8/3/2018/Fitch Ratings
China’s National People’s Congress, which opened this week, underscored a continued adherence to GDP growth targets, in line with building a “moderately prosperous society” by the 100-year anniversary of the Communist Party in 2021. Efforts to contain financial risks will also remain a focus, bolstered by the authorities’ confidence in the strong growth momentum sustained over the past year. Nevertheless, the improved policy balance between growth and financial stability could be tested if growth slows, which may necessitate a reversion to a more expansionary policy stance, says Fitch Ratings.
The 2018 macroeconomic targets announced at the NPC indicate broad stability in policy settings, with the GDP growth target effectively unchanged from 2017 at about 6.5%. This implies a slowdown from 2017, when the economy outperformed the target, expanding by 6.9%. The 2018 target is consistent with our own forecast of a modest slowdown, driven by tighter credit conditions and a cooling property sector. The fiscal deficit target was narrowed to 2.6%, from 3.0%, though the use of extra-budgetary funds to smooth accounts dilutes the utility of yoy comparisons.
Sustained growth momentum supported by a favourable external outlook should provide the authorities scope to continue addressing macrofinancial risks through most of this year. The government made use of improved global activity and strong domestic momentum to advance reform and tighten financial regulation in 2017. Premier Li noted in the NPC work report that “macro leverage ratio is increasing by much smaller margins and is generally stable”. Fitch’s augmented measures of credit growth also show a marked deceleration, with overall financial leverage increasing only moderately over the past year.
The slowdown in credit growth has been mostly driven by measures to curb risks associated with shadow banking and interbank lending. These efforts have reduced complexity in the financial sector and lowered the near-term prospects of a financial shock. That said, leverage growth was also contained last year by a sharp acceleration in nominal GDP growth, as producer prices surged due to capacity cuts tied to supply-side reforms. This is unlikely to be repeated.
A key policy uncertainty concerns the government response if, as we expect, real GDP growth slows more sharply towards the end of 2018. Data for the property, construction and broader industrial sectors suggest some momentum has already been lost. Trade protectionism is also a downside risk, but the expected US steel and aluminium tariffs are not likely to meaningfully affect China on their own.
At the NPC, Premier Li appeared to acknowledge that the policy focus is contingent on economic performance, stating that, “as long as the major economic indicators are within an acceptable range… our energies should be focused on advancing reform”. Continued efforts to address financial vulnerabilities through an economic slowdown would point to a lasting shift in policy settings, while reversion to stimulus would signal that growth remains the priority.
A major political development at this NPC is the probable removal of the presidential two-term limit, which underlines President Xi’s consolidation of power. More centralised decision-making could speed up structural reform in the short run, but concentration of power also raises the risk of policy mistakes as China’s economy grows in size and complexity.
The NPC report also signalled continued focus on property rights, intellectual property protection and further opening up of the services sector. There were also warnings to provincial governments on controlling debt risks. To this end, the government has pledged to more clearly define central and local government fiscal responsibilities – a process that should be supported by a planned increase in central government transfers to local governments this year.