping away that base effect, our model points to 4.1% growth in 2023. The average growth rates over 2022-23 is also 4.1%.
- Inflation: The government set an inflation target of 3.0%, in line with 2023. That is the same target that the government has set every year in the past decade, with the only exception being Covid in 2020. China’s economy is experiencing disinflationary pressures – CPI averaged 0.2% in 2023. The inflation target entails that the government is expecting consumption to recover in 2024, more policy measures will follow. Normalising base effects around pork supply chains should entail upside risks to headline CPI in 2024. However, 3.0% remains a little bit ambitious in our opinion. We have kept our CPI forecast unchanged at 2.5%.
- Reflation: The official targets point to a significant reflation of China's economy in 2024. Nominal GDP is expected to go from 4.3% (excluding base effects) in 2023, to 8.0% in 2024. Li Qiang’s did mention that 5.0% will be “more challenging”, but we believe its simply not possible unless policy settings change mid-year. All eyes are on the United States Federal Reserve, as a potential rate cut in June could pave the way for China to roll out stronger policy support. In the meantime, we have kept our GDP growth forecast for 2024 unchanged at 4.5%, entailing a miss.
- Monetary policy: The December Central Economic Work Conference (CEWC) kept the line that money growth should be “fundamentally in line with nominal GDP”. That points to a continuation of the current “targeted and effective” monetary stance, with little room for China to deploy universal rate cuts. In case this line is dropped at the NPC, that would entail a stronger easing bias in 2024. In any case, achieving 5.0% growth in 2024 will be no easy feat, requiring sustained pro-growth measures. The PBOC will almost certainly continue to manage liquidity through daily open market operations and we expect at least 50 basis points in reserve requirement ratio cuts.
- Fiscal policy: In the context of targeted monetary policy, fiscal stimulus should have to be front and centre. However, the government decided to keep the budget deficit unchanged at -3.0% of GDP. That entails a tightening bias – recall that the budget deficit was adjusted to -3.8% in the middle of 2023. Besides, the target for local government special purpose bonds was set at CNY 3.9 trillion (around 3.0% of GDP), which is less than last year's CNY 5.99 trillion yuan. The move partially reflects concerns around local government debt, as a decline in land revenues and higher expenditures during covid have compounded to credit risks.
- Ultra-long bond issuance: The downside will be partially offset by an extraordinary CNY 1 trillion (0.8% of GDP) in ultra-long special government bonds, the second time that China uses this mechanism since covid in 2020. The funds will be used to implement major national strategies and build capacity in key areas. We believe that this will be used predominantly as a fiscal transfer from central to local governments, in order to bail out stalled real estate projects and expand manufacturing capacity in “new productive forces”. With that being said, we are still looking at a smaller amount than 2023. It will be challenging for China to hit the 5.0% growth if policy settings are marginally tighter.
- Military spending: The Premier mentioned that the PLA should “strengthen military training and preparedness across the board”. But then left the military budget target unchanged at 7.2% (CNY 1.7 trillion or USD 231 billion). Although President Xi has vowed to modernize China’s military by 2050, there are other more pressing priorities in the near term, while increasing military spending at this juncture may unnecessarily stoke geopolitical risks ahead of presidential elections in the United States. US President Joe Biden signed an annual USD 886 billion defence bill last year, roughly 4 times larger than China’s.
- Structural reforms: The work report omitted the slogan “houses are to live in, not for speculation” for the first time since 2019. The move follows the December Central Economic Work Conference (CEWC), where President Xi also dropped the slogan in favour for a more nuanced line on local supply-demand imbalances. This is no surprise and reflects a new structural paradigm for the housing sector. The Premier also vowed to improve policies to boost birth rates by improving parental leave and increase insurance requirements for employers.
Implications for investors:
The CNH was little changed at 7.2110 after the key targets were revealed. The decline against the dollar YTD is more to do with wide rate differential between China and the US, and any changes are likely to be driven by USD moves rather than China policies.
The Hang Seng Index, representing offshore equities, sold off -2.9% intra-day; while the Shanghai Composite Index and CSI 300, representing onshore equities, were up 0.4% and 0.8% respectively on state buying. It will be hard for China to achieve 5.0% growth in 2024, given no increase in policy support. That is not conducive to double digit earnings returns, leaving Chinese equities exposed to a potential revision to earnings expectations, from current levels of 13%.
This article is based on an earlier report by UBP
