Headed into the National People’s Congress, one of the big questions was whether the market would get a GDP target for 2020 considering the damage the world’s second largest economy suffered at the hands of the coronavirus during the first quarter.
Now, we have an answer. China has not set a growth target for this year.
Premier Li Keqiang cites the pandemic and associated uncertainty in explaining the decision.
This isn’t entirely surprising. Indeed, many analysts have long called for the abandonment of the target. But the fact that Beijing is omitting it altogether (as opposed to, say, striking some manner of comprise using a range combined with qualitative goals) is notable, to say the least.
Li says the absence of a target in 2020 will allow Beijing to focus on employment, mitigating financial risks and eliminating poverty.
The global economy is, of course, expected to contract sharply this year on the heels of lockdown protocols instituted across most major economies. Simply put, the first half of 2020 witnessed the single largest demand shock in a century, which means that even if China manages to engineer a robust recovery domestically, external demand will remain weak.
The Chinese economy suffered an unprecedented contraction in the first quarter, shrinking a worse-than-expected 6.8%. Of all the “unthinkable” visuals market participants have been forced to ponder over the last three months, you could argue that the chart below is among the most astounding.
Since then, the data has steadily improved, or at least according to China it has. Activity numbers for April showed industrial output rising for the first time since the onset of the virus, for example.
And yet, retail sales remain severely depressed, and PPI deflation worsened materially last month, which is set to weigh further on industrial profits.
Li set a CPI growth target for 2020 at about 3.5% on Friday. Consumer price inflation, which hit seven-year highs in 2019, is cooling alongside an abatement in food prices, which had surged on the back of a stratospheric rise in the cost of pork.
When it comes to monetary policy, the PBoC refrained from cutting MLF rates and left the de facto benchmark unchanged this month, after completing another round of easing in April.
Since mainland markets reopened after the Lunar New Year (which was extended to help contain the virus), Beijing has cut key rates multiple times, with the latest round representing comparatively large reductions (20bps).
China is widely expected to implement more easing going forward and fiscal policy will be more expansionary as well. Markets are looking for officials to abandon the self-imposed 3% line in the sand on the fiscal deficit and some have urged China’s leadership to abandon deficit goals altogether amid the dramatic hit to the economy.
Indeed, it looks as though the Party will target a 3.6% deficit in 2020, according to Li’s remarks Friday. The target for the surveyed jobless rate is around 6%. Loan relief for smaller businesses has been extended to March of 2021. China will issue 1 trillion yuan in new sovereign debt to fund economic revival initiatives.
Renewed tensions with the Trump administration bode poorly for the future of the trade deal and a series of escalations on Capitol Hill over the past several days paves the way for sanctions, including measures aimed at punishing Beijing for a planned crackdown in Hong Kong. Huawei is back in Trump’s crosshairs, and it now looks as though some Chinese companies may be forced to delist from US stock exchanges.
Li on Friday said China needs to “perfect” Hong Kong’s laws for national security. “We will establish sound legal systems and enforcement mechanisms for safeguarding national security in the two special administrative regions, and see that the governments of the two regions fulfill their constitutional responsibilities”, he added.
Meanwhile, the world wants more in the way of answers on the origins of the virus, and China isn’t particularly keen on providing any. There is, as of yet, no proof (or even any evidence, really) to support rumors that COVID-19 was manmade or deliberately released. In other words, it’s not clear China has the answers the world is looking for, although one would be naive to suggest Beijing has told the international community everything there is to know. As ever, the truth is likely somewhere in-between.
In any event, the abandonment of the GDP target speaks volumes about the scope of the damage inflicted by the pathogen, and quite clearly suggests that a full recovery for the Chinese economy is some ways off.