China kicked off its 3,000 delegate National People's Congress (NPC) meeting on Saturday. Under China's 1982 Constitution, The NPC, China's parliament, is meant to be the most important body of state rule. But, China's Communist Party controls the state. So in practice, the NPC is effectively a rubber stamp parliament for the Communist Party decisions and plans. More importantly, for outsiders, the NPC meeting is also the venue for the Premier, China's number two leader, to lay out goals and targets for the year as well as its five-year plan. This blog posting will cover plans for the next year, and I will leave an analysis of Beijing's new five-year plan for a later posting.
As is the custom, the NPC began with a speech by Primeir Li Keqiang, where he laid out policy goals and economic targets, warning of a "difficult battle" ahead for painful rebalancing. It should not be forgotten that policymaking by the Party in China is meant primarily for maintaining control. Reforms and goals set out at the NPC are effectively a road map for the Party to maintain stability and control in a post-rapid-growth China. I dissected Premier Li's 37-page speech and have put together a number of key points. I will concentrate on economic policies and targets that might impact us here on the other side of the world.
Premier Li started his speech listing some economic results over 2015. Here are some of the key points.
- 13 million new jobs were created in 2015, exceeding the 10 million goal.
- Contribution of consumption to GDP reached 66.4%.
- 12,000 new business startups occurred per day on average.
- Per capita disposable income rose 7.4%.
- Savings deposits rose 8.5%.
- Energy consumption per unit of output fell 5.6%.
- 64 million people gained access to safe drinking water.
- 14 million were lifted from poverty.
- 3.2 trillion RMB in local government bonds replaced shadowy local debt through Beijing's swap program. That has reduced overall financial system risks.
- Red tape for business and industry was cut. The number of items required for new business approval were cut by 85%.
- Services now account for over half of the economy at 50.5% of GDP.
Some of the most important information given during the meeting are plans and targets for the economy. Here are the key 2016 targets.
- Target GDP: between 6.5% and 7.0%, vs. 7% in 2015. For the first time in decades, Beijing announced a GDP target range instead of a specific number. The change is a signal that President Xi's regime is putting increasingly less emphasis on overall generic output goals. Last year Li's NPC speech qualified the growth target, defining it as "about" 7%, not the hard target seen in years prior. Within the next few years, the target might be scrapped altogether. Beijing's true goal is not general economic output, but instead is focused on employment stability and robust job creation that can only come from new economy sectors. The new target range also implies that the potential range of stimulus measures will vary. We may see a little, or we may see a lot; forecasting possible stimulus measures will be difficult in 2016. But, since China's underlying GDP (adjusting for a temporary surge in the financial sector) is already growing close to 6.5% already, some amount of stimulus is required to keep the economy within the range. Lowering the growth target while needing rapid growth in the service sector, consumption, and new economy sectors to support job creation means one thing: industry - heavy industry like cement and steel making in particular - will continue to grow weaker. The two-speed economy will grow more divergent. Overall import demand from the rest of the world will remain weak, even if the economy remains stable. Rapid growth in China's new economy sectors cannot replace the hole in global demand left by declines in the old economy sectors. For more details, see my blog post: Rebalancing to consumption is grinding forward, but don't expect Chinese consumers to revive global growth.
- Job creation target: 10 million new jobs, unchanged from 2015. Urban unemployment target: 4.5%. This year may begin the largest purge of old economy jobs since 40 million workers were laid off in the late '90s during SOE privatizations and subsequently absorbed by faster-growing sectors. Officials last week said 1.8 million people this year will be laid off from old economy sectors, like steelmaking and coalmining. Also announced last week were plans for 100 billion RMB in funds to help find new employment for those losing jobs to economic restructuring, in a sign that Beijing anticipates more cuts to come in traditional industries. Reuters, citing anonymous sources, put the number of planned firings at 5-6 million over the next two years. Forced mergers, deleveraging, and planned reductions of "zombie" firms will result in a continuous flow of jobs out of old economy sectors. Therefore, 2016 will require much more aggressive job creation than we've seen in the last two decades, and new economy sectors seem to be the only source for absorbing the job losses. The fast-paced service sector has been able to absorb job losses from economic restructuring for years (see chart on the right), but those losses will accelerate. Rapid job creation in China's new economy sectors is the most important factor for maintaining economic and social stability in 2016.
- Inflation target: 3.0%, unchanged from 2015. M2 growth target of 13%, unchanged from 2015. Inflation running around 1.6% to 1.8% recently means plenty of room - in theory - for monetary easing to help the ambitious job creation. But in practice, the real ceiling to monetary easing efforts is not inflation, but instead is the debt burden. Total credit growth is running around 12%, well above GDP growth and pushing higher China's 220%-plus debt to GDP burden. The corporate debt-load in China is over 130% of GDP, a major risk and headwind to growth. The PBOC can print a lot more money to boost job creation before bumping against the inflation target, but that would exacerbate the debt burden situation. 2016 monetary easing will not be constrained by inflation, but instead will be mitigated by corporate debt-load worries.
- Ficscal deficit target: 3% of GDP, compared to 2.7% target in 2015. China's fiscal deficit will increase by 560 billion RMB. But, it is important to note, 500 billion of that will be from tax reductions, not additional spending. Traditionally, fiscal stimulus has been done through infrastructure spending, like rail and road projects, benefitting the industrial sector. Tax cuts may have less benefit to traditional industries. Fiscal boosts via tax cuts also mean that stimulus will bypass local leaders frightened to deploy fiscal capital over worries of Xi's anti-corruption.
- Explicitly stated non-numeric goals: "Maintain a balance between ensuring steady growth and making structural adjustments", "Cut overcapacity and excess inventories". Those two goals mean Beijing is probably going to start getting serious about reforming inefficient "zombie" firms, but will probably step in and roll back restructuring if growth begins to veer off track.
- There were some more plans to boost consumption and services: promoting more online retailers, setting up consumer finance companies to grow consumer credit, ensuring people take allowed vacations to boost mass tourism, and cutting import tariffs to name a few. Consumption and services seem to be the recipients of growth-boosting reforms, and industrial sector reforms are set to focus on cuts to capacity and waste.
Each year since ascending to power, Xi's regime has surprised nearly everyone with a number of policy shifts; from corruption crackdowns that stunted local infrastructure investment and changed consumption spending, to the yuan policy shifts that spawned global market turmoil. Within Premier Li's speech, here are the key plans that may result in more policy shocks.
- Li stated that Beijing will "push hard" to successfully upgrade and reform state-owned enterprises. After years with meaningless and disappointing state firm restructuring, 2016 might be the year we finally see some big changes, including mergers, shutting down firms, bankruptcies, and privatizations. That would be disruptive to industrial sector growth and imports, stunting commodity usage, but would eventually lead to higher quality growth.
- Innovation-driven development is a key goal in Li's speech. China was the first country to have over a million patent registrations in one year. Venture capital and local government support of the tech sector has surged. Beijing plans to train 21 million migrant workers in order to improve skills for the new economy. 2016 could see another jump in start-ups, patents, and many more purchases of global firms by local corporate champions to acquire technology and innovation. With the new "Made in China 2025" announced, we could see Beijing trying to stifle foreign new economy firms operating in China as part of a drive to boost local tech and service competitiveness.
- Pollution fighting is another key area of reform mentioned. Plans to expand natural gas and renewables remains ambitious. See my blog posting: China's ambitious renewable energy investments. But, plans like cutting back on coal burning and reducing vehicle emissions could add both opportunities and risks. Shutting down inefficient plants could exacerbate downside risks to SOE reforms. 3.8 million old high-emission vehicles will be taken off the roads, and will need to be replaced. This is another reform that will be bad for the old economy sectors and good for the new.
The announcements and plans were plentiful this NPC. But all in all, if I had to break Li's NPC speech down into one sentence for those of us outside of China interested in its economic prospects, it would be the following: Beijing will try to push growth-boosting policies in new economy sectors - services, consumption, renewable energy, tech firms, start-ups - and hope those sectors will compensate from reforms designed to contract the old economy sectors. Perhaps the new growth range will allow them more flexibility to ease the pain of restructuring than in past years when policymakers were beholden to a hard growth target.