China’s NPC: A new narrative on growth and liquidity

China’s slowing economy and planned changes to its foreign investment landscape will take centre stage at the nation’s annual legislative meeting which begins tomorrow (Tuesday).
 
Markets will likely focus on numbers, such as this year’s GDP target. But the real takeaway from the 2019 National People’s Congress will not be a number.
 
The message to watch for is the government’s new policy narrative – a narrative aimed at boosting domestic and international confidence in the Chinese economy amid a slowing economy facing a trade war. We see two key themes emerging:
 
1.     Deleveraging is dead. Not in so many words but the clear message will be that shoring up growth with plenty of liquidity is now top priority.  

2.     China to further open up its markets in a move to reduce a major source of friction with its trade and investment partners.

 
A GDP target is no longer a meaningful indicator of government policy. Where exactly the number falls in the widely expected range of 6%–6.5% has little correlation with the new policy priority, which is that  Beijing will pull out all the stops this year to protect jobs.
 
Providing steady and until now rising incomes has been crucial to the continuing right to rule of the Chinese Communist Party.
 
The NPC message will be that shoring up economic growth will be the new normal. Deleveraging – a key goal outlined in the government’s so-called supply-side reforms launched in 2015 – is definitely out. Monetary policy, whatever the official description and denials, can be expected to be ultra loose.
 
Early numbers confirm the outlook. New renminbi loans surged to Rmb 3.23 trillion ($476.97 billion) in January. Total social financing, the broader measure of credit, jumped to Rmb 4.64 trillion ($685.18 billion) the same month. To put the numbers into context, China’s stimulus package to counter the global financial downturn in 2008-2009 was Rmb 4 trillion or $586 billion at the then exchange rates.
 
Constraining further lending is the current under-capitalisation of Chinese banks in meeting their total loss-absorbing capacity under international standards. Among the innovative ways to help Chinese banks replenish their capital are fundraising tools such as perpetual bonds. This will likely come under the heading of financial innovation in the Premier’s report which sounds better than finding ways of raising funds to boost massive lending.
 
More specific measures to support growth, such as ways to increase consumption, are likely to be mentioned in the news conferences typically held on the sidelines of the NPC.
 
More important to the medium-term outlook for the economy are the structural changes that are supposed to open up China’s markets to its trade partners. 
 
China has been saying for decades that it will further open up its economy and work harder towards protecting intellectual property rights. In practice all these years, however, foreign businesses have had to deal with a protected market where the playing field is tilted in favour of domestic companies with forced technology transfers a common complaint.
 
Any new legislation introduced should therefore be scrutinised for the extent to which it will introduce meaningful changes that would avert future friction with China’s trade and investment partners.
 
The media are likely to make much of the new Foreign Investment Law being reviewed at the NPC as evidence that China is indeed opening up its markets. It touches on issues such as unfair technology transfers, intellectual property rights protection and equal opportunities in public procurement. If adopted, it will replace three existing statutes on foreign investment.
 
But, like many Chinese laws, it is couched in such broad terms and vague language that there is ample room for discretionary interpretation and implementation. And the law continues to maintain a legal distinction between foreign-funded and domestic companies.
 
Also on the Premier’s to-do list will be capital markets reform with an emphasis on strengthening risk management and regulatory oversight. This dovetails with Beijing’s ambition to increase the weighting of renminbi-denominated equities in MSCI indexes, which will drive more money into A-shares markets.
 
The elephant in the room – the trade and investment dispute with the United States – is unlikely to be mentioned specifically. And any moves to further open up Chinese markets will be presented as the natural and continuing development of Beijing’s decades-old Open Door Policy.
 
Premier Li Keqiang will be treading a fine line in his work report. He must prepare the nation for an extended period of slow growth while trying to instil confidence in the international and domestic business communities in China’s future economic outlook. He must push new measures to open up China’s economy but downplay the impact of the tariffs fight with the United States in hastening the process.
 
Only time will tell if China is genuinely opening its economy to its trade and investment partners. But its new narrative on growth and liquidity is already playing out.


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