How NPC policymakers can restore confidence in China’s economy and markets

Current stimulus measures are insufficient to boost long-term loans and investment in the real economy amid low private-sector confidence
More accommodative monetary policy and greater regulatory transparency could go a long way to improving investor sentiment

Chaoping Zhu

Published: 2:31pm, 18 Feb 2022

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The annual session of the National People’s Congress (NPC) will be held in Beijing from March 5. Amid China’s softening economic growth and falling stock prices, the conference is likely to draw a lot of attention from the market as investors expect to see more accommodative policy measures to stabilise growth.

Since the third quarter of 2021, there have been continuous policy efforts to revive China’s economic engine, particularly in domestic investment. At the NPC, a flexible growth target and bigger budget deficit are likely to be set in the government work report.

Moreover, to restore confidence of the private sector and investors, top policymakers may take this opportunity to better communicate their long-term reform plans.

Setting the annual growth target is top of the agenda at each NPC session. This year, expect to see a flexible growth target rolled out, probably between 5 per cent and 6 per cent. The economy is facing both secular and cyclical headwinds, so a flexible target will help Beijing mitigate the pressures.

An annual growth rate above 5 per cent is close to China’s long-term potential, and is also a critical level for creating sufficient employment. A moderate and flexible target is also helpful in preventing excessive stimulus and aggressive debt being accumulated by local governments.

More accommodative policies are expected to help mitigate growth risks. Since the third quarter of 2021, the People’s Bank of China has shifted to monetary easing from its previously hawkish stance.

To boost investment, the central bank cut its required reserve ratio by 50 basis points in December and the loan prime rate by five basis points in January. Lending restrictions to the real estate sector were also loosened.

However, given that private-sector confidence remains depressed, the current monetary stimulus seems insufficient to boost long-term loans and investment in the real economy. Therefore, hints at continuous monetary easing, particularly reducing financing costs, are expected to feature in the government work report.

Meanwhile, better coordination between monetary policy and, for example, fiscal and property market policies, should be emphasised to stimulate investment activities. In comparison with monetary policy, fiscal measures might have a more direct impact as growth drivers in the first half of this year.

Tax reductions and fee cuts might be put forward as major fiscal policy tools to support the private sector, particularly small and medium-sized enterprises. Meanwhile, local governments’ bond issuance quotas could be raised to provide funds for infrastructure investment.

To support fiscal expansion, the central government will be more tolerant of the transitory rise in the country’s deficit. The NPC might approve a fiscal deficit-to-GDP ratio at 3.2 per cent for 2022, the same level as for 2021 but still higher than the historical average.

Although these short-term stabilisation measures will draw the most eyeballs during the NPC, it is worth noting that Chinese policymakers will also seize the opportunity to communicate their long-term reform plans.

As the second year of the 14th five-year plan, 2022 will be the year for implementation of development plans across all sectors. High-quality development, including in the domestic technology sector, as well as improvements to the population structure, control of systemic risks, and environmental development, will be among the highlights in the government work report and other legislative proposals to the NPC.

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Moreover, policymakers may also look to further clarify targets and approaches for the slew of reforms launched in 2021, given that this has led to confusion among private businesses and low confidence about investment.

In particular, antitrust regulation in the internet sector makes it hard to accurately gauge the worth of the listed internet giants. As a result, their stocks underperformed in both onshore and offshore markets. If NPC policymakers can make the regulatory mechanisms more transparent, it could help restore investor confidence.

For investors, the NPC will be a good time to re-evaluate China’s economic policy and reset their plans. The short-term stimulus measures could boost sentiment and reverse the weakness of Chinese stocks. Meanwhile, the reform and development plans will be key to providing clearer guidance for the longer term.

Chaoping Zhu is a Shanghai-based global market strategist at JP Morgan Asset Management