China: Key takeaways from the National People’s Congress – and what to watch for next

SUMMARY

• Xi Jinping is content with a return to economic normalcy this year and a floor on growth of 5%; the NPC reaffirmed our view that consumption and especially service sector growth will drive the rebound, with fewer positive spillovers to the global economy than in a cycle fueled by investment stimulus.
• Xi’s financial regulatory restructuring points to a continued focus on systemic risks, and could pave the way for increased pressure on the sector to advance his social and technological goals; a new Party body to oversee science and technology policy aims to boost self-reliance but will deepen US apprehension over Beijing’s innovation aspirations.
• New premier Li Qiang will focus on implementing measures that support entrepreneurship and employment, but he is unlikely to push back on Xi when political/geopolitical goals conflict with the economy; the leadership’s pledges to support the private sector are positive but also come with the expectation that firms will back Xi’s key priorities.
• Xi’s harsh criticism of the US at the NPC shows that it will be difficult to lower US-China tensions from their high baseline level; Beijing’s ability to broker a diplomatic breakthrough between Iran and Saudi Arabia points to Xi’s growing aspirations as a global dealmaker, but it is unlikely that he has the same capacity or the ambition to replicate that with Ukraine and Russia.

Key takeaways from the NPC

1. Xi Jinping’s new agenda is his old agenda. There were few big surprises at the NPC. This is logical: Xi has been in power for ten years, and the more important meeting in terms of policy was the 20^th Party Congress in October. Even so, expectations that Xi might take a turn this year towards greater “pragmatism” – such as a stronger pro-growth tilt, or lighter touch with political and geopolitical themes – were overstated. Xi is paying more attention to the economy but is far more focused on long-term strategic goals such as boosting technological self-reliance, avoiding systemic risks, expanding China’s global influence, and pursuing “common prosperity.” Xi’s overarching objective, repeated seven times in a short closing speech at the NPC, is “building a strong country and rejuvenating the nation” (see our summary of the speech HERE).
2. Beijing is content with a return to economic normalcy this year and won’t aggressively pursue rapid growth for its own sake. The NPC set a conservative target of “around 5%” GDP growth and laid out restrained stimulus (see our write up of the March 6 government work report HERE). In practice, 5% is Beijing’s effective floor on growth barring a new economic shock, and 5.5% growth this year is more likely than 5%. This would still be relatively subdued given the low base of only 3% growth in 2022. Market implications: The post-Covid rebound in activity, rather than stimulus, will do most of the work in powering the recovery. Consumption and services will be the key drivers, with fewer positive spillovers to the global economy than in a cycle fueled by loose credit and accelerating investment (see our earlier report: China: What could go wrong in 2023, 29 January 2023).
3. Xi remains focused on financial stability, but the broader ramifications of his financial sector overhaul are still unclear. A lack of communication to markets is a risk to watch with the new team. Xi installed a mostly new economic team (see our analysis HERE) and restructured the financial regulatory apparatus, creating a new super-regulator for activities other than capital markets (see summary HERE). More changes are on the way, including the likelihood of a new Party body to oversee financial policies, which could be announced in coming days. These developments centralize Xi’s authority over the financial sector. To what end? At the very least, Xi aims to prevent systemic risks and challenges to Beijing’s regulatory authority. He may also have more sweeping aims to curb the sector’s influence (and pay) and refocus it on financing industrial policy goals and more inclusive growth. For now that conclusion remains speculative, and the holdover of Yi Gang as central bank governor provides at least temporary reassurance of a competent hand overseeing monetary policy. Market implications: Do not expect loose credit/monetary policies given the focus on financial stability. Keep watch for signs that financial policies could be in for deeper changes. The retirement of vice premier Liu He, who was in a unique position to credibly explain China’s economic policy objectives to markets, could leave a big hole in communication with markets if no one on the new team steps forward to play this role (see yesterday’s take on Liu’s retirement HERE).
4. China’s industrial and innovation policies to promote technological self-reliance will ramp up – inviting more restrictions from the US in a continuing vicious cycle. The government restructuring at the NPC included the formation of new Central Commission on Science and Technology, a Party body that will oversee efforts to accelerate progress in breakthrough innovation and address “chokepoints” vulnerable to US pressure such as semiconductors. Xi’s push for a “whole nation system” to promote sci-tech goals will intensify US perceptions that there is no real distinction between China’s private firms and its state and military – leading to further technology controls. Market implications: US-China technology tensions will stay hot.
5. Beijing will intensify efforts to support the private sector and entrepreneurship – but firms must support Xi’s strategic initiatives. Xi’s speech to the private sector during the NPC described entrepreneurs as the Party’s “own people” and pledged measures to improve the operating environment for business (see summary HERE). The new premier, Li Qiang, will make this a key focus of his work, particularly as he looks to boost employment growth this year. These pledges are positive and also reaffirm our view that regulatory risks for China’s e-commerce companies are low right now. Still, Xi’s speech made it crystal clear that he expects private firms to support the Party’s economic and technological objectives – such as by focusing their business models on core areas of innovation – as well as the “common prosperity” initiative, which includes harmonious labor relations, giving back to society, and sharing prosperity more equitably within the firm. Market implications: Private firms will benefit from more favorable policies but some must also adjust business models and priorities to suit the leadership’s technological and social development objectives.
6. Xi’s new economic team is made up of pragmatists who nonetheless will focus on loyally implementing his agenda. The new premier, Li Qiang, made it clear that his focus is on implementing policies rather than designing them. That isn’t all negative – Li is a pragmatist who will look to work with the private sector and foreign firms. But he is unlikely to push back on Xi when political or geopolitical priorities (such as self-reliance) interfere with the economy. Other officials within the top economic team are either Xi acolytes or technocrats with a background in science, aerospace and defense with the skills to advance innovation goals. Market implications: The formal business and investment environment will remain stable, but Xi’s assertive political and geopolitical goals will be a weight on private sector and foreign confidence.
7. As Xi steps out as global dealmaker, US-China geopolitical tensions remain high. In his speech to the private sector at the NPC last week, Xi took the unusual step of directly calling out the US for its “containment, encirclement and suppression” of China. That shouldn’t come as a shock given the state of the relationship and the fact that containment – at least in the technology sphere – is now more or less explicit US policy following the imposition of semiconductor controls in October. New foreign minister Qin Gang continued that brushback of Washington the next day, describing the Biden’s administration’s professed desire to install “guard rails” in the relationship as empty and hypocritical. While such sentiment does not mean rising tail risks – conflict over Taiwan, and Chinese lethal support for Russia both remain unlikely – it does mean that it will be difficult to lower tensions from the high current level. Indeed, this week Beijing indicated that it may not be ready to accept US calls for Biden and Xi to speak by phone – a key watchpoint now that NPC is over. In the meantime, Beijing captured global headlines by brokering a diplomatic deal between Iran and Saudi Arabia, well-timed to coincide with the NPC and Xi’s start of a new term as president. Media report that Xi may visit Moscow as soon as next week and speak with Ukrainian president Zelensky for the first time since the start of Russia’s invasion. It is unlikely that Beijing has the same capacity — or aspirations – to play dealmaker in the Ukraine conflict as it did with Saudi Arabia and Iran, but Xi’s efforts are worth watching.

What to watch for next in policy:

• The strength of the reopening rebound. Chinese officials have been encouraged by the initial recovery in activity in January and February but are cognizant that these are still early days. While the NPC clearly indicated on overall stance of staying disciplined on stimulus this year, policy will remain supportive for now to help the recovery gain momentum. The property sector remains a key watchpoint. There are signs of an initial recovery in sales, but the weak state of developer finances will remain a weight on confidence and could force the authorities to roll out more policies to prevent further deterioration.
• Potential Party announcements in coming days. As noted, over the next several days or weeks Beijing is likely to make further announcements as to new/expanded Party bodies to oversee key areas of policy – potentially to include a financial sector oversight body.
• National Financial Work Conference: It is likely that Beijing will convene a National Financial Work Conference, typically held every five years, sometime this spring or summer. The NFWC has often been the venue for charting major changes in financial regulation. This year it could settle key details on the regulatory restructuring, and chart the next step in efforts to address rising local government debt risks and weakness in China’s regional banks.