Analysts at ANZ explained that China held its 2016 National People’s Congress meeting on Saturday.
Key Quotes:
“And as it was the first year of the 2016-2020 period, the Government Work Report presented by Premier Li Keqiang covered not only the policy targets for 2016, but also the 13th Five Year Plan. As you can imagine, there was plenty discussed, from a new (lower, but still ambitious) growth target of 6.5-7% to the ongoing need for reform and desire to restructure and cut excess capacity in many industries.
At the outset, that all sounds fine. But it highlights the challenge that Chinese policy makers are grappling with – that these goals are not necessarily complementary.
Do they support growth now and risk exacerbating structural problems (such as excess leverage and resource misallocation), or do they allow some more short-term pain in the hope of longer term gain? Li acknowledged this tension stating that “On the one hand, we will focus on current realities and take targeted steps to withstand downward pressure on the economy. On the other hand, we must have our long-term development goals in mind, keep some policy tools as options for later use, strategize our moves and gather strength.”
Getting that balance right is easier said than done of course, but there did appear to be some hints that officials were leaning more towards the need to provide near-term support over reform, with the targets for both M2 money growth and total social financing lifted and a larger fiscal deficit announced.
Our Asian colleagues also believe that even with a lower GDP growth target, 150bps of additional RRR cuts will be required this year. So if that really is the case and the desire for growth is trumping reform, and the deleveraging can gets kicked further down the road, then while additional policy support may buoy risk sentiment in the first instance, it will leave many still questioning the sustainability of that growth.”
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