In the government work report delivered on March 5, 2019, the following targets for economic development are worthy of special attention.
Flexible GDP Growth Target
The growth rate for GDP in 2019 is set at 6-6.5 percent, which is in line with market expectations, and the range allows flexibility, which means that China’s tolerance for the slowdown of macroeconomic growth has increased. It is not difficult to reach a growth rate in this range, so the relaxation of monetary policy or fiscal policy will be limited in 2019. It can be said that China prefers to maintain a good balance between controlling risks and stabilizing economic growth, rather than implement macroeconomic policies for great stimulation. In 2019, the above-mentioned growth target will be achieved mainly by infrastructure investment with eased fiscal support, and regulators are not likely to significantly lift restrictions on real estate markets in first- and second-tier cities.
At the same time, six percent as the lower limit shows a clear requirement for the growth rate, indicating that the Chinese government will not tolerate economic growth rate that falls below six percent in 2019. If a series of uncertainties lead to a significant increase in economic downward pressure, the Chinese government will strengthen its policies on maintaining growth. However, the probability of this change seems low according to the current situation.
In 2019, China’s economic growth rate may be around 6.3 percent, and the quarterly economic growth rates of this year will be a U-shape.
Loose Inflation Target
According to the targets set by the government work report, consumer prices will increase by three percent, 11 million new jobs will be created in cities and towns, and the urban surveyed unemployment rate will be 5.5 percent in 2019. Last year, the growth rate of consumer price index (CPI) was 2.1 percent. As long as there is no drastic change in food prices, it will remain stable at around two percent in 2019, and the growth rate of production price index (PPI) may drop significantly, so there may be a shrinkage.
This government work report attaches greater importance to employment. Under the threat of economic downturn, the target for employment is lower than that of 2018: 11 million new jobs in urban areas (13.61 million in 2018) and surveyed unemployment rate 5.5 percent in urban areas (about five percent in 2018). Although the aging of China’s population is accelerating, the service industry still grows relatively fast. In this context, the pressure is still within control, despite the decline in export growth and the difficulties faced by small and medium-sized enterprises (SMEs), which may lead to increasing unemployment.
Steady Expectation for Fiscal Deficit
In 2019, the fiscal deficit is expected to account for 2.8 percent of GDP according to the government work report, reaching 2.76 trillion yuan (around US$410 billion). This target does not exceed the threshold of three percent as expected by the market, which means that the central government is more cautious about possible expenses in the future. However, from 2016 to 2018, the government’s fiscal deficits, including the special bonds issued by local governments, accounted for 3.55 percent, 4.01 percent, and 4.07 percent of GDP, respectively, exceeding three percent for three consecutive years. The scale of local government special bonds approved in 2019 reaches 2.15 trillion yuan (about US$320 billion), an increase of 800 billion yuan (around US$ 119.25 billion) over 2018. In 2019, therefore, the government fiscal deficit to GDP ratio after adjustment will further increase to 4.98 percent.
The official fiscal deficit target still stays below three percent, which means that the amount of government bond in 2019 will be limited. The local government special bonds of 2.15 trillion yuan (about US$320 billion) will mainly be used to finance the infrastructure construction in key areas and key projects. This is especially important when local government budgets are tight and their debts are heavy.
Unprecedented Tax and Fee Cuts
According to the government work report, the rate of value-added tax levied on manufacturers will be reduced from 16 percent to 13 percent, and the ratio of payment by employers in the endowment insurance system for the urban working group will drop to 16 percent. The tax and administrative fee reduction is unprecedented. This is of great significance to enterprises in China, especially to SMEs. It not only helps increase the profits of industrial enterprises, but also helps boost the confidence of SMEs. The reduction will better realize the cost reduction of supply-side structural reform. It is expected to play a very positive role in maintaining growth in manufacturing investment and private capital investment.
The author is a research fellow with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences and chief economist of Pingan Securities Co., Ltd.