China’s 2023 March NPC (National People’s Congress) ended on 13 March after a 9 day meeting. This is the first NPC after Xi Jinping was elected for the third term as the General Secretary of the CPC Central Committee. This is also the first NPC after China abandoned its zero-COVID policy in December of last year, with a new administration getting on board.

(1) March NPC Government Work Report (GWR)

Major economic development targets are set as below:

• GDP: around 5%

• Fiscal deficit: 3%

• CPI: 3%

• LG special bond quota: CNY3.8trn

• Unemployment rate: 5.5%

Growth target: The Government Work Report (GWR) set 2023 GDP growth target at “around 5%”, in line with our expectation while at the lower end of market forecasts. We think “around 5%” is the most comfortable setting for the authorities since it leaves room for any upside surprise and it is less constrained if headwinds emerge. At the same time, we note that the GWR is setting the new employment target for 2023 at 12mn, which is 1mn higher than those during 2019-2022. Historically speaking, 1 percentage point of real GDP growth corresponds to approximately ~2.25mn new jobs before the pandemic and corresponds to ~2.17mn during 2021-2022. Therefore, the 12mn new employment target suggests that 2023 real GDP growth may be in the range of 5.3%-5.5%.

Fiscal policy: In accordance with the fiscal deficit target at 3% of GDP, the value terms of fiscal deficit is CNY3.88trn, which is comprised by CNY3.16trn in central government debt and CNY0.72trn in local government general debt. It should be noted that the increase of CNY0.51trn in fiscal deficit all comes from the central government debt increment, which suggests that authorities are attempting to ease local government debt pressures. Though the fiscal deficit target as a percentage of GDP increased to 3% from 2.8% last year, the tax rebate and reduction will be lower in 2023. Meanwhile, LG (Local Government) special bond quota target at CNY3.8trn is also lower than last year’s actual LG special bond issuance of CNY4.15trn. Overall, we think the fiscal arrangement is in line with our view of less expansionary fiscal stimulus in 2023.

Monetary policy: The GWR sends the same message as in the PBoC Q4 MPR (Monetary Policy Report): (1) Aggregate money supply and TSF (Total Social Financing) growth will be matched with nominal GDP growth; (2) Liquidity will be reasonably sufficient to ensure market rates moving around policy rates, trying to avoid any liquidity shock; (3) The real policy rate will be kept in a reasonable range to maintain stable CNY. Overall, we see a low probability of a policy rate cut. That said, as PBoC Governor Yi Gang said RRR (Reserve Requirement Ratio) cut is an efficient way for long term liquidity injection and announced 25bp RRR cut in March, we think further RRR cut cannot be ruled out, especially if recovery is slower than expected or there is any liquidity turbulence.

Other highlights: (1) Housing. While the notion that “housing is for living, not for speculation” remains, the overall tone is tilted towards avoiding downside risks rather than curbing the upside. We think that the general guidance is aimed to support not to lift the whole sector, with targeted support biased towards the demand side and top real estate developers. (2) Expanding domestic demand is the top priority: specifically, expanding consumption and investment. Guidance on consumption focuses on big ticket items (such as auto and housing related durables) and services consumption (such as dining, tourism). The authorities will also try to improve household income in an effort to boost consumer confidence and release excessive savings. (3) POE (Private Owned Enterprise). The GWR reiterates the importance of POE in economic development and calls for substantial and full scale support to POE, regarding tax, funding, land, property rights, and public opinion.

(2) Personnel arrangement

The NPC surprisingly retained the People’s Bank of China (PBoC) governor and the Finance Minister. As expected, Li Qiang succeeded Li Keqiang as the Premier and He Lifeng became one of the Vice Premiers, an important role in economic and policy setting.  However, the NPC surprised the market by retaining Yi Gang as the PBoC governor and Liu Kun as the Finance Minister, as both of them exceeded the working age limit for their rankings and neither of them were promoted to a higher ranking with a higher age limit. Against this backdrop, we think the appointment of Yi and Liu may be transitory with two viable options: (1) the once every five years National Financial Working Meeting is likely to be held later this year, which may trigger further reshuffle; (2) Yi and Liu may stay for 2-3 years to guarantee a smooth transition from the old administration to the new one. In either case, we think it is a positive signal to the market: showing top authorities adopting a practical stance in personnel arrangement.

(3) Party and State Council Institutional Reform

Financial regulatory framework reorganized. A new regulatory body, the National Financial Regulatory Administration (NFRA), is set up on the basis of the China Banking and Insurance Regulatory Commission (CBIRC) and will replace CBIRC after the reform. At the same time, the NFRA will consolidate some responsibility from the PBoC and the China Securities Regulatory Commission (CSRC).¹

At the same time, a Central Financial Commission (CFC) is set up at the Party level (on top of State Council) to replace the State Council run Financial Stability and Development Committee (FSDC) and oversee the PBoC, NFRA and CSRC. The FSDC is a powerful body that was set up in 2017 and headed by former Vice Premier Liu He to coordinate financial regulatory bodies, maintain financial stability, and set policies on economic reform and development. While FSDC’s hierarchy ranking is set at the State Council level, it indeed put State Council on the sidelines for financial system management the past few years. In this sense, we don’t read the CFC as a totally new set up, but we see it to strengthen the role of the Party in the financial system leadership and better implementing Xi Jinping’s idea and guidance.

High level CSTC is set up and streamline the responsibility of the Ministry of Science and Technology. Similar to the case of CFC, a Central Science and Technology Commission (CSTC), governed directly by CPC Central Committee, is set up to enhance the Party’s centralized and unified leadership over the work of science and technology. The CSTC will be in charge of pushing forward the building of a national innovation system, deliberating major strategies/plans/policies on sci-tech development at a country level, and coordinating efforts to resolve the major issues regarding tech tension. Meanwhile, the Ministry of Science and Technology will be restructured, by stripping some non-core responsibilities and channeling more resources to accelerate technology breakthroughs in an effort to gain more self-reliance amid the US-China tension.

Hong Kong (HK) and Macao affairs lifted up to Party level and a new regulatory body set up on data management. A Hong Kong and Macao office at the Party level will be formed on the basis of the existing Hong Kong and Macao Affairs Office (which is at the State Council level). Such an arrangement reflects authorities’ great attention and firm determination to improve the political system in HK and Macao. At the same time, a new agency named National Data Bareau will be set up under NDRC (National Development and Reform Commission) to be in charge of data security issues, such as coordinating the integration, sharing, development and application of data resources, and building up of digital economy.

Bottom line: Lower than market expected GDP growth target and retaining veterans for key positions suggests the new administration is adopting pragmatic attitudes on economic development and planning. Policy settings (regarding monetary policy, fiscal, and key sectors) are definitely towards a supportive stance, while we are less likely to see big stimulus. Regarding institutional reform, since all the newly formed committees (i.e. the financial system, technology and HK/Macao affairs) will be directly governed by CPC Central Committee rather than State Council, it suggests to us the new Party administration is not satisfied with the previous work at State Council level, and they want to strengthen the leadership in order to fix the weak link. While consolidating and strengthening supervision is an important purpose of the restructuring, we are less likely to see another wave of regulatory crackdown in the short term, given, at the current stage, authorities appear to be more concerned about the downside risks rather than the upside.

¹ For example: supervisory responsibility of Financial Holding companies and financial consumers protection will be transferred from PBoC to NFRA, responsibility of investor protection will be transferred from CSRC to NFRA, while the original supervisory framework from CBIRC on the banking sector will remain the same.

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