SUMMARY:
- The National People Congress’ ambitious growth target and optimistic assumptions mean that Beijing will need to implement more fiscal stimulus by mid-year; the leadership will add only as much support as necessary, but the policy response is unlikely to be as slow as it was in 2023
- The leadership voiced new concern over excessive investment in hot sectors at the NPC; still, excess capacity will continue to be a source of risk for the domestic economy and for trade frictions this year
- Key watchpoints in the weeks ahead include property sector weakness, economic data releases, and the end-April Politburo meeting; we continue to have low expectations that a third plenum reform meeting will be a major market catalyst
Our March 5 note on the National People’s Congress government work report (link HERE) laid out the key takeaways for growth and stimulus. In this note we add some final thoughts on the NPC and what investors should watch for next.
China’s annual National People’s Congress concluded on Monday on an anti-climactic note. Going back to the early 1990s, the NPC had closed with a press conference by the Premier, but Beijing ended the tradition this year. The decision falls into the category of ‘shocking but not surprising.’ It is not surprising in that it reflects an ongoing diminishment of the role of the Premier and the State Council (government cabinet) as strictly subservient to the Party apparatus directly controlled by Xi. It is shocking in the sense that these press conferences had been the one opportunity each year to hear the Premier discuss the economic situation in somewhat candid terms and to address questions from the media. If ever there were a period when this might have been helpful for confidence it is this year.
Instead, Beijing let its stimulus announcements do the talking, and that message was been underwhelming for investors. Our March 5 report (link again HERE) noted that the economic plan unveiled at the NPC met our forecast of a “weak 5%” scenario: that is, Beijing set a relatively ambitious target for real GDP growth of “around 5%”, but without the forceful stimulus necessary to decisively secure that goal. The upshot is that domestic demand is set to remain subdued amid continuing headwinds from the property sector and local government debt burdens, fragile private sector confidence, and a cautious household sector. Deflationary pressures seem likely to persist, acting as a constraint on corporate revenue and profit growth and on nominal GDP growth, which is unlikely to be much higher than last year’s 4.6% growth rate.
More stimulus will be necessary
There is significant fiscal stimulus already in the pipeline from recent local government bond issuance, the central government’s CNY 1 trillion bond issuance last October, and central bank financing for housing-related programs. That should provide a modest cushion to demand over the next few months. But Beijing’s budget plans for the full year make optimistic assumptions, including that local government land sales to developers will be roughly the same as last year. With property activity showing no signs of hitting bottom, Beijing will likely need to add more stimulus by mid-year in order to keep growth above a 4.5% trajectory.
That risks a repeat of the dynamic last year, when growth slowed sharply over the summer and the policy response lagged. The leadership waited until the end-July Politburo meeting to outline incremental new measures, and until October to announce a surprise bond issuance to boost lagging confidence. The potential upside this year is that the policy response may not be quite as slow because the tools are ready. In announcing another CNY 1 trillion bond issuance at the NPC (this time in the form of “ultra long-term special treasury bonds”), Beijing left the door open to a further bond issuance later this year. Still, investors will be in a waiting game of determining when Beijing will step in and how forcefully.
New growth drivers: Stepping on the brakes while hitting the gas?
Several clients have noted that the policy mix at the NPC implies another “boring” year for China’s economy, in the sense of being neither dramatically bad nor good. We would agree at a broad level but would caution against concluding that this is an economy that is somehow static. It is instead undergoing dynamic change, including two key trends that are in something of a tug-of-war when it comes to support growth: (1) the ongoing decline of the real estate sector and its broad ripple effects; and (2) China’s rapid build up of capacity in advanced manufacturing, particularly the clean tech complex of electric vehicles, batteries, and solar.
Beijing has been pinning its hopes on advanced manufacturing taking the place of real estate, but it is not large enough or supported sufficiently by domestic demand to play that role. That reality is contributing to excess capacity, surging exports and growing trade tensions with the EU and US, particularly over EVs. How Beijing addresses this dynamic will be a key issue this year for the domestic economy, China’s commodity demand (particularly metals) and for trade partners.
The NPC sent mixed messages as to how China’s strategy will evolve. The key buzz phrase this year was “new quality productive forces,” which refers to Xi’s push for growth led by high-tech, high-efficiency industries rather than resource-intensive industries. At the same time, Xi used an important NPC appearance to warn local officials not to simply pile investment into hot sectors, creating bubbles and fiscal risks (please see: That’s what Xi says, 7 March 2024). Likewise, PBOC governor Pan Gongsheng said that the central bank will restrict lending to sectors facing overcapacity, while at the same time pledging to continue lending programs that encourage credit to favored sectors such as clean tech. Simply put, these various contradictory comments suggest that China’s leadership is indeed worried about excessive investment in some new sectors but remains wedded to its core industrial policies given the economic and geopolitical stakes.
We anticipate that this will result in a combination of the following approaches:
- Modest efforts by the central government to rein in local investment in sectors facing excess capacity. This could include trimming the weakest players in the EV sector.
- New measures to boost demand and correct the supply-demand imbalance. Beijing has pledged to promote upgrading of appliances, vehicles, and industrial equipment this year. Some of these measures (such as for vehicles) are likely partly intended to help absorb excess capacity. Likewise, there has been speculation this week that utilities in China will lift caps on curtailment rates for solar electricity generation, a measure that could boost demand for solar firms (see Bloomberg story HERE).
- Continued investment – and new risks of overcapacity – in other high-tech sectors such as semiconductors. Despite Xi’s warning, officials throughout the system face powerful incentives to steer investment in areas that he has earmarked as strategic priorities. And Xi himself would much prefer overinvestment to underinvestment as he seeks to promote China’s technological self-reliance and its critical role in global supply chains.
It is not only local officials who are trying to invest alongside Beijing. This year’s NPC has also sparked the usual round of articles about equity investors looking to identify the high-tech sectors that will benefit from policy support. This strikes us as challenging to do successfully, given how much government and private sector capital will be flowing to these industries, stretching valuations and breeding over investment. While not as flashy, sectors such as consumer services seem less likely to suffer from these distortions.
Key watchpoints ahead:
Xi’s economic team continues to face the core tension between: (1) the desire to boost growth and confidence; and (2) the need to adhere to Xi’s directive of “high quality development” – meaning financial discipline and a focus on new growth drivers. The result is that policymakers will likely provide only as much stimulus as necessary to meet Beijing’s bottom-line: official growth somewhat above 4.5%, and no significant social or financial instability. Below are the key watchpoints for the policy response in coming weeks:
- Signs of property stabilization. The property sector continues to be the key macro risk for the economy this year and the biggest weight on confidence. Beyond the direct impact on economic activity, a further decline in property sales and prices will weigh on the fiscal capacity of local governments – meaning that fiscal stimulus could underperform against budget targets – and add to deflationary pressures. The NPC outlined only an incremental approach to property support, but an extended further deterioration will put even 4.5% growth at risk and raise pressure on Beijing to contemplate more aggressive measures (e.g., a stronger financial backstop to buttress confidence in property developers). The risk of default by developer Vanke, partially owned by the Shenzhen government, highlights how financial stresses have spread beyond private developers.
- Economic data releases. On March 18 (March 17 Eastern time), Beijing will release combined activity data for January and February. Spending during the Lunar New Year holiday in February appeared relatively robust, but some data suggest that momentum quickly fell off after the holiday; the full month’s data will help clarify. Data for March (for release in April) will also be important as the seasonal distortions from the Lunar New Year will be over by then. Among the questions is the extent to which a welcome pickup in January inflation was due to seasonal distortions or reflecting an actual improvement in consumer demand.
- Further details on NPC announcements. Coming weeks should see more details trickle out on various pledges made at the NPC. One area we are watching is Beijing’s plan for a year-long campaign to promote upgrading of products such as appliances and vehicles. We remain skeptical that this initiative will be highly significant at the macro level in boosting consumption, given the lack of a funding commitment at the NPC and the fact that local government finances remain under heavy strain.
- End-April and End-July Politburo meetings. China’s Politburo (the senior 24 Party members) meets quarterly to review economic policy. The end-April meeting will be the first since the NPC and the release of economic data in Jan-March so will be worth monitoring for initial NPC follow up. The late July meeting will review the first half’s performance and, like last year, will likely be the occasion for another round of stimulus to keep growth on track.
- A third plenum. Beijing will almost certainly hold a “third plenum” meeting this year after deciding not to hold one last fall. The timing remains ambiguous, and we are inclined to think that it will happen in H2 rather than H1 (low conviction). More importantly, we have not seen signs of a major new reform agenda that would excite investors, and thus are skeptical that this event would be a major market catalyst.
