◎ Several proposals in the 2019 government work report seemingly cancel out each other or will contradict Xi’s push to have the “Party lead everything”
Chinese premier Li Keqiang delivered his 2019 government work report to the National People’s Congress at the Two Sessions on March 5.
The backdrop:
The government work report comes as China is experiencing an economic downturn and waging a trade war with the United States. Meanwhile, the factional struggle in the Chinese Communist Party appears to be escalating.
Our take:
Li’s work report offers specific economic targets which Beijing hopes to accomplish in 2019, but is vague on foreign policy issues. Three early takeaways:
1. Beijing wants to have its cake and eat it
Several proposals in the 2019 government work report seemingly cancel out each other or will contradict Xi Jinping’s push to have the “Party lead everything”:
- The report calls for a continuation of “structural deleveraging,” yet hints at government efforts to increase liquidity with a “prudent and moderated monetary policy” and “proactive fiscal policy”;
- The report unveils planned cuts of about 2 trillion yuan ($298.3 billion) in taxes and fees for firms, as well as a simplification of administrative procedures for firms, yet contains plans to boost environmental protection, poverty alleviation, and elderly care;
- The report said that China will “further relax controls over market access, shorten the negative list for foreign investment, and permit wholly foreign funded enterprises to operate in more sectors,” yet does not provide details or explain how further relaxation of controls in China stacks with increased Party control over all aspects on the mainland;
- The report said that Beijing will make targeted cuts in the reserve requirement ratio for small and medium-sized banks to increase lending to small enterprises by large banks by over 30 percent, a move which may raise risks and contradict Beijing’s “battle against potential financial risks in 2019”;
- The report calls on local governments to “lead frugal days” and “find ways to raise funding” without offering any solutions.
2. Beijing is not optimistic about China’s economy
The government work report hints that Beijing is expecting China’s economy to worsen further in 2019:
- Beijing is targeting economic growth of 6.0 to 6.5 percent in 2019;
- China’s budget deficit target for 2019 is 2.8 percent, up 0.2 percent from the previous year;
- Beijing plans to keep increases in M2 money supply in line with nominal GDP growth “to keep major indicators within an appropriate range”;
- China’s finance ministry will issue 2.15 trillion yuan worth of special government bonds in 2019, the bulk of which will be for infrastructure investment;
- Beijing plans to add 11 million urban jobs and achieve a surveyed urban unemployment rate of about 5.5 percent.
Beijing’s 2019 economic policies appear to focus on stabilizing unemployment, the financial sector, foreign trade, foreign investment, domestic investment, and market expectations. Of the six focuses, greater emphasis is being placed on the financial sector, investments, and unemployment.
For the CCP to “compromise” on its previous policies through tax cuts, cutting expenditure, and curbing control affirm our pessimistic view of China’s economic prospects. The fact that “compromises” were made also suggests that China’s economic woes are affecting the Party’s ruling legitimacy.
3. Beijing is vague on foreign policy
Li Keqiang’s report deals with the Sino-U.S. trade war and other foreign trade issues in the broadest of terms:
- The report notes that “economic globalization has suffered setbacks, multilateralism has taken a hit, and there is fluctuation in the international financial markets.” In particular, “Sino-U.S. economic and trade frictions have adversely affected the production of some companies and market expectations.”
- The report calls for an acceleration in the construction of a “free-trade zone network of the highest standards, promote regional comprehensive economic partnership agreements such as the China-Japan-Korea Free Trade Area and China-EU investment negotiations, as well as continue to promote Sino-U.S. economic and trade consultations”;
- The report drops the “Made in China 2025” slogan but continues to emphasize Beijing’s plan to upgrade China’s manufacturing industry and strengthen technology development.
The government work report’s “omission” of the “Made in China 2025” tag and vague foreign policy targets suggest that Beijing is trying to keep things low-key for the moment and avoid making announcements that look like concessions to the United States before a Sino-U.S. trade agreement is reached. Beijing may find other channels to expand on foreign policy plans after or during the Two Sessions; top banking regulator Guo Shuqing told reporters on the sidelines of the Two Sessions that China can “absolutely” reach a deal with America on opening up its financial sector.
4. We got it right—Our China 2019 outlook
The government work report said that Beijing plans to cut taxes and boost infrastructure spending.
We predicted Beijing’s moves in our China 2019 outlook:
- “The central government will introduce tax reduction measures, but will unlikely trim a proportionate number of government workers. As a result, corporate tax will be subtly raised, not decreased”;
- “The central government may order more infrastructure projects, but will find it tough selling bonds to fund the projects.”
Get smart:
1. Li Keqiang’s government work report indicates that the CCP seems to now have a better handle on the trade war than last year. The trade war “ceasefire” has also granted Beijing a chance to “catch its breath” and develop countermeasures, including using delay tactics to gain an advantage over Washington. We identified the CCP’s delay measures and its strategic significance in our 2019 special report.
2. The Xi leadership cannot possibly have its cake and eat it. Chinese officials will prioritize the preservation and accumulation of political capital to secure career advancement, and will be torn between implementing targets in the government work report and staying “politically correct” under Xi’s “the Party rules everything” policy. A form of bureaucratic gridlock could ensure, and Chinese companies could end up with heavier burdens this year.
Bureaucratic gridlock could also sabotage a Sino-U.S. trade deal if one is reached in March. In our China 2019 outlook, we wrote that the Trump administration could yet raise tariff rates and add tariffs in the second half of the year.
3. Foreign companies or investors should stay skeptical about signs of China’s economic and financial “recovery” (such as A-shares entering “bull market territory”), and be prepared for further deterioration of the Chinese economy in the third and fourth quarters of the year.
