What can we expect from the National People’s Congress?
The National People’s Congress (NPC), China’s top legislature, is set to open its annual session in Beijing on May 22. After a 120-day delay caused by the COVID-19 outbreak, the gathering of 3,000 delegates is seen as a symbol of China’s success in containing the epidemic. More importantly, it will set the tone for economic policies, which are critical for China to buffer the shock from the global pandemic. A large fiscal package, which will be supported by an accommodative monetary policy, is widely expected to be announced.
Given the high uncertainties associated with the global pandemic, a numerical 2020 Gross Domestic Product growth target may not be set at this convention. Since policymakers still tend towards avoiding a 2008-style stimulus and asset bubble, they may take a data-driven approach when introducing supportive policies. Therefore, a qualitative goal, such as to achieve “stable economic growth”, may take the place of a number, which could help prevent excessive stimulus.
Meanwhile, stable employment may be emphasized as the top policy priority. In order to help college graduates find jobs, the government is expanding recruitment in the public sectors. Further measures may be introduced at the NPC, including employer subsidies and tax rebates, to support job creation in private sectors.
Against this backdrop, fiscal policies will play a major role in the stimulus. A COVID-19 special central government bond (worth around RMB 2trillion (trn)) may be issued to support social security subsidies or strengthen credit supports for the private sectors. Meanwhile, the issuance quota for local government special bonds may be raised by RMB 1.5trn to RMB 4trn, with the proceeds allocated to projects in infrastructure and urban community renovation. According to our estimates, the hike in government financing implies a RMB 2.5trn or 1.7 percentage point increase in the augmented fiscal deficit.
On the monetary policy front, continuous easing measures are expected to support financing activities in public and private sectors. After several cuts to its policy rates and the required reserve ratio, the People’s Bank of China (PBoC) has brought down the 1-year loan prime rate (LPR) to 3.85%. In comparison with the zero interest rate policy by the U.S. Federal Reserve, there is still room for further rate cuts by the PBoC.
However, prudent monetary policy and regulation may also be reiterated at the NPC, and regulators will maintain a targeted approach in its easing operation. This suggests that the liquidity flow into financial and property markets will be weaker than widely expected, and therefore a selective and fundamental-driven approach is still essential for investors.
EXHIBIT 1: POLICY AND MARKET INTEREST RATES IN CHINA
Source: CEIC, National Interbank Funding Center, PBoC, J.P. Morgan Asset Management.
*Starting from August 2019, the PBoC releases a monthly 1-year and 5-year LPR based on quotes from 18 banks. For this new monthly quote, banks are required to submit them in the form of open market operation rates (especially for the medium-term lending facility) plus a margin to the national inter-bank lending center. The central bank requests all commercial banks to reference the finalized LPR to price their new lending and use the LPR as the benchmark rate in floating rate loan contracts going forward.
Data reflect most recently available as of 11/05/20.
Investment implications
Uncertainties in the global economy continue to overshadow Chinese growth prospects, leading to pressures on corporate earnings, particularly in export sectors. The regulator’s efforts to avoid an excessive liquidity injection and asset bubble has also curbed valuation growth in the Chinese equity market. As a result, equity investors need to take a fundamental-driven approach to identify stocks with long-term potential. During the virus outbreak and lockdown period, sector leaders in technology, healthcare and consumption have shown resilience in their business models and profitability, which are expected to sustain in the long run. The Chinese government’s investment initiatives to strengthen infrastructure, especially internet and communication facilities, may also benefit the growth of these sectors. Therefore we continue to follow these sectors as our long-term investment theme.
Meanwhile, the declining interest rate will continue to support the bond market. In comparison to the extremely low yields in the rest of the world, Chinese bond yields remains attractive for global investors. Therefore, Chinese bonds may be good candidates for defensive as well as income-generating assets.
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