Stopping the bubble: what to watch at China’s NPC

The NPC gathers party delegates from around country to discuss policy and is set to meet on March 5. What can the international community expect in the aftermath?

" Even policymakers have realised by now the Chinese economy needs to address several structural issues crucial to long-term sustainability."
Raymond Yeung, Chief Economist, Greater China, ANZ

At the conference Premier Li Keqiang is expected to reinforce the message from December’s Central Economic Work Conference, including an adjustment to China’s “new normal”.

In a nutshell, 2017 will be a year for deepening supply-side structural reforms in China - namely, the five initiatives of deleveraging, capacity reduction, inventory reduction, cost reduction and mending the weaknesses of the economy.

With this in mind, we would downplay the importance of official targets on growth and inflation. In fact, even policymakers have realised by now the Chinese economy needs to address several structural issues crucial to long-term sustainability, instead of focusing on maximising gross domestic product (GDP).

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UNWELCOME

We believe the government has kicked off an attempt to prevent a financial bubble. Strong credit growth is not welcome in China.

Therefore, a key thing to watch at the NPC is the government’s stance on money supply (M2) and credit growth (total social financing, or TSF).

We envisage two equally possible scenarios:

• Lowering the M2 and TSF targets to around 11 per cent to 12 per cent from last year’s 13 per cent. This will reinforce the government’s intention to taper this year- a likely scenario given monetary policy has reached its limit in boosting real activities.

In 2016, one yuan of new credit generated just 20 cents of additional GDP nominally, almost one-fifth of the level a decade ago. At the same time, credit within the financial sector now represents 25 per cent of banks’ total assets, compared with 12 per cent in 2007, promptings concerns about a financial bubble.

• Another possibility is Chinese policymakers will replace a quantitative target with a general statement like ‘keeping credit growth at a reasonable range’.

In our view, this is the best approach as the People’s Bank of China (PBoC) modernises its operational framework from a quantitative-based to a price-based regime with the intention to establish a base curve. A single M2 or TSF target can hardly represent the government’s monetary policy stance.

In practice, we believe the authorities will use the following operational variables to inform their policy decisions in the near-term: money supply, housing-related credit, the gap between market repo and reverse repo rates and commercial banks’ excess reserves placed at the PBoC.

TARGET

China is not the only economy which announces economic targets. In most countries, targets are typically official forecasts derived from realistic assessment and the figures are primarily used for economic planning and fiscal budgeting.

Since a significant portion of the Chinese economy continues to be state-owned, this type of official forecast will have a direct bearing on corporate activities.

The reality is the Chinese economy has become more sensitive to global and domestic events beyond the government’s control, including the market reaction to its own policy actions.

Adopting a target range can introduce some degree of flexibility and allow policymakers to adjust their actions accordingly.

For monetary policy, we believe the best approach is to develop a set of explicit policy goals and operational targets.

This will provide a transparent tool for the central bank to communicate with the market, and it is critical if China is serious in modernising its monetary policy framework.

Raymond Yeung is Chief Economist, Greater China at ANZ