Economics NPC Takeaway – Fiscal Stimulus in Line, Greater Credit Support

The latest China housing survey showed a sharp weakening of market sentiments and purchase intention amid COVID-19 shock. Thus, UBS economists expect total property sales to decline by 5-7% in 2020.

22 May 2020

The bar graph illustrates what percentage of survey respondents intend to buy a home in the next 2 years, 3 years or more, never, or are undecided.

No GDP growth target for 2020

As we had expected, the National People's Congress (NPC) did not set an explicit GDP growth target for 2020, and emphasized the importance of supporting employment, protecting basic livelihood, and reducing  poverty  as  the  main  economic  objectives  instead.  This  means  policy  stimulus  will be more measured and targeted than in 2009.

Fiscal stimulus 4.5-5% of GDP

We estimate China's total fiscal stimulus to be about 4.8% of GDP in 2020, including 1) 2% of GDP in tax and fee reduction and 0.3% in emergency spending for Covid-19, 2)  0.5%  of  the  2019  tax  &  fee  cut  carried  over  into  2020,  and  3)  2%  of  GDP  in  additional  spending,  mainly  in  infrastructure  (infra  investment  to  grow  >10%).  The  expansion of AFD will be bigger, including tax revenue losses. The expansion of deficit will  be  financed  by  a  RMB  1  trillion  in  special  treasury  bonds,  a  1.6  trillion  increase  in  special LG bonds, use of unspent government funds, transfer from other budgets, and some quasi-fiscal means.

Greater credit support – total social financing (TSF) growth to reach 13.8%

While the NPC kept the tone on monetary policy as "prudent", it called for a "notable increase" in money and credit growth. We expect adjusted TSF credit growth to pick up further to 13.8% (vs our previous forecast of 12.5%) in 2020, helped by required reserve ratio (RRR) and policy rate cuts, including a 25 bps deposit rate cut. Increase liquidity should also help support larger corporate and government bond issuance without direct monetization of deficit. We  now  see  credit  impulse  to  jump  to  >9%  in  Q4,  and  see  25-30ppts  increase  in  China's debt/GDP ratio.

More reform and opening – what could surprise?

The NPC called for more opening up and reforms, echoing recent policy directives. We think the most notable new wordings in the broad reform directives relate to 1) using capital   market   and   securitization   to   increase   state   capital   returns   for   SOEs   in   competitive  sectors,  and  2)  affirming  and  protecting  an  equal  footing  of  private  property  rights  versus  public  ones  through  legislation.  The  actual  implementation  of  these  and  other  SOE  reform  measure  remains  to  be  seen,  but  could  be  a  positive  surprise for the market if implementation proceeds speedily.

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