Focus still on economic growth

On tax reform, the government has pledged to extend value-added tax to cover the railways, and post and telecommunications industries in April, as part of a long-running move to replace the inefficient business tax and reduce the tax burden of the service sector. Although the Ministry of Finance said it will accelerate legislation of a property tax, large-scale fiscal reform, which many see as necessary to put local government finances on a more sustainable footing, does not appear to be on the agenda, at least in the near term.

The premier has called for further reduction in the role of the State and signaled a continued determination to reduce red tape with a pledge to further cut 200 investment approval items.

Finally, we warn against making too much of the budget statement on March 5. This includes a target for the budget deficit of 2.1 percent of GDP, in line with last year's deficit. But some key decisions, those that determine the activities and financing of local government financing vehicles and therefore the overall impact that government spending has on the economy, take place off budget. As a result, the budget figures give only a partial view of the government's overall fiscal stance.

The plans in the budget to strengthen oversight of local government borrowing and reduce the reliance on local government financing vehicles are probably of greater importance, both for this year's economic outlook and in addressing structural concerns. On this broader basis, the overall fiscal stance is likely to tighten this year.

Looking ahead, the key events to watch out for during the remainder of the NPC session are likely to be the news conferences. In particular, Li's news conference on the final day of the NPC annual session (possibly on March 13) will be an opportunity to hear from him in a relatively unscripted format. It should give us some insights into where his, and the leadership's, priorities lie.

For example, the news conference has the potential to cast valuable light on a number of key issues, including how the government will handle the trade-off between short-term growth and deleveraging, areas that take priorities for reform and topics such as currency and property policies that have so far received less attention at the NPC session.

The authors are economists with Capital Economics, a London-based macroeconomic consultancy.

China's GDP growth target for 2014 set at 7.5 percent	Infographic: Five key words from Li's govt report