Over dinner on the night before the opening of the National People's Congress on May 22, a friend of mine who works in a security firm suggested that I should take seriously the messages coming out of the current session of China's legislature for investment ideas if I wanted to invest in stocks.
Indeed, the NPC makes decisions that impact business and families alike in the county, and, as such, it is closely followed by government officials, company executives and people on the street.
This year's NPC is convening at an extraordinary time, after a two-month delay due to the pandemic, and is also making some extraordinary decisions. It was noticed that for the first time since 2002, the government did not set a GDP target for this year. The news caught many by surprise, and was reported extensively by both local and international media.
The move reflected the Chinese government's sober assessment of the domestic and international economic conditions and the impact of the global pandemic as it considered whether the country should stick to its original ambitious “doubling” plan — the goal set in 2009 to double the country's GDP by 2020. China was on course to hitting the target until the coronavirus outbreak in January.
The pandemic has wrought immense damage to the Chinese economy and is setting back the realization of the cherished objective by six months or more. China's GDP contracted 6.8 percent year on year in the first quarter of this year, the most severe economic downturn since the 1970s. More important, it was the high degree of uncertainty brought by the pandemic and the international economic situation that prompted Chinese leaders to drop the GDP target. The Chinese economy is intertwined with the rest of the world, with the country's exports accounting for 30 percent of global GDP. It is, therefore, impossible to shield itself from shocks beyond its borders.
Take the automobile industry, for example. The country's automobile production in April increased by more than 5 percent year-on-year. Yet the industry is seeing disruptions in its international supply chains and drop-offs in overseas sales. As the pandemic rages in many parts of the world, it is neither wise nor realistic for the government to set a specific GDP target for the year.
Some people speculate that China would abandon the practice of setting a yearly GDP growth target altogether, in favor of adopting targets for employment and inflation and focusing more on areas such as the environment and household income. To be sure, more emphasis will be placed on the quality of economic development, which continues to be of paramount importance for China as a developing country.
Of course, GDP has its limitations, but it remains the most accurate and comprehensive gauge of a country's economic achievements. I believe that setting an ambitious yet realistic target is conducive to its fulfillment, and it's likely that China will want to resurrect that long tradition in the future.
By some estimates, the Chinese economy will grow by around 1 percent in the second quarter and will pick up speed in the second half of this year. The IMF's prediction in April placed the country's GDP growth for 2020 at 1.2 percent. If that forecast comes true, the country will continue to serve as a major engine of growth for the world economy, since most of the major economies in the world expect negative growth.
China's economy is on its way to recovery. Despite the battering by the pandemic, the fundamentals of the economy remain largely unchanged, with the potential capacity and long-term trends that point to sustained growth still in place. Barring a second wave of the virus, an expansion of 6 percent, if not higher, in the second half of 2020 is deemed achievable. If that is the case, the country will achieve GDP growth for the year between 3 and 4 percent. What is more, it will contribute massively to job security — another top priority for the government this year.
China is aiming to create 9 million new jobs, but the country faces enormous challenges in sustaining good employment numbers. In addition to workers dislocated by the epidemic, 8.74 million university and college graduates, a new record, will join the workforce this autumn. Although 3.5 million jobs were already created in the first quarter of this year, the task remains daunting.
To this end, the government seeks to improve the business climate, encourage startups and retain workers. Despite all the government's efforts, however, unemployment is expected to rise substantially this year. To put things in perspective, more than 11 million jobs were created in 2019. It would be quite an achievement if the government were to succeed in capping the urban surveyed unemployment rate at 6 percent, compared with the 5.2 percent of 2019.
Elimination of poverty in every corner of the country is another top priority. Back in 2012, the government set the end of 2020 as the deadline for the historic undertaking. In the seven years that followed, 94 million people have been lifted out of poverty. Helping the remaining 5.5 million rural residents, the hard core of the impoverished population in the country, to get out of the trap of poverty is the “last mile” in the government's poverty eradication drive. Arduous as the mission will be, especially in the context of the pandemic, the government is determined to accomplish it — and to ensure that no one will be left behind.
To fight the pandemic and stimulate the economy, China plans to raise its fiscal deficit to more than 3.6 percent of GDP, up from 2.6 percent last year. On top of this 1 trillion yuan ($140 billion) in increased spending, the government will also issue 1 trillion yuan in treasury bonds and increase the quota on local government special bond issuance to 3.75 trillion yuan ($527 billion), up from 2.15 trillion yuan last year.
According to the IMF, as of the end of April China had announced fiscal measures amounting to around 2.6 trillion yuan ($365.97 billion), or 2.5 percent of its GDP. The increased spending is dwarfed by developed countries such as Italy and the United States, whose fiscal measures account for more than 10 percent of GDP. It also falls short of China's stimulus package during the 2007-08 global financial crisis. At that time, China injected capital into the economy equivalent to 13 percent of its GDP.
The government is expected to pursue a more proactive and impactful fiscal policy when conditions warrant. Until recently, a 3 percent deficit had been considered in China as a redline. An expression in Premier Li Keqiang's report to the NPC — “at least 3.6 percent” — indicates that government spending could rise further, as it is determined to maintain a stable economy. Justin Lin, former chief economist of the World Bank, suggested that given the hammering of the economy in both demand and supply by the pandemic, a budget deficit higher than 3.6 percent — or even as high as 6 percent — should be considered.
In terms of monetary policy, China is believed to have a lot of room to maneuver. The current one-year loan prime rate stands at 3.85 percent. Li Dao Kui, an economics professor at Tsinghua University and a former member of the monetary policy committee of China's central bank, endorsed the government's approach to create some leeway for a rainy day but predicted that it will adopt a more aggressive monetary policy if the international economic situation worsens.
In light of the uncertainty beyond its borders, China is placing more emphasis on internal demand for stability and growth. Meeting the internal demand is now regarded as the “point of departure” and the “foothold” of China's development efforts.
China's domestic demand is huge. It has a middle class whose population is equivalent to the European Union. It has the world's largest market with 1.4 billion people. It has also established a comprehensive industrial system with powerful manufacturing capacity. As the country undergoes urbanization and the digitalization of its economy, domestic demand for investment will be huge.
Does this mean China is turning inward? On the contrary, the country is committed to a more open and inclusive economy for the world. New measures are being taken. The “negative list” for foreign investors will be “significantly shortened,” meaning that more sectors will be opened up to foreign investment, with fewer restrictions. In addition, an increasing number of free trade zones will be set up. All these actions point in one direction: The country is opening faster and wider to the outside world.
The so-called phase one trade agreement between China and the U.S. also found a place in the government's work report. The government called for joint efforts to implement the agreement — more clear evidence of the Chinese government's intention to honor its commitments despite diminishing demand in the country for U.S. goods and services.
However, the fate of the agreement is uncertain. The ability of the U.S. to supply goods has been hit hard by the pandemic. What is worse, U.S. President Donald Trump may find it politically convenient to dump the agreement at some point in the election campaign, as he threatened to do in early May.
As I watched Premier Li addressing the NPC on television, I was impressed by one particular item on the government's must-do list for this year: the China International Export Expo, or CIEE. It was launched in Shanghai in 2018 with President Xi Jinping blessing the gathering by delivering opening remarks in two consecutive years. The annual event has attracted tens of thousands of overseas businesspeople and has served as an important platform for foreign companies to break into China and expand their share in the Chinese market.
This time, however, despite all the difficulties the country is facing this year, China hopes to contribute to the global economic recovery by sharing business opportunities through the expo. It is a blessing for the world business community at a time when the entire globe has plunged into an economic slowdown.
