Li Keqiang’s good news in his work report... But is it real?

Li Keqiang came up with some goodies as he delivered his annual work report to the National People’s Congress after what can certainly be considered a tough week for China. In fact, not only the lifting of  Presidential term limits was proposed last week, which poses fear for excessive power consolidation, Trump also struck back with more import tariffs on steel and aluminium on top of those on solar panels and washing machines announced only a few weeks earlier.

• Li Keqiang’s goodies in his work report are of two kinds, aiming at domestic observers and the international community, respectively.
• For domestic observers, the most obvious one is a generous growth target (6.5%) once again. This is clearly reassuring for highly leveraged sectors as it indicates that the Chinese government is again prioritizing growth versus deleveraging. The winners are clearly upstream sectors and real estate developers. In the same vein, an inconsistency between the new target for China’s fiscal deficit 2.6% of GDP (from the current 3.7% and the previous target of 3%) and the still robust growth is apparent. More than one percentage point of fiscal restraint will be hard to obtain without pushing down economic growth. If one digs deeper, even more so as the budget contemplates large investment in infrastructure, which can only be absorbed if taxes are increased or other expenditures are cut. However, there was no signs of large enough revenues and income tax cuts were also announced today.
• For the international community, the progress report refers to opening up of a number of sectors to foreign competition. More specifically, it mentions the full opening up of manufacturing, as well as expanding opening to telecommunications, healthcare, education, pension, and new-energy cars. As for China’s financial sector, the bank card settlement services, and insurance business will gradually welcome foreign investment. In addition, the report reiterates an extension or removal of the foreign ownership limits on banks, securities and futures firms, funds, and asset management firms. Most importantly, Li Keqiang promises a uniform standard for market access for domestic and foreign ban

One should note that both the opening of new-energy cars and foreign financial entities to foreign investment seem quite aligned with the US’s core interests in China, and to be more of a goody to calm Trump’s anger than a general welcome of foreign competition. Finally, even if the promised opening-up were real this time, it would still take quite some time to convince foreign investors that this time is real. A good example is the opening-up of the financial sector already announced right after Trump’s visit to China in November, which has not received much response from foreign investors so far.

Full reports for NATIXIS clients