Neil Thomas
This year’s Two Sessions broadly met the expectations outlined in a preview article I co-authored with my colleague Jing Qian in late February. Li Qiang announced an unchanged economic growth target of “around 5%,” a record-high fiscal deficit target of 4% of GDP, a reduced consumer price inflation target of 2%, and stable targets for creating over 12 million new urban jobs and keeping urban unemployment at around 5.5%. Given falling property prices, weak consumer sentiment, strained local finances, and rising geopolitical volatility, these targets are relatively ambitious.
Despite the pro-growth messaging, we overestimated promises of stimulus. Beyond an extra 1.6 trillion yuan in deficit spending, Beijing will issue 4.4 trillion yuan in local government special-purpose bonds for investment in infrastructure, purchases of idle land and unsold housing, and payments of arrears to government contractors. A 1.3-trillion-yuan issuance of ultralong special treasury bonds will fund projects that advance national security and other interests. Beijing will also issue 500 billion yuan in special sovereign bonds to recapitalize state-owned banks.
All the same, these unprecedented stimulus measures and bond issuances are unlikely to achieve 5% growth, especially given Beijing’s reliance on exports and the potential for further U.S. tariffs, sanctions, and export controls (in addition to the 20% tariff increase since January). Xi Jinping seems open to a deal with U.S. President Donald Trump but is keeping his powder dry in case of further U.S. escalation. The more intense the trade war, the more aggressively Beijing will add stimulus. Nonetheless, debt concerns will likely deter a stimulus “bazooka,” and direct consumer stimulus remains unlikely due to ideological opposition and implementation hurdles.
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