Yesterday, the National People’s Congress (NPC), the annual assembly of China’s legislature, officially kicked off in Beijing. At the Great Hall of the People, Premier Li Keqiang took to the podium to deliver the official government work report – essentially the Chinese leadership’s yearly state-of-the-nation address – before thousands of delegates.
H+K Strategies has sketched out below a quick snapshot of the main takeaways for our clients. As the NPC continues to unfold in the coming days, we will provide more detailed assessments of the work report’s implications for businesses as well as further insights that emerge from the many panels, Q&A sessions and press conferences that are convened with senior leaders.
A year of uncertainties
At the beginning of 2019, China is navigating its way through many uncertainties. Internally, these revolve predominantly around the vulnerabilities created by a slowing Chinese economy; externally, the biggest unknown remains the outcome of the ongoing China-U.S. trade talks.
The work report fully acknowledged the difficulties faced this year. Premier Li cautioned that China will need to contend with “a graver and more complicated environment as well as risks and challenges” and should be ready for “a tough struggle.” In short, Chinese decision-makers are fully aware that the road ahead will not be an easy one.
A softer national growth target
This year’s growth target for the economy – nearly always the biggest ticket item disclosed in the work report – was downgraded slightly from last year’s goal of “around 6.5%” to between 6% and 6.5%. In 2018, the Chinese economy expanded 6.6%, exceeding its target, but the longstanding deceleration persisted. Weakening momentum was mostly due to the impact of Beijing’s deleveraging campaign, intensified efforts to crack down on heavy polluters in manufacturing, and the trade row with the U.S.
In 2019, the overriding priority for policymakers is continuing to orchestrate an orderly deceleration. By setting a growth range rather than a single hard figure, the Chinese leadership is providing officials with more flexibility and greater room to maneuver through a year with an uncertain economic outlook.
Fresh stimulus measures
To help shore up flagging growth, the work report outlined a series of new stimulus measures for 2019 as expected. These included moves such as plans to reduce companies’ tax burdens and social insurance contributions by nearly 2 trillion yuan (US$298 billion), expand lending from state-owned banks to smaller firms by more than 30%, and boost infrastructure investment by 40 billion yuan compared to last year.
However, Premier Li did emphasize that China would not resort to a broad-based stimulus package as in the past, stressing that, “we must 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.” Beijing remains cautious about returning to a highly credit-fueled approach to growth and adding to the country’s huge debt load.
Moves towards greater market liberalization
Throughout the work report, China’s state-led approach to economic management was more muted than usual. A number of steps long backed by private companies received greater official endorsement, such as the expanded access to state loans and major cuts in taxes and fees mentioned above as well as other plans to cut red tape and improve the business environment. As the economy slows, Premier Li repeatedly stressed the need to “energize market entities through reform and opening up.”
There were also many welcome signals for overseas investors and businesses. For instance, the work report vowed to further liberalize access to the market, reduce the negative list for foreign investment, and allow wholly foreign-invested companies to operate in more sectors. To sum up, it concluded that, “China’s investment environment is all set to get better and better, which means more and more business opportunities for foreign companies in China are a sure thing.”
As always, however, the actual follow-through on such pledges will be the key. Many international businesses have grown weary from what the European Chamber of Commerce in China has called “promise fatigue.” But with China looking to reenergize its growth, foreign companies may see moves toward widening market access unfold at a faster pace than before.
Taking Chinese consumption to the next level
The next steps for driving forward Chinese consumption, which now stands as China’s main economic engine, were also laid out. According to the work report, policymakers will use various measures to “increase urban and rural personal incomes and boost capacity for consumption.” In particular, it specifically highlighted taking significant steps towards further developing elderly care – the number of people over 60 years old in China has already reached more than 250 million – as well as child care services.
Strengthening the tourism industry and sustaining auto sales by offering preferential policies for buying new-energy vehicles were also mentioned. Last year, China’s car sales declined for the first time in over two decades, but sales of electric and hybrid vehicles dramatically bucked the downward trend by surging over 60%. The work report made clear that Chinese policymakers are increasingly focused on piling support behind the brightest spots in China’s consumer landscape – those with the greatest future potential.
Strengthening China’s positioning as a responsible global actor
As its global footprint has mushroomed, China has had to deal with intensifying concerns around the world over its rising influence. The work report sought to ease such anxieties by re-declaring Beijing’s commitment to “safeguarding economic globalization and free trade.” For the Belt and Road Initiative (BRI), it also emphasized that China would continue to “promote the joint pursuit of the BRI,” the main vehicle for Chinese economic diplomacy, with companies playing the lead role in bringing this vast transnational endeavor to fruition. Some nations involved in the project have expressed misgivings about what impact it will ultimately have on them.
In a rare move, the work report did directly refer to relations with the U.S. by emphasizing that China would continue to promote bilateral trade negotiations. Although brief, the very mention of the talks signaled the importance that Beijing attaches to resolving tensions and reaching an accord.