China's "State Of The Union" Address Warns Of Tepid Growth, Sees Larger Deficit, Hawkish On Housing

The most notable overnight event was the release of the Chinese Government Work Report as part of the annual meeting of the National People's Congress which kicked off today and runs until March 17. This is the Chinese equivalent of the State of the Union address, delivered in this case by the outgoing premier Wen Jiabao. In it, Wen summarized his administration’s achievement in the past ten years in some detail, while voicing a sense of crisis when talking about existing social and economic problems. The key highlights were the closely watched economic targets for 2013, which while not surprising, were at the lowest levels in the past decade, confirming that the Chinese slowdown in both economic and loan growth is likely here to stay as the economy downshifts from its mercantilist approach, even while pesky inflation pressures persist.

Xinhua's summary of the speech was as follows:

"The Chinese government announced Tuesday that its GDP growth target will remain around 7.5 percent this year to leave room for economic restructuring. The target is intended to help create jobs and improve people's well-being, Premier Wen Jiabao said while delivering his last government work report to the opening session of 12th National People's Congress (NPC), China's top legislature.


This marks the second consecutive year for the world's second-largest economy to target 7.5-percent growth. In 2012, the government cut its growth forecast from 8 percent for the first time in eight years. Wen warned of the profound and persisting impact of the global financial crisis, as well as the unstable recovery of the world economy, as major threats to China's economic growth.


However, the premier cited the considerably increased capacity of China's manufacturing industry, significantly improved infrastructure, a high savings rate and a large workforce as favorable factors that will sustain development.


"In light of comprehensive considerations, we deem it necessary and appropriate to set this year's target for economic growth at 7.5 percent, a goal that we will have to work hard to attain," Wen told nearly 3,000 national legislators attending the NPC session."

The presented economic "targets", which are understood to be the baseline of what the government's economic goalseeking intends to achieve, are summarized as follows courtesy of SocGen:

SocGen's Wei Yao has some more details on what last night's release means for the market:

There were no big surprises in the closely-watched economic targets for 2013 – 7.5% for real GDP growth, 3.5% for consumer price inflation, CNY 1.2tn for the budget deficit and 13% for M2 growth. All are in line with market expectations, except for the inflation target (Cons. 4%). In our view, this combination implies a prudent policy stance.

Past experience suggests that growth targets should be interpreted as the minimum level that the government aims to achieve, while inflation targets usually mark the trigger point for policy tightening. If this still applies, the lowering of the CPI target may indicate that the authorities aim to strike a better balance between growth and risk, with medium-term sustainability higher on the priority than short-term buoyancy. Actually, risks are coming from more places than consumer goods inflation. The 2013 work report was more hawkish on housing inflation and speculation. Preventing systemic financial risk was emphasized as part of the monetary policy objectives. Particularly, the risk associated with banks off-balance-sheet activities was singled out. Premier Wen explained that China needs a certain level of economic growth to provide a stable backdrop for structural reforms. Hence, growth is a means, while reforms are the end.

As for the increase of the budget deficit from 1.5% of GDP set for 2012 to 2% for 2013, we don’t think it suggests a more proactive fiscal stance than what Beijing is implementing at the moment. Putting it together with the lower money growth target and more cautious words on local government debt in the budget report, the 0.5ppt increase in the deficit ratio seems to be an effort to move more fiscal spending on to the budget with closer supervision. This is supportive to pro-consumption expenditures (social security, healthcare and education), but not necessarily conducive to credit-fuelled public investment.

The report this year is shorter, but the reduction is mostly on the outlook section. Notably, the section on the government’s 2013 tasks is titled as “suggestions” instead of “objectives” as in the previous reports. This work report is more backward looking than instructive, which explains the light wording on structural reforms. For that, the report from the National Development and Reform Commission (NDRC) – the planning agency – offers much more. The NDRC report, which dedicates a separate section on the urbanisation strategy, is the new government’s roadmap. We will follow up on this later.


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