Comment: Besieged China Knows Its National Priority Is The Economy

SINGAPORE: China faces a multitude of challenges, including rising tensions with the United States, backlash against national security law, and more.

However, the events of last week suggest that the country has not lost sight of its main national priority: maintaining the economy.

After a delay of more than two months due to the COVID-19 epidemic, China held its long-awaited Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress (NPC), the official political body the highest in the People’s Republic of China.

These meetings were held in exceptional circumstances this year, as the country struggles to recover from the epidemic and most of the rest of the world continues to fight the virus.

Keeping 5,000 delegates gathered in the great monumental hall of the people in Tiananmen Square in good health and safety is a Herculean task.

The AFN session began with a minute of silence to remember the victims of COVID-19 during a major public mourning.

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But the main subject discussed was undoubtedly economic policy.

This was reflected in the main reports presented during the sessions: Prime Minister Li Keqiang’s government work report, the planning speech of the minister in charge of the National Development and Reform Commission He Lifeng and the budget speech from Minister of Finance Liu Kun. .

NO GROWTH TARGETS

Remarkably, for the first time since 1994, when it started publishing annual growth targets, the Chinese government has not set an explicit growth target for 2020.

It was a wise choice, after the historically small decline of 6.8% year-on-year in GDP in the first quarter, and given the high level of uncertainty regarding the trajectory of the pandemic.

Many had argued that a target could drive local governments to act.

This year is also the last crucial round of China’s decade-long goal of doubling its GDP in the 2010s to realize the vision of arriving as a moderately prosperous society.

However, the Chinese government has wisely withdrawn, probably calculating that containment measures for coronaviruses made this impossible. Maintaining an overly ambitious target would have led to an over multiplication of macroeconomic policies.

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Implicitly, however, there is always a growth assumption hidden in the reports presented. As Wang Tao of UBS pointed out, if you look closely at the budget figures and the 3.5% inflation target, the government assumes that real GDP growth will be in the range of 1, 8 percent.

This is an achievable target, despite great uncertainty, and the challenge that China would have to exceed the IMF forecast by 1.3%, which is close to the recent consensus consensus forecast by investment banks. 1.35%.

But 2% growth can be a stretch, when it requires returning to 6% growth in the second half, pending second quarter estimates.

A MODERN STIMULUS

The stimulus involved in the speeches by governments, although greater than that announced earlier this year, still seems modest compared to what China has put in place after the global financial crisis.

One caveat is that China’s fiscal accounts are complex, and estimating a consolidated global deficit is difficult, but it appears to be in the range of 10.5% of GDP.

In terms of recovery, the deficit would be around 5 percentage points higher than last year’s deficit, and considerably lower than the recovery from the global financial crisis, at 12% of GDP over two years.

A 10% deficit is also lower than forecast for the United States (15.5% of GDP) and some EU economies at this stage.

Again, China has emerged from the epidemic with less damage than most economies, so a weaker stimulus may well be needed.

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Much of the economic recovery can come from the monetary side. Although Premier Li has promised to pursue a prudent policy in a more flexible manner, the emphasis is on flexibility. Total social finance, a measure of all credit in the economy, must grow at least as much as last year, which in a slow-growing economy means easing monetary policy.

If the economy turns out to need an extra boost, China can always add another later in the year, which Premier Li hinted in his speech.

CHINA’S YEAR AIM TO REDUCE POVERTY AND MAINTAIN LOW UNEMPLOYMENT

For China, this is not the year of growth, but the year of poverty reduction. Economic growth was mentioned 16 times in Prime Minister Lis’ speech, but poverty returned 23 times. Stability (10) and security (six) were also frequently mentioned.

Concretely, China aims to keep urban unemployment below 6% and create 9 million new jobs.

However, with growth of around 2%, the objective of new jobs could be strained. If 6 percent growth were needed to create 13.5 million jobs, 2 percent growth would create something like 4.5 million jobs.

China also faces a major challenge in the fight against unemployment. Many migrants lost their jobs during the severe recession in the first quarter, with some 50 to 100 million people looking to resume their old job or find a new one.

China has maintained its goal of eliminating extreme poverty this year will not be easy. Even before COVID-19, some 10 million people were already living in extreme poverty.

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There are plans to increase social benefits and rural pensions, which is a good thing. These payments have been minimal and are the programs that would support poverty reduction in China in the medium term.

Politics also has the added benefit of promoting consumption. Beneficiaries, however poor they may be, are likely to spend aid.

The central government has dedicated a special transfer of social protection program spending to local governments, but the challenge is to target and reach those who need it.

NEW INFRASTRUCTURE INVESTMENTS

Infrastructure spending will continue to play a role in stimulus, but is much less important in China’s plans compared to the revival of the global financial crisis, when China’s expansion of its highways, railways and cities spurred growth and pushed up commodity prices around the world.

This time, new infrastructure will take center stage, including investment in 5G networks, charging stations for electric cars, cloud computing and the like, with much of the 3.75 trillion yuan (523 billion US dollars) of special local government bonds set aside for this target.

With COVID-19 wreaking havoc, decisions to advance investment in this area will allow China to lead the pack in the industries identified under its Made in China 2025 plans.

By the end of the year, China aims to have 600,000 base stations for 5G, the backbone of the digital economy of the future.

DO NOT RELEASE ON STRUCTURAL REFORMS

Finally, the government has reconfirmed its commitment to structural reforms. Premier Li called for boosting market entities through reform and strengthening new growth engines and listed a host of structural reforms.

It should be noted the promised opening of the economy and the reduction of the list of sectors in which foreign companies cannot invest.

Although there has been past resistance, structural reforms may have a better chance when things are difficult. As they say: never lose a crisis.

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THE SURPRISE OF HONG KONG

Although China’s economic policy decisions were important, it was the surprise proposal for a Hong Kong security law that made the headlines.

The controversial proposal also pushed some 7% of the Hong Kong stock market back into trading days, with investors viewing the bill as a threat to Hong Kong’s freedoms.

The news sparked street protests and concerns over Hong Kong’s autonomy under the One Country Two Systems formula.

American politicians were quick to respond, suggesting that the United States could react in a number of ways, including a withdrawal of Hong Kong status under the Hong Kong Policy Act of 1992, which gives the island a special trade status distinct from that of the continent.

This may be a bluff, as it would also hurt the extended American interests in the city, but the threat alone has cast a shadow over the city.

Already, the Hong Kong economy has been hit hard by street protests and coronavirus that lasted a year, contracting 8.9% in the first quarter, the largest decline in four decades.

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This week, the AFN passed the bill, authorizing the AFN Standing Committee to draft and adopt lawmakers this year.

SINO-AMERICAN FIREWORKS

Unsurprisingly, rising tensions with the United States sparked fireworks during the two sessions. Although Premier Li Keqiang assured China’s commitment to the trade deal, Foreign Minister Wang Yi accused the United States of having a cold war mentality.

There has been a noticeable deterioration in US-China relations in recent weeks as the US administration has heightened anti-China rhetoric about the origin of coronaviruses and has tried to blame the pandemic in China, including by fueling accusations that the World Health Organization is pocket China.

Despite the Phase 1 trade deal, the U.S. continued to tighten sanctions against Chinese companies, adding 33 organizations to its export blacklist for human rights and national security violations last week.

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Domestic sentiment has been heightened, as calls to the U.S. government to subsidize U.S. businesses to leave China have increased.

Although some of these saber cuts are part of Trump’s election campaign, it is increasingly likely that the United States and China will accelerate their decoupling following COVID-19.

This is not only problematic for China and the United States, but also for world trade and risks delaying the global economic recovery after the pandemic.

But for now, China remains focused on keeping its economy on an equal footing as it makes its way through these troubled waters.

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Bert Hofman is director of the Institute for East Asia at the NUS.