China: NPC vows more support to private sector and SOE reform

• The lack of a growth target, fiscal stimulus and the upcoming Hong Kong National Security Law stole the headlines at the National People's Congress (NPC).
  However, as usual, the NPC provided a lot of interesting information that didn't make it into the headlines. Below, we give a bit of colour on some of the issues that didn't get so much attention.

• Further support to the private sector, a three-year plan to speed up reform of State Owned Enterprises (SOEs) and a ‘significant shortening' of the negative list for foreign investment were key features in the Government Work Report.

• Chinese leaders also again emphasised a boost to investments in technology and a strong focus on domestic demand.

The annual NPC ended in Beijing last week following a week of new laws passed and goals set for the coming year. The highlight of the NPC is the Government Work Report presented at the opening by the Premier, Li Keqiang, which looks back at what was implemented in the past year and outlines plans and goals for the coming year. The worsening relationship with the US did not take up much space in official documents but was nevertheless hinted at in one key statement in the Work Report: ‘At present and for some time to come, China will face challenges like never before'. On top of the tensions with the US, the statement likely referred to the challenges posed by the COVID-19 crisis.

 

The three things that grabbed the headlines

While I will focus on some of the less reported issues, first a comment on the main headlinegrabbing points:

1. No GDP growth target. For the first time since the 1990s, China refrained from setting a growth target. It was not a big surprise, as it has been signalled for a while. According to Li Keqiang, the reason is that China will face factors that are difficult to predict and he mentioned the COVID-19 development uncertainty for the world economic and trade environment. China instead outlined a focus on security in six areas (employment, finance, foreign trade, foreign investment, domestic investment and expectations) to ensure stability on six fronts (jobs, living needs, operations of private sector, food and energy security, supply chains and primary -level governments). Employment is mentioned 34 times in the 24-page document, which clearly highlights the focus China puts on this. A target of 9m new jobs was put forward.

Comment: Scrapping the growth target makes a lot of sense, as the uncertainty is unprecedented and a target would risk local governments pursuing wasteful investments to achieve a specific target.

2. Stimulus. The Work Report outlined plans for both monetary and fiscal policy. When it comes to monetary policy, China intends to cut reserve requirement ratios and interest rates, and enable M2 growth and aggregate financing to grow at ‘notably higher rates' than last year. On fiscal policy, plans for further easing were outlined, bringing the total stimulus for 2020 to around 41/2-5% of GDP.

Reductions in taxes, fees and other corporate costs are set to be implemented and investments in infrastructure lifted. This includes ‘new infrastructure' in next - generation information networks, 5G applications and charging facilities for electric vehicles.

Comment: The stimulus was in line with what we assumed in our GDP forecast. It will likely be adjusted as needed to sustain a certain level of employment. We believe it is positive that we are not seeing the all-out big stimulus seen in 2008-09, which led much wasteful investments. It is clear, the stimulus will lead to more debt but this inevitable and is the case in all countries currently.

3. Hong Kong National Security Law. The new National Security Law has grabbed the most headlines, with the US now preparing sanctions on China. US Secretary of State Mike Pompeo said last Wednesday that it is clear Hong Kong is no longer autonomous and should therefore no longer have a special status, and Trump later revealed that Hong Kong's sp ecial status will be removed, although he did not take any concrete steps to do it. The special status gives Hong Kong lower tariffs than China and more access to American technology. The National Security Law is actually not written yet but a draft decision was made at the NPC, which paves the way for a new law to be written for Hong Kong, to prohibit ‘separatism, subversion, terrorism, any behaviour that gravely threatens national security and foreign interference'. The law will bypass the Hong Kong legislature.

Comment: The plans for the new law has added yet another area of strain between US and China and possibly also led to critique from the EU. It is also a clear signal from China that it will not bow to US pressure and sanctions and will do what it finds necessary to defend its interests. China has stated that most Western countries have similar laws and that it is simply closing a hole in the Chinese legislation, which has proven necessary due to the character of the violence in Hong Kong and signs of foreign interference, that threatens the sovereignty of China. The move risks adding to the violence in Hong Kong, though, and will probably add to the structural headwinds for Hong Kong's economy .

 

Further emphasis on private sector and entrepreneurship

It has become an increasingly general belief that China wants more state and less markets. However, I would challenge this notion. In my view, China wants a strong and more efficient state alongside the market playing a bigger role. It may sound like a contradiction but China's reform p lans, as I read them, are more about putting greater competitive pressure on state owned enterprises (SOEs) while improving the business environment for all companies, including the private sector.

It is easier said than done, and especially when it comes to reform of SOEs, progress has been slow (more on this below). There are still strong vested interests both in the big SOEs and in the local regions where many of them operate.

However, when it comes to easing of regulations for the private sector, not least SMEs, reforms have been made over the past decade. The changes have resulted in China moving to a rank of 31 in the World Bank's Ease of Doing Business index out of 190 countries, from number 90 five years ago. In the latest report, the World Bank wrote ‘China has undertaken substantial efforts to improve the domestic business climate for small and medium-size enterprises, maintaining an active pace of reforms.'

The Government Work Report continues to stress the need for deepening supply-side reforms and opening up. It rarely reaches the headlines of news coverage but it is nevertheless important for the understanding of which economic model China is actually aiming for.

The report highlights that China has more than 100m market entities and 10,000 new companies opening every day in China. At the press conference, Premier Li Keqiang said this number should be watched closely because it is an imp ortant indicator of China's vitality. By far the most jobs are created in the private sector (around 90%) and, with employment being a corner stone in providing better lives and securing stability, it would make sense that China wants a vibrant private sector. Of course, the distinction between state and private can be fluid in China, but it is likely that most Chinese jobs are created by Chinese entrepreneurs rather than big SOEs. Much of the stimulus over the past year has been aimed at private small and medium enterprises (SMEs) and just this week another relending programme was announced by the PBoC, in which the central bank funds commercial bank loans to SMEs at zero interest. This is in line with the goal stated in the Work Report that highlighted the importance of better financing access for the SMEs.

The term ‘market entities', entrepreneurs or private sector is mentioned 30 times in the 24- page document and I've listed some of them in the box below. The emphasis on market entities has been there for some years but it tends to fly under the radar and drown in other news on China.

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