2015 Government Work Report Preview

Transcription

1 Thomas Shik Senior Economist 2015 Government Work Report Preview Mainland China s Premier Li Keqiang will deliver his annual government work report to the National People s Congress (NPC) on March 5. Given the economic deleveraging that is currently taking place, we expect the Central Government to lower its growth target to about 7% for We are also likely to see a shift in focus to the quality of economic growth and rebalancing the Mainland s economy towards services and consumption. The Central Government may step up efforts to pursue its One Road, One Belt strategy, which aims to develop new markets for Mainland exporters. February 2015

2 On March 5, mainland China s Premier Li Keqiang will deliver his annual government work report to the National People s Congress (NPC). The speech is likely to come under the spotlight as it traditionally includes an analysis of the previous year s events and sets targets on a number of economic variables for the coming year. Many consider it the equivalent of the US President s State of the Union address. China meets growth target in 2014 Last year Mr Li targeted economic growth of about 7.5% and pledged to create over 10 million new jobs in towns and cities, while highlighting the downside risks facing the Mainland s economy. GDP growth last year was in line with the Central Government s target at 7.4%, and 10.7 million new jobs were created (Exhibit 1). However, the pace of economic expansion in 2014 was still the weakest recorded since Exhibit 1: Mainland Economy in 2014 s vs Performance Gross domestic product (GDP) about 7.5% 7.4% Consumer price inflation 3.5% 2.0% Money supply (M2) growth 13.0% 12.2% New urban jobs created > 10 million 10.7 million Trade growth 7.5% 2.3% While consumer price inflation, broad money supply (M2) growth and foreign trade all came in below official expectations, it should be noted that projected figures for economic variables other than economic growth and new employment are generally regarded as soft guidance rather than hard targets. The authorities may not take explicit measures if, for example, trade growth appears likely to miss its target. There are many historical examples of large differences between what the Central Government would like to achieve and actual performance (Exhibit 2 & 3) 1. 1 With respect to Exhibit 3, M2 growth target was unavailable in February

3 Exhibit 2: Inflation vs Performance % Exhibit 3: M2 vs Performance % In contrast, official targets for economic growth and the number of new jobs created are considered as minimum performance standards that must be achieved. It is therefore common to see targets for both variables outpaced by actual performance figures year after year. The government authorities are also likely to take action if it appears that the target for either of these variables may not be achieved (Exhibit 4 & 5). For example, when it became clear that the Mainland was facing a real risk of growth coming in below 7.5% in 2014, we saw the People s Bank of China (PBOC) shift its stance from targeted easing to a broader, more explicit policy of loosening. Exhibit 4: GDP vs Performance Exhibit 5: New Jobs vs Performance % million jobs February

4 China looks set to cut 2015 growth target Given the economic deleveraging that is currently taking place, we expect the Central Government to lower its growth target to about 7% for The authorities are likely to show greater tolerance for a slower pace of economic expansion with the Mainland now shifting to a growth model in which consumption plays a bigger role. Indeed, all provinces, municipalities and autonomous regions with the exceptions of Tibet and Shanghai have already cut their growth targets for this year (Exhibit 6). Exhibit 6: Provincial Economic Growth s Provinces 2014 GDP target 2015 GDP target Change Anhui 9.5% about 8.5% down about 1.0% Beijing about 7.5% about 7.0% down 0.5% Chongqing about 11.0% about 10.0% down 1.0% Fujian about 10.5% 10.0% down about 0.5% Gansu about 11.0% about 8.0% down 3.0% Guangdong 8.5% about 7.5% down about 1.0% Guangxi 10.0% 8.0% down 2.0% Guizhou 12.5% 10.0% down 2.5% Hainan about 10.0% 8.0% down about 2.0% Hebei about 8.0% about 7.0% down 1.0% Heilongjiang about 8.5% about 6.0% down 2.5% Henan above 9.0% 8.0% down about 1.0% Hubei 10.0% above 9.0% down about 1.0% Hunan about 10.0% 8.5% down about 1.5% Inner Mongolia about 9.0% about 8.0% down 1.0% Jiangsu about 9.0% about 8.0% down 1.0% Jiangxi about 10.0% about 9.0% down 1.0% Jilin about 8.0% about 6.5% down 1.5% Liaoning about 9.0% about 6.0% down 3.0% Ningxia about 10.0% 8.0% down about 2.0% Qinghai about 10.5% 8.0% down about 2.5% Shaanxi about 11.0% about 10.0% down 1.0% Shandong about 9.0% about 8.5% down 0.5% Shanghai about 7.5% n.a. n.a. Shanxi about 9.0% about 6.0% down 3.0% Sichuan about 9.0% about 7.5% down 1.5% Tianjin 11.0% about 9.0% down about 2.0% Tibet 12.0% about 12.0% almost unchanged Xinjiang 11.0% about 9.0% down about 2.0% Yunnan above 11.0% about 8.5% down about 2.5% Zhejiang about 8.0% about 7.5% down 0.5% Source: Wen Wei Po, Hang Seng Bank February

5 The deleveraging process has led to slower investment, a housing market adjustment and, hence, weaker economic growth. The PBOC has recently slashed the required reserve ratio (RRR) and interest rates, and injected liquidity into the banking sector, but banks may still find themselves getting more risk averse with respect to providing credit in the current market conditions. The PBOC s actions may not be sufficient to stop growth from slowing further this year. (For details, please see our China Economic Monthly for February, How Effective have PBOC measures been in Support Growth?) Focus shifts to rebalancing Premier Li Keqiang is likely to reinforce the message that the focus will now be on the quality rather than the quantity of economic growth and that the Mainland will continue to turn away from an investment or export-led growth model to one that is more focused on the tertiary sector and increased domestic consumption. Our opinion is that such a change should be viewed as a long-term economic plan. Although the tertiary sector accounted for 48.2% of the economy in 2014, up from 43.4% in 2011 and above the secondary sector s share of 42.6%, it does not mean that the Mainland has already succeeded in this rebalancing not least because part of the tertiary sector s apparent rise in recent years is a product of the secondary sector s slowdown (Exhibit 7 & 8). Our calculations indicate that had the secondary sector, which is dominated by manufacturing and production, risen in by the same pace as it did in , its share of the economy would have been 46.3% in 2014, slightly higher than the tertiary sector s 45.4% 2. In fact, the Mainland is still tackling excess capacity in a number of sizeable secondary industry sectors. The Ministry of Industry and Information Technology has stated that capacity in the steel, cement and plate-glass industries was cut more than expected in 2014 (Exhibit 9). Despite this, these heavy industries still saw a rise in production last year. Steel output jumped 4.5% to 1,125.6 million tons, while cement and plate-glass output rose by 1.8% to 2,476.2 million tons and 1.1% to million units respectively. In the midst of a global economic slowdown when demand is falling, the problem of overcapacity or huge oversupply looks set to remain an issue for the Mainland economy for some time to come. 2 Here we also assume that the tertiary sector would grow in by the same pace as in February

6 Exhibit 7: GDP by Sector Exhibit 8: GDP Sector Growth Source: Reuters EcoWin, Hang Seng Bank Source: Reuters EcoWin, Hang Seng Bank Exhibit 9: 2014 Capacity Reduction s vs Figures Reduction Reduction Steel (thousand tons) 27,000 31,100 Cement (thousand tons) 42,000 81,000 Plate glass (thousand units) 35,000 37,600 Source: State Council, Ministry of Industry & Information Technology, Hang Seng Bank New Silk Road lifts hopes for long-term prospects With the exception of 2010, net trade s contribution to economic growth has been negative in recent years (Exhibit 10) 3. We expect Premier Li Keqiang to put an emphasis on boosting trade and exports as a way of stopping growth from slowing further to below 7%. In addition to creating new free trade zones based on the model established in Shanghai, which has since been replicated in Tianjin, Fujian and Guangdong, the Central Government may step up efforts to pursue its One Road, One Belt strategy, which aims to develop new markets for Mainland exporters. But, again, this is the kind of long-term strategic initiative which may not have a significant impact on the Mainland economy in the short term. 3 Data for 2014 not yet been available. February

7 Exhibit 10: Contributions to Economic Growth Consumption Investment Net trade 6.0 percentage points Source: CEIC, Hang Seng Bank One Road refers to the 21 st century Maritime Silk Road, an initiative proposed in 2013 by President Xi Jinping, which aims to enhance the Mainland s trading ties with Southeast Asia and even Africa. One Belt refers to the Silk Road Economic Belt, which extends trade and transport links between the Mainland and central Asian nations. The Mainland s exports to the Association of Southeast Asian Nations (ASEAN) have nearly doubled in the past five years. Its share of exports to the ASEAN region has also risen from 8.8% in 2010 to 11.6% in 2014 (Exhibit 11 & 12). Exhibit 11: China s Share of Exports (by region) Exhibit 12: China s Export Growth (by region) Source: Reuters EcoWin, Hang Seng Bank Source: Reuters EcoWin, Hang Seng Bank February

8 That said, advanced economies currently remain the Mainland s top export market. The US and European Union together with Hong Kong, Japan and Korea accounted for nearly 60% of the Mainland s total exports in 2014, while central Asian nations, including Russia, accounted for just 8.6% 4. This suggests that the Mainland only sends about one-fifth of its total exports to the ASEAN region and central Asian countries that are on the New Silk Road or the Maritime Silk Road. While the Central Government s vision of One Road, One Belt should benefit the Mainland s economy in the long run, these new markets are extremely unlikely to replace advanced economies in terms of share of Mainland exports during the next few years. Conclusion Against this backdrop, the Central Government looks set to lower its growth target to about 7% for The economic slowdown in recent years is providing an opportunity for a shift in focus to the quality of economic growth and rebalancing the Mainland s economy towards services and consumption. Such a change is a longterm economic undertaking. The Central Government s One Road, One Belt strategy is also likely to take time to bear fruit in the form of ASEAN and central Asian countries significantly increasing their imports from the Mainland. 4 Here central Asian nations include Iran, Iraq, Israel, Kazakhstan, Oman, Pakistan, Russia, Saudi Arabia, Turkey, and the UAE. February

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