China: What do the targets set by the National People‘s Congress mean?

Below are what we consider to be the highlights of the government work report, listed in the sequence of importance for the Chinese economy.

Stabilising jobs is the top priority of the government, setting a GDP target is not.

The report highlighted many times that jobs are important to the economy this year. By repeating this objective, it's clear how critical the job market situation is.

The target for the jobless rate is around 6%, which is optimistic as global demand is sinking. This is especially true for factory workers.

So how can the government achieve this target when the current jobless rate is already at 6%?

The work report provides some hints. Higher education institutions are going to increase capacity by two million students this year. This could absorb new graduates from high schools to continue their education and allow others to do post-graduate degrees, which will reduce the number of people looking for jobs. But this may not help young factory workers who have been recently laid off. These workers are usually in the low-income group, they need a job not only for themselves but also for their families living in rural areas.

The amount of fiscal stimulus is uncertain but seems low compared to my estimate of between 6% and 8% of nominal GDP.

The work report stated a fiscal deficit of more than 3.6%, but it did not provide an upper limit. So it seems the government wants to be flexible on the stimulus amount.

Looking at the special government bond size of CNY3.75 trillion (+1.6 trillion from 2019) together with the special government bond of CNY 1 trillion, the stimulus is smaller than I had expected. However, the government can beef up the issuance of local government special bonds around August when the situation around the coronavirus becomes clearer. The government did increase this quota in June last year after the trade war escalated.

The report set a very strong tone on how the money should be spent.

• Fee and tax cuts, rental reduction, inducing consumption and investments.
• It cannot be used on the operation of local governments
• General government expenses have to be reduced

The report, by emphasising job stability, stated that banks should lend to companies to keep them afloat. We expect the PBoC to lower interest rates and provide innovative policies to lend to SMEs.

The focus of growing technology is obvious and the report highlighted this as an important objective.

As we have mentioned, the New Infra scheme is now at the core of its long-term growth plan. Though this plan has been laid out by the government, it will be up to the private sector, i.e. the market to decide which areas will grow within the wide scope of technology.

To us, this signals that the technology war between China and the US has escalated. China is going to develop its own technological capacity so it won't be too dependent on the rest of the world.

As usual, there is a section on trade. But apart from “implementing the Phase 1 deal with the US” and building regional trade mechanisms, the description of trade is quite vague.

This may signal that China realises the difficulties faced by exporters this year, as global demand is weak.

No growth target has been set for 2020 and indeed, there was not a single word on GDP growth. This is what we expected.

Our view is that it is impossible to set a growth target at this uncertain time when the whole world has suffered from Covid-19 and global demand is very weak, which will have a serious impact on China's economic growth. The risks, however, are not all one way. If Covid-19 subsides quickly, and there is no second wave then global demand could recover faster than we expect and GDP growth in China could be better than our forecast of -1.5% for 2020.

There is another threat to China's growth, however, which is the technology war with other economies, especially the US. We believe this will hurt China's businesses even if Covid-19 subsides. Moreover, there is a chance of a second round in the trade war.

• So how can we gauge the performance of the government if there is no GDP growth target? We can gauge its performance by looking at industrial profits. The damage from Covid-19, the technology war and potential trade war are hurting the manufacturing sector more than the service sector in China. An improvement in industrial profits should be a barometer of how well the economy has managed these three risks.