Lower targets, more stimulus for China

The upcoming National People’s Congress in China will almost certainly set a reduced growth target of 5 per cent. Hitting it may require more fiscal stimulus but the changes the government is seeking in the economy are beginning to emerge.

You’re expecting a significant event in China shortly, Peiqian?

The National People's Congress is an annual parliamentary session where all the key government officials in China sit together to set targets for the year ahead. The key focus for markets is the GDP target, which tends to be an anchor for policymaking and an indication of what government will do over the next year.

But this year they’re aiming low?

We already know the policy target will be set around 5 per cent, because local governments gathered in January to set their own provincial GDP targets. The weighted average of those is 5.4 per cent, which is slightly lower than last year and weak compared to the past decade, but still fairly stable. 

But even that target may prove a struggle? 

From where we stand right now, 5 per cent looks somewhat ambitious. Market consensus is currently in a range of 4.5 to 5 per cent. So in order to achieve the targets, there might be some upside surprises on policy making. An expansion of the fiscal deficit target is likely, or they might have to expand the local government special bond issuance quota to support infrastructure, or even expand central government bond issuance. 

You haven’t mentioned cuts to interest rates?

Monetary policy doesn't seem to be a priority right now, especially when the US Federal Reserve has not yet pivoted fully to its own rate cuts. That being said, there may be room for the People’s Bank of China to cut rates later this year when the Fed pivot becomes clearer, but that is unlikely to be aggressive. It will play more of an accommodative and supporting role for fiscal easing.

Chinese stock markets have been under pressure over the past year, is that still justified?

From a broader perspective, China is really trying to shift from high numerical GDP growth rates into a model which focuses on high quality growth, where they focus much less on debt-driven growth engines like infrastructure or real estate, and more on the high value-added manufacturing sector, and consumption that will drive a more sustainable growth pattern. So while the growth rate will be lower, we are probably looking at a higher quality of growth going forward.

So you think this process will smooth out?

Our base case for China's growth this year is “controlled stabilisation”, which means that while China maintains a fairly stable growth at 5 per cent, beneath that we are going to see this changing pattern of growth with some of the sectors facing structural headwinds. 

Anything else to watch out for?

Cyclically, China is still on the path to recovery. The good news is we have seen new growth drivers emerging, such as the services sector which has been a heavier driver of growth over the past year. The industrial sector has also been rebounding in a fairly stable way. More generally, China currently has around 300 million middle class households, and policymakers have an ambitious goal to bring that number up to somewhere between 600 and 700 million households in the mid-2030s. That implies a huge jump in Chinese consumption in the years to come.

And on the ground?

I think the transition in the makeup of growth is already very visible. If you drive around Shanghai or even lower tier cities in China, you definitely see more green car number plates [denoting electric vehicles], and also more charging stations on the way. That's a symbol not just of the environmental transition happening but of China moving towards supplying more high-end manufacturing products. They are also striving to be forward looking and to tackle the demographic challenges of the years ahead - 52 per cent of all industrial robots in use globally are currently installed in China. We will see the impact of those trends over the next decade. ‘