What to expect at the NPC - Capital Economics
China Economics

What to expect at the NPC

China Economics Weekly
Written by Mark Williams
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The National People’s Congress – the stage on which China’s government sets out its economic plans – starts on Friday. We expect the budget to confirm the withdrawal of post-COVID fiscal support. It’s unclear whether a GDP growth target will be announced for 2021 – it wouldn’t affect this year’s outlook if one were announced, but it would signal that the government feels unable to abandon a target-focused approach that has many unwelcome consequences. The NPC will also be presented with a draft of the new Five-Year Plan.

The National People’s Congress that starts on Friday is the stage on which the government sets out its economic plans. There are a few things to focus on.

Withdrawal of fiscal support

The budget presentation (also on Friday) is likely to confirm that the post-COVID largesse has ended. Government borrowing dropped at the end of last year. (See Chart 1.) So far in 2021, local governments have issued no new debt at all, whether general purpose bonds for regular fiscal operations or the special bonds that financed the infrastructure portion of stimulus last year. In January last year, issuance amounted to RMB790bn. Even pre-pandemic, issuance in January 2019 was RMB370bn, or around 5% of monthly GDP.

Chart 1: Govt. & Quasi-Fiscal Net Bond Issuance

(% of trend GDP, SA)

Sources: CEIC, Wind, Capital Economics

A new local government quota for this year will feature in the budget, and policy will formally still be “proactive”. But that two month hiatus sends a clear signal that priorities have shifted. We expect confirmation that pandemic-response measures are being withdrawn – including social security waivers and issuance of “anti-pandemic” sovereign bonds, which together totalled 2.5% of GDP last year. The special bond quota will be pared back. One implication is that infrastructure investment will slow further. The Finance Ministry hopes to stabilise the ratio of government debt to GDP which, on its narrow measure, increased by around seven points last year. (See Chart 2.)

Chart 2: Government Debt (% of GDP)

Sources: CEIC, Wind, Capital Economics

Growth targets aren’t going away

It’s unclear whether a 2021 GDP growth target will be announced – probably not. Either way, targets aren’t being abandoned. They will feature throughout the Five-Year Plan – indeed, there may be an implicit average growth target in any goal set for the economy in 2025. And annual growth targets are still very much in vogue in the provinces – they have all set targets for this year of 6% or higher.

But a national, annual GDP target has a particularly pernicious effect: it constrains the response to cyclical slowdowns, encouraging officials to err on the side of excess stimulus or to manipulate the data. Abandonment would be welcome if it’s for good.

The Five-Year Plan

The NPC will also be presented with and – after due consideration – pass the new Five-Year Plan. A draft should be published on the NPC’s first day (that’s what happened in 2016). Key themes will be the “dual circulation model” – the effort to boost self-sufficiency in strategically-important sectors like semiconductors, a drive to push Chinese firms to the forefront of emerging technology sectors, and the environment. We’ll have more to say soon.

The week ahead

The NPC is the main event of the coming week. On the data front, the PMIs due at the start of the week will shine a light on the impact of Spring Festival travel restrictions.

Data Previews

Manufacturing PMIs (Feb.) Sun. 28th Feb./ Mon. 1st Mar.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

“Official” PMI (28th Feb.)

09.00

51.3

51.1

52.0

Caixin/Markit PMI (1st Mar.)

09.45

51.5

51.3

52.0

Factories should benefit from Spring Festival restrictions

The manufacturing PMIs dropped back in December and January from November’s multi-year highs. We think this reflected supply constraints rather than a slowdown in demand and expect that broad trend to continue playing out over coming months. After all, industry capacity utilisation is running at an eight-year high. (See Chart 3.) Demand should tail off over coming months – particularly export demand as major economies open back up.

But February could be an outlier. Normally, many factories would be closed or running at reduced capacity in the weeks around Lunar New Year (which fell on 12th February this year). Travel restrictions will have allowed many firms to reopen sooner and with a larger workforce than usual. We’re expecting that to be reflected in a rise in the headline indices.

Chart 3: Industry Capacity Utilisation Rate (%)

Sources: CEIC, Capital Economics

Non-manufacturing PMIs (Feb.) Sun. 28th Feb./ Wed. 3rd Mar.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

“Official” Non-man. PMI (31st Jan.)

09.00

52.4

52.0

51.8

Caixin/Markit Services PMI (3rd Feb.)

09.45

52.0

52.0

51.5

Not travelling, not shopping?

The monthly cycle of data releases is always interrupted around the Lunar New Year, with most high-profile series not available for a month. As a result, we’ve had little additional data since the last round of PMIs. An additional complication is that while the PMIs are seasonally-adjusted, for services as for manufacturing this was not a normal Lunar New Year.

On the positive side, cinema ticket sales set a new record for the festive period despite capacity restrictions, helped by the screening of a number of blockbusters whose 2020 releases were delayed.

But other normal activities were disrupted by the travel restrictions. Tourism and travel will have been subdued. The impact on retail activity is not immediately clear: people unable to spend time with their families might have gone shopping instead. But the official figures for the first week of the holiday suggest that spending was only 4.9% higher than in the same period in 2019 – that’s relatively subdued.

The upshot is that the headline PMIs could plausibly go either way. On the basis of the little information we have so far – car and property sales, the move should not be too big. (See Chart 4.)

Chart 4: Car & Property Sales (% m/m, seas. adj.)

Sources: Wind, Capital Economics

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (China)

Previous*

Median*

CE Forecasts*

February

Sun 28th

Chn

“Official” Manufacturing PMI (Feb.)

(15.00)

51.3

51.1

52.0

Chn

“Official” Non-Manufacturing PMI (Feb.)

(15.00)

52.4

52.0

51.8

March

Mon 1st

Chn

Caixin Manufacturing PMI (Feb.)

(09.45)

51.5

51.3

52.0

Wed 3rd

Chn

Caixin Services PMI (Feb.)

(09.45)

52.0

52.0

51.5

HK

Retail Sales (Jan.)

(16.30)

(-13.2%)

Fri 5th

Chn

Start of National People’s Congress (including on Friday presentation of government work reports, the budget and, probably, a draft of the Five-Year Plan).

Selected future data releases and events:

March

Sun 7th

Chn

Foreign Exchange Reserves (Feb.)

Chn

Trade Data (Feb.)

Wed 10th

Chn

Inflation Data (Feb.)

Also expected during this period

8th – 18th

Chn

Foreign Direct Investment (Feb.)

9th – 15th

Chn

Aggregate Financing “AFRE” (Feb.)

9th – 15th

Chn

Net New Lending (Feb.)

9th – 15th

Chn

M2 Money Supply (Feb.)

TBC

Chn

CBRC Data on Financial Institutions (Assets, Earnings, NPL, Q4)

TBC

Chn

Vehicle Sales (Feb.)

Main Economic & Market Forecasts

%q/q annualised (%y/y), unless stated

Latest

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

2020e

2021f

2022f

Official GDP

(+6.5)*

(+21.0)

(+9.0)

(+7.0)

(+5.5)

(+5.0)

(+2.3)

(+10.0)

(+4.5)

GDP (CE CAP-derived estimates)

(+7.6)*

(+31.0)

(+10.0)

(+5.0)

(+2.5)

(+3.0)

(+1.0)

(+10.0)

(+3.5)

Consumer Prices

(-0.3)**

(+0.9)

(+1.8)

(+1.5)

(+1.4)

(+1.4)

(+2.5)

(+1.5)

(+1.5)

Producer Prices

(+0.3)**

(+1.0)

(+2.5)

(+2.0)

(+1.5)

(+1.3)

(-1.8)

(+2.0)

(+0.5)

Broad Credit (AFRE)

(+13.0)**

(+12.0)

(+11.0)

(+10.0)

(+9.0)

(+8.0)

(+13.3)

(+9.0)

(+7.5)

Exports (US$)

(+18.1)***

(+27.0)

(+14.0)

(+2.0)

(+3.0)

(-2.0)

(+3.6)

(+10.0)

(+1.5)

Imports (US$)

(+6.5)***

(+17.5)

(+22.5)

(+12.5)

(+8.0)

(+7.0)

(-1.1)

(+15.0)

(+6.0)

RMB/$

6.47

6.40

6.30

6.20

6.20

6.20

6.54

6.20

6.20

7-day PBOC reverse repo %

2.20

2.30

2.40

2.50

2.50

2.50

2.20

2.50

2.50

1-year Loan Prime Rate (LPR) %

3.85

3.95

4.05

4.15

4.15

4.15

3.85

4.15

4.15

1-year MLF Rate %

2.95

3.05

3.15

3.25

3.25

3.25

2.95

3.25

3.25

10-year Government Bond Yield %

3.27

3.20

3.10

3.00

2.80

2.70

3.20

2.80

2.60

RRR (major banks) %

12.5

12.5

12.5

12.5

12.5

12.5

12.5

12.5

12.0

CSI 300 Index

5,370

5,550

5,600

5,650

5,700

5,825

5,211

5,700

6,200

Hong Kong GDP

(-3.0)*

(+3.0)

(+5.5)

(+4.5)

(+6.5)

(+7.5)

(-6.1)

(+5.5)

(+5.5)

Hang Seng Index

29,277

30,000

30,175

30,350

30,500

31,500

27,231

30,500

34,250

Sources: Bloomberg, CEIC, Capital Economics *Q4; **Jan.; ***Dec.; End of period


Mark Williams, Chief Asia Economist, mark.williams@capitaleconomics.com
Sheana Yue, Assistant Economist, sheana.yue@capitaleconomics.com