Focus still on economic growth

Premier Li Keqiang's news conference on last day of NPC annual session will help identify priority areas of reforms

The Government Work Report presented by Premier Li Keqiang on the opening day of the National People's Congress annual session on March 5 provided useful clues to the government's priorities and objectives for the rest of the year.

The big news on day one of the NPC session was that the government set the GDP growth target at "about 7.5 percent" for 2014, unchanged from last year. At face value, this is disappointing. There has been a growing recognition, inside as well as outside the government, that addressing China's structural problems should take priority over headline rates of growth, as long as this can be achieved without major job losses.

In particular, credit and investment spending need to slow down. But with consumer spending growth likely to be stable and exports on course only for a moderate acceleration, any appreciable slowdown in credit and investment would be almost certain to pull growth below 7.5 percent.

That said, there are also signs that the government is giving itself more room to maneuver on growth. In its report on March 5, the National Development and Reform Commission, China's highest planning body, said the GDP growth target is "flexible". It did not say that last year. It also stated that local governments "must not seek faster growth or compete with each other to have the highest growth rate". Also, People's Bank of China Governor Zhou Xiaochuan recently said he thought that growth of between 7 percent and 8 percent would be appropriate. It appears that policymakers are no longer inclined to defend the target at all costs.

Regarding reforms, while the goals laid out at the Third Plenum of the 18th Central Committee of the Communist Party of China in November have been largely reiterated, there were a few noteworthy takeaways. First was a strong signal on financial reform. The premier's work report suggests a deposit insurance scheme will be put in place this year to help speed up the process of interest rate liberalization. The report also indicated the first private bank may be launched this year.

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 Daily 03/08/2014 page5)