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Two Sessions special: China skips annual GDP target but widens fiscal deficit, plans Covid-19 special treasury bond

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By Addison Gong, Rebecca Feng
22 May 2020

In this special round-up on China’s annual Two Sessions parliamentary meeting, the government does not set a growth target for 2020 but raises the budget deficit to at least 3.6% of GDP. It also plans to issue Rmb1tr ($140bn) of special ‘anti-pandemic’ treasury bonds.

Chinese premier Li Keqiang delivered the government work report at the 14th National People's Congress on Friday morning.

The government did not set a specific growth target for China’s economy in 2020, mainly because of the uncertainty relating to the Covid-19 pandemic globally and the economic and trade situation, said Li. It is the first time in decades that China has not given numeric targets for its annual GDP growth.

“The development of our country is facing some unpredictable factors,” Li said.

In March 2019, he announced a growth target of 6% to 6.5%. The actual growth last year came at 6.1%.

“Given the lack of a formal GDP growth target this year and the likely disappointment over the size of fiscal stimulus, the extent of growth support is less certain and the risks to our own 2020 forecasts of 3% real GDP growth and augmented fiscal deficit of 16.8% of GDP are tilted toward the downside,” economists at Goldman Sachs wrote in a note on Friday.

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China will raise its fiscal deficit to above 3.6% of GDP, compared to last year’s target of 2.8%. This would increase the budget deficit by Rmb1tr. The government also said that it plans to issue Rmb1tr of special treasury bonds to fight the pandemic.

“These are special measures for special times,” Li said, adding that the combined Rmb2tr will be transferred to “the localities”, and the government will set up a special transfer payment mechanism to make sure that the money “reaches directly to the grassroots of the cities and counties, to benefit enterprises and the people”.

The proceeds of the Covid-19 special bond must be used well, Li said. It will fund the fight against the virus including the research and development of vaccines, medicines and rapid testing technologies 

The central government has set a Rmb3.75tr quota for local government special purpose bonds, a Rmb1.6tr increase from 2019.

The combined budget deficit (Rmb3.6tr), local government special bonds (Rmb3.75tr) and the Covid-19 special treasury bonds (Rmb1tr) amount to 8.4% of GDP, economists at Barclays said in a Friday report.

“The fiscal package fell short of the expectation of [around] 10% of GDP, which would have been closer to the relative size of packages in other major economies such as the US and EU,” they said.

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The Chinese government plans to increase the proportion of the proceeds of these special-purpose bonds that can be counted towards project capital for infrastructure projects.

The measure will help infrastructure project developers secure loans from banks. The State Council has imposed a minimum project capital ratio requirement for infrastructure project developers that needed to borrow loans from banks.

At the same time, China is asking the local governments to cut expenses. The central government is taking the lead, slicing 50% of its expenses that are not absolutely necessary.

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China and the US will together carry out the phase one trade deal, according to Li. The country will also improve its trading relationships with other countries.

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Li said China will significantly shorten the negative list for foreign investment and create a negative list for cross-border trade in services. The country’s free-trade zones will be given more autonomy in their own reform and opening up efforts. China will also establish new pilot free trade zones in the central and western regions.

The government said it will create a fair business environment for foreign enterprises.

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The target for consumer price index (CPI) inflation was set at 3.5% for 2020. CPI inflation was 2.9% for 2019, with a notable rise in late 2019 due to surging pork price.

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China will use a combination of measures, including cutting the benchmark interest rate and reserve requirement ratio, to guide faster growth in money supply and social financing compared to 2019, and keep the renminbi exchange rate stable.

It will implement creative monetary policies to make sure companies have easy access to bank loans, and push down the borrowing cost.

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Micro, small and medium-sized enterprises got another extension to repay their loans.

The Chinese government had previously extended payment deadlines for micro, small and medium-sized enterprises that are impacted by Covid-19 to June 30. That deadline has been further pushed to the end of March next year.

Li also told banks to increase their lending to small and micro enterprises. Large commercial banks must increase their inclusive loans to small and micro enterprises by at least 40%. The government will also support corporations tapping the bond market for funds.

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Small and micro enterprises and individually-owned businesses will not need to pay their income tax until next year. The government estimated that the measure will reduce the tax burden of corporations by more than Rmb2.5tr throughout 2020.

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The tax cuts in China totalled Rmb2.36tr in 2019, compared to the planned Rmb2tr, according to Li.

By Addison Gong, Rebecca Feng
22 May 2020