China curbs financial risk to deliver a ‘moderately prosperous’ society by 2020
Beijing — China stepped up its push to curb financial risk, cutting its budget deficit target for the first time since 2012 and setting a growth goal of about 6.5%, omitting last year’s aim for a faster pace if possible.
The deficit target — released on Monday as Premier Li Keqiang delivered his annual report to the National People’s Congress in Beijing — was lowered to 2.6% of GDP from 3% in the past two years. The 6.5% goal is consistent with President Xi Jinping’s promise to deliver a "moderately prosperous" society by 2020.
Policy makers dropped a target for M2 money supply growth, saying it was expected to expand at a similar pace to last year. Authorities reiterated prior language saying prudent monetary policy will remain neutral this year and that they will ensure liquidity at a reasonable and stable level.
Xi has ratcheted up his drive to curb debt risk, pollution and poverty at a time when the world’s second-largest economy is on a long-term growth slowdown. His efforts to rein in spending contrast with a historic expansion of US borrowing under Donald Trump during a period of economic expansion.
The 2018 targets "suggest slower growth and a fiscal drag", said Callum Henderson, a MD for Asia-Pacific at Eurasia Group in Singapore.
"This makes sense for China in the context of the new focus on financial derisking, poverty alleviation and environmental clean-up, but is less good news at the margin for those economies that have high export exposure to China."
Growth surpassed 2017’s target with a 6.9% expansion that was the first acceleration since 2010. Economists forecast a moderation to 6.5% this year amid the ongoing deleveraging drive and trade tension with the Trump administration and a further deceleration to 6.2% in 2019.
"We will improve the transmission mechanism of monetary policy, make better use of differentiated reserve ratio and credit policies and encourage more funds to flow towards small and microbusinesses, agriculture, rural areas and rural residents, and poor areas, and to better serve the real economy," Li said in his report.
Spending to curb pollution will rise by 19% to $40.5bn as authorities strive to make greater progress on one of their key objectives, Li said. Authorities aim to cut sulfur dioxide and nitrogen oxide emissions by 3% and keep reducing smog in key areas. Days with heavy air pollution in key cities have fallen by 50% in the past five years, said the work report.
The lower fiscal budget deficit ratio goal should be seen in the context of the government’s awareness of the risk to systemic stability amid the deleveraging drive, said Pauline Loong, MD at research firm Asia-Analytica in Hong Kong. "The work report this year is focused throughout on risk management."
Growth will be supported by 800-billion yuan of tax cuts for enterprises and individuals, while use of special purpose bonds will prioritise "supporting ongoing local projects to see them make steady progress", the Finance Ministry said.
Still, the augmented fiscal deficit, which includes local government financing vehicles and other off-balance-sheet activities, will remain expansionary at about 10% of GDP this year, estimates Liu Li-gang, chief China economist at Citigroup in Hong Kong. That’s down from the International Monetary Fund’s estimate of 12.6% last year.
"The recent pace of fiscal stimulus is unsustainable and unnecessary," said Stephen Jen, CEO of Eurizon SLJ Capital in London. "A curtailment in the official fiscal and growth target makes sense."
The report said an increase in the thresholds for personal income taxes is planned.
Officials said they would study setting up a national financial institution to help fund housing projects. China aimed to set a development plan for the Pearl River Delta region this year to better integrate economic development of Hong Kong, Macau and surrounding cities in Guangdong province, Li said.