The 14th National People’s Congress (NPC) and Chinese People’s Political Consultative Conference (CPPCC) or “Two Sessions” began on the 5th of March with high expectations of major reforms and government appointments as well as the final formalisation of Xi Jinping’s unprecedented third term as China’s leader.
This is the first “Two Sessions” post Covid restrictions being lifted in December 2022. It is also the first of the “Two Sessions” in the Chinese Communist Party’s (CCP) new five-year term. In this paper, we look at the potential implications from the government work report and the key announcements from these meetings.
2023 GDP growth target ~5%
This modest GDP growth target suggests that China will put more emphasis on high-quality growth and sustainable development, striving for economic stability, rather than aiming for the breakneck growth seen in past years. At the local level, the average of the regional growth targets is around 5.6%, indicating that local governments are still striving for high growth. Businesses can still expect considerable government support including more infrastructure investment, incentive policies and measures to boost domestic consumption. In that regard, we believe it is likely that China will eventually deliver a higher than targeted growth figure in 2023.
Constructive on consumption recovery
One key mention in the work report is to promote steady improvements in household-incomes and the purchase of big-ticket items like appliances. Despite no detailed polices, we expect stimulus to surprise to the upside, boost consumer confidence and revitalise consumer spending throughout the year. We believe consumption will contribute around 2/3 of GDP growth for 2023, back to the pre-Covid average level versus ~30% in 2022.
Supportive on fiscal policy
The central government budget deficit ratio is set at 3% (vs 2.8% last year) and the local government special bond quota is RMB3.8trn (vs RMB3.65trn last year). Despite no sizable increase in fiscal policy announced for 2023, the carry forward effect of last year’s physical workload, together with fiscal stimulus this year, would further drive infrastructure investment nationwide, contributing to GDP growth by ~2%.
Proactive on industrial modernisation
The government aims to continue to push through concerted efforts towards core technologies in key sectors and make enterprises more advanced, smarter and more eco-friendly. We believe China will keep focusing on technological self-reliance amidst the ongoing US-China rivalry. Industries with greater ability to localise. as well as those debottlenecking overseas supply chains are at the helm of economic development. Meanwhile, companies in advanced manufacturing with high-end technology may benefit from policy tailwinds and become long-term beneficiaries.
Stabilising the property market
There was no mention of ‘houses are for living, not speculation’ in the 2023 outlook. The key focus for the government is to avoid bankruptcy of leading property developers and stabilise the property market, indicating positive polices for the property sector. As the policy environment remains supportive while the housing market sees a recovery in demand and inventory digestion, we are positive on China’s property market.
Reforming state-owned enterprises (SOE’s)
The government pledges to improve SOE’s core competitiveness and balance their economic and social obligations. This, together with actions to benchmark SOE with leading global enterprises and set a profitability and cashflow tilted appraisal system, shows China’s continuous effort to improve SOE efficiency and management. We might see a revaluation of SOEs despite their long-term structural growth potential remaining unclear.
In addition to the government work report, the State Council institutional reform is another highlight which, overall, delivered the message of power consolidation and responsibility clarification, with key changes being:
Consolidation of financial market regulation
The National Financial Regulatory Administration (NFRA) will be established to replace the China Banking and Insurance Regulatory Commission (CBIRC), into a body directly under the State Council. NFRA will also take over some duties from the People’s Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC) for better supervision of the industry. Responsible for behavioral regulations in the entire financial industry, the NFRA may be able to address regulatory gaps that existed due to the division of responsibilities and different standards. This is particularly important in the era of financial innovation which has blurred the boundaries of financial activities and entities. Additionally, raising the CSRC from a public institution to an affiliate of State Council suggests a heightened policy focus on capital market liberalisation and the promotion of direct financing.
Establishment of National Data Bureau
The proposed data bureau will be run by the National Development and Reform Commission and will absorb the functions of the Central Cyberspace Affairs Commission, which oversees China’s internet. We potentially expect the government to promote data sharing and expand digital infrastructure which will benefit firms contributing to digital transformation and infrastructure advancement. The set-up of the data bureau, together with the mention of ‘continuing regular oversight while supporting the development of the platform economy’ in the report, provides confirmation that the intense scrutiny for big tech firms should be behind us.
China’s new Premier, Li Qiang, made his first public debut in a press conference on Monday the 13th of March. As a long-time aide to Xi Jinping, Li’s remark offers good insight into how the new leadership sees the future of China.
During the press conference, Li reiterated the 5% GDP growth target for 2023 on the back of policies to stimulate demand and investment. In his remarks on the private economy, Li was notably supportive The private sector gained an outsized share of the economy in terms of output, instilling more confidence to continue to innovate, helping to spur both near-term and longer-term growth. In terms of government policies, Li mentioned implementing a more level playing field between private and public sectors, encouraging better protection of intellectual property, and continuing to open up to foreign investment, encouraging the flow of goods, services, people and ideas.. In addition, he spoke of “an open China”, which toned down recent narrative with regards to the decoupling between the US and China. Overall, we believe the new Premier is seen as pro-business with a pragmatic work style. Li was a loyal enforcer and a strong implementer of policies throughout his previous tenure, we expect this to continue in his new post.
Economic growth and stability are clearly at the top of the agenda for the new government. With the power reshuffle complete and economic growth targets being made, we believe China will see its economy return to growth in 2023. Hence, we are constructive on sectors such as consumption, internet and property.
In the long term, as China puts more focus on high-quality sustainable growth, self-sufficiency and national security, we believe advanced manufacturing sectors such as renewables, electronic vehicles and semiconductors will be major beneficiaries.
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