On March 5, the National People’s Congress (NPC) was held in Beijing, and Premier Li Keqiang delivered the Government Work Report (hereinafter “the Report”). This year’s Report took place amid the slowing economy and US–China economic negotiations. This article will illustrate some key elements from the Report that are relevant to China’s macroeconomic policies in 2019.
The Report presented the sobering recognition of the current situation, noting that “In 2019, China’s growth will be confronted by more complicated, more severe circumstances; predictable risks and challenges, as well as those that are unpredictable, are growing larger in quantity and size.” On the other hand, China’s growth is still in the period of crucial strategic opportunities. China remains confident in its economic outlook, remarking that “We have the willingness and ability to prevail against the difficulties and challenges of all kinds. The long-term current of our economy toward a favorable direction has not changed, and it never will.”
The Report demands, as the basic principles of the policy, “the adherence to five”: (1) the general principle to pursue progress while ensuring stability; (2) a philosophy of new development; (3) high-quality development; (4) supply-side structural reform as its main task; and (5) deepening market-oriented reforms and expanding high-standard opening up. It also requires “the stability of six” (employment, the financial sector, foreign trade, foreign investment, domestic investment, and expectations).
Concerning macroeconomic policy, the Report also notes that China will continue to “pursue a proactive fiscal policy and a prudent monetary policy, implement an employment-first policy, strengthen the coordination between these policies to keep major economic indicators within an appropriate range, and sustain healthy economic and social development.”
“Stability,” especially that of the economy and society, is typically emphasized in a year with major political events, such as this year’s 70th anniversary of its founding. For this reason, “an employment-first policy” was newly listed in the macro policies on an equal footing with fiscal and monetary policies.
(1) Economic growth:6–6.5% (the target in 2018 was approximately 6.5%, and the actual result was 6.6%.)
The growth target was revised downward. However, the economic report by the National Development and Reform Commission (NDRC) explains that 1) it is based on the sufficient evaluation of unstable factors and uncertain factors in economic management; 2) it contributes to the stability of the market forecast; and 3) it aligns with the current potential of China’s economic growth.
(2) Employment
1) The increase of new urban employment: over 11 million
(The target in 2018 was over 11 million, and the actual result was 13.61 million. However, as will be described later, this target is virtually inflated.)
2) The surveyed urban unemployment rate: around 5.5%
(The target in 2018 was within 5.5%. The actual result was 4.9% in the national surveyed urban unemployment rate, and 4.7% in the unemployment rate surveyed in 31 major cities.)
3) The registered urban unemployment rate: within 4.5%
(The target in 2018 was within 4.5%, and the actual result was 3.8% at the end of December.)
(3) Consumer Price Index (CPI) increase rate: around 3%
(The target was around 3% in 2018, and the actual result was 2.1%.)
(1) Increasing deficit ratio
In terms of a proactive fiscal policy, the Report says that China will be “pursuing it with greater intensity and enhancing its performance.”
The deficit-to-GDP ratio in 2019 is projected at 2.8%, a 0.2-percentage-point increase from 2.6% in 2018.
The Report explains the reason for the “moderate” increase in the deficit-to-GDP ratio this way: “We have given full consideration to factors such as government revenue and expenditure and the issuance of special bonds; we have also taken into account the need to leave policy space to address risks that could arise in the future.” Since special-purpose bonds issued by local governments are used for profitable projects, they are not included in the local governments’ debt. Thus, it is compatible with the deduction of debt risk. Presumably, China did not change the deficit-to-GDP ratio back to 3% immediately, as it wanted to leave some room for launching stimulative measures depending on the course of US–China trade friction in the future.
(2) Large-scale tax cuts
The report states that the country will “introduce both general benefit and structural tax cuts, focusing primarily on reducing tax burdens in manufacturing and on small and micro businesses.”
1) Deepened VAT reform
The tax rate will be reduced from 16% to 13% in the manufacturing industry, and from 10% to 9% in the transportation, construction, and other industries. They will ensure that tax burdens in all industries only go down and not up.
2) Implement the general benefit tax cut policies issued at the start of the year
Regarding the content of this policy, finance vice-minister Liu Wei explained at the press conference on March 7 that the qualification criteria for small and micro businesses were eased, and 179.8 million enterprises were newly qualified; the rate of enterprise income tax was reduced; and the minimum VAT threshold for small-scale taxpayers is raised as of January 1.
(3) Reduction of enterprise contributions of social security costs
We will reduce the unit premium rate for urban workers’ basic aged-care insurance to 16%. The social insurance premium payments for small and micro businesses will be substantially reduced in 2019.
(4) Raising financial resources
Tax cuts and fee reductions have significantly expanded from 1.3 trillion yuan in 2018 to 2 trillion yuan. In order to raise the financial resource to aid them and prevent deficits from growing, the central government undertakes to: increase the profits turned in by designated state-owned financial institutions and enterprises directly under the central government; cut general expenditures by over 5%; reduce expenses on “official hospitality, official overseas visits, and purchase/maintenance of official vehicles” by around 3%; and take back all funds that have long remained unused.
(5) Effective use of local government bonds
In FY 2019, 2.15 trillion yuan of special local government bonds will be incorporated (800 billion yuan increase on last year). The Report explains that this will provide funding for the construction of key projects, and that the scope of use for special local government bonds will be expanded moderately. The role of the local government bonds is emphasized as the financial resource for infrastructure investment.
(1) Appropriate relaxation and tightening
The Report states that their “prudent monetary policy must be eased and tightened to the right degree.”
The phrase “maintenance of (economic) neutrality” was removed from the description of the monetary policy. In addition, the phrase “reasonably ‘stable’ liquidity” that appeared in 2018 is now rephrased as “reasonably ‘sufficient’ liquidity.” From those points, it is evident that the monetary policy will be managed in a relatively relaxed way compared to 2018. Still, such measures are not pork-barreling but rather are focused on securing the funding for small and micro businesses. Further, although a specific number has usually been set as the target for the scale of M2 money supply and social financing, this time it was only described as that it should be in line with the nominal growth rate.
At the press conference held on March 10, when ask about the word “neutral” no longer being used, Yi Gang, the head of the People’s Bank of China, replied, “The essence of our prudent monetary policy is practically unchanged.” Furthermore, he explained that the phrase “relaxed or tightened to the right degree” means to generally assimilate the growth of the scale of M2 money supply and social financing with the nominal growth rate.
(2) Alleviation of the difficulties and high costs of financing faced by enterprises
The government will employ approaches such as reserve requirement ratios and interest rates as needed to guide financial institutions to increase lending and reduce the cost of borrowing. In particular, the reserve requirement ratio for medium and small banks will be lowered further, and all the released funds will be lent to private enterprises and small and micro businesses.
In addition, the Report states that loans to be granted to small and micro businesses by large state-owned commercial banks must be increased by over 30% in 2019. However, this could potentially result in a growing bad loan ratio and the renunciation of capital. Thus, the government will support the efforts of large commercial banks to replenish self-owned capital through multiple channels.
(3) Stability of the exchange rate
The Report says that the government will “improve the exchange mechanism rate and keep the RMB exchange rate generally stable and at an adaptive and balanced level.” This previously used expression has made a comeback on the subject of RMB rate; this is deemed to reflect the forming consensus between the US and China regarding stabilizing the exchange rate (not devaluating RMB rate).
(1) Employment target practically raised:
The Report states that “an employment-first policy will be pursued with full force.” It explains, “The employment-first policy has been elevated to the status of a macro policy for the first time ever in 2019. The purpose of this is for all sectors to emphasize employment and strengthen their policies to support employment.”
Regarding the employment situation, the Report says, “Both in the immediate future and for some time to come, the pressure on aggregate employment will not decrease, the related structural issues will become more pronounced, and new factors affecting employment are growing. Thus, employment must be positioned with greater priority.” The Report demands that the increase in the number of new workers in 2019 must reach the figures from the past few years on top of achieving the anticipated target.
Among economic indexes, the one most emphasized by Premier Li Keqiang is the employment index. Since the target for new jobs has been achieved and passed in the past, reaching only 11 million will practically be a shrinkage. To relax the pressure on employment, the target for new jobs must continue to be achieved and exceeded.
(2) Stable and expanding employment
Military veterans and temporarily laid-off workers are newly added to the government’s key groups for employment, along with college graduates and rural migrant workers. This indicates that the employment issues concerning those groups have been worsening.
Against the said issues, the Report illustrates the government’s concrete measures. One of them is to apply a fixed amount of tax and fee deduction for three years for enterprises that hire rural impoverished individuals or individuals with urban unemployment registration for more than six months. The government also allocated 100 billion yuan from the outstanding amount of unemployment insurance funds for skills upgrade training and the training for switching jobs or industries for over 15 million workers. In addition, the admission quota of vocational colleges will be expanded by one million students, aiming to accept more college graduates, military veterans, temporarily laid-off workers, and rural migrant workers.
(1) Consumption
The first matters to be emphasized on will be the full implementation of the revised Individual Income Tax Law, which will confer benefits to the 80 million taxpayers eligible for the tax reduction policy.
In terms of new services, the government will be putting more effort into the development of eldercare, especially community eldercare services. The development of various types of childcare services will also be accelerated. Other measures include further development of the tourism industry, and keeping ongoing preferential policies on the purchase of new-energy vehicles.
(2) Investment
The primary points in this field will be the completion of an 800-billion-yuan investment in railway construction and a 1.8-trillion-yuan investment in road construction and waterway projects. Investments will be strengthened in major water conservancy projects, intercity transportation, logistics, the infrastructure of regional cities, disaster prevention, as well as civil and general aviation (for topographical survey, crop-spraying, and other purposes outside cargo or passenger transportation), and other infrastructural facilities, and construction of next-generation information infrastructure will be accelerated. In addition, the government will encourage private capital to participate in the construction of key projects.
Conclusion
The Report highlights the following as three points as being essential for its macroeconomic policy:
(1) Holistically handle the relationship between the domestic and the international
The Report states that China must “boldly face the challenges and turn risks into opportunities,” indicating its stance on pursuing reformation and opening up, as triggered by its slowing economy and US–China economic friction.
(2) Strike the right balance between maintaining stable growth and preventing risks
The risks must be solved gradually in the course of development. The Report explains that “When proceeding with policies, schemes, and measures under this situation where the present downward pressure on the economy is increasing, the effects of tightening must be prevented in order to have a synergetic effect, and economic indicators must not be allowed to slide out of its appropriate range.” This is based on the lessons they learned: in early 2018, the monetary authority, being too preoccupied with reducing debt ratio, strictly regulated shadow banking and other money-making activities of the banks. As a result, private enterprises, as well as small and micro businesses, faced financing difficulties, which eventually accelerated the economic slowdown.
On the other hand, the Report also states that the government “should not attend only to immediate concerns or adopt short-term strong stimulus policies that will end up undermining long-term development and generating new risks or hidden harmful effects.” This highlights their cautious stance on launching major economic stimulus measures as seen in 2009–10.
(3) Balance the relationship between the government and the market, and energize market entities through reform and opening up
The Report says that “As long as market entities are energized, we can boost the internal forces driving development and withstand the downward pressure on the economy.” It explains that the government will promote reform and opening up, accelerate the establishment of a unified, open, orderly, and competitive modern market system, relax market access, ensure fair supervision and management, and create a law-governed, internationalized, and facilitated business environment. This indicates the government’s intention to pursue further marketizing reformation.
The Report also expresses that “Market allocation is the most efficient form of resource allocation,” and that “The government must determinedly hand over matters it should not manage to the market, and make maximum reductions in its direct allocation of resources.” This indicates the revival of the notion of “letting the market exercise its decisive role in resource allocation.”
As illustrated above, government leaders do not intend to undertake large-scale simulative measures or enhance the roles of government and state-owned enterprises to counter the escalating economic slowdown and US–China economic friction. Instead, it endeavors to maintain sound and continuous development of the economy and social stability in a broader picture by focusing primarily on stable employment, along with further pursuing marketizing reformation and high-level opening up. This is not only constituted by the government’s reflections on its major simulative measures taken in 2009–10, but also indicates that the reformists’ opinion is dominant, which means that reform and opening up must be pursued further to relax US–China economic friction. However, the nationally surveyed urban unemployment rate was 5.3% in February (4.9% in last December), and 5.0% in the unemployment rate surveyed in 31 major cities (4.7% in last December), both deteriorated since December. If the unemployment rate declines any further, or the GDP growth rate in the January–March quarter is significantly decelerated, calls for “postponing reforms and prioritizing large-scale stimulative measures” may grow stronger. It remains necessary to monitor future trends in the economy and policies.
（Dated Mar 29, 2019）