April 13, 2024
Economy

China’s coming ‘Two Sessions’ put plans to jumpstart economy in the spotlight


China’s “Two Sessions” policy meetings kick off next week and the markets are watching to see what Beijing does to kick-start the world’s second-largest economy.

China’s “Two Sessions” policy meetings kick off next week and the markets are watching to see what Beijing does to kick-start the world’s second-largest economy.

The stakes are high. The annual gathering of the National People’s Congress deputies and top policymakers comes as China’s economic woes pile up. Consumers have tightened their purse strings, the country’s property giants are struggling for survival and stock markets have suffered a punishing selloff. The government has rolled out measures to stabilize the economy, including steps to stoke demand for housing, but persistently weak data has raised doubts about whether stimulus has been bold enough.

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The stakes are high. The annual gathering of the National People’s Congress deputies and top policymakers comes as China’s economic woes pile up. Consumers have tightened their purse strings, the country’s property giants are struggling for survival and stock markets have suffered a punishing selloff. The government has rolled out measures to stabilize the economy, including steps to stoke demand for housing, but persistently weak data has raised doubts about whether stimulus has been bold enough.

Key announcements on the investors’ radar include the outlook for China’s economy in 2024, featuring targets for gross domestic product growth, inflation and employment. The GDP target, which the country has only failed to reach twice, will be the most keenly watched.

GDP TARGET: Though the sessions start Monday, markets will have to wait until Tuesday for Chinese Premier Li Qiang to announce the economic growth target in his annual government work report. Analysts are expecting Beijing to aim for “around 5%,” the same as in 2023. Market consensus is for a 4.6% increase this year, based on current policy support.

“The narrative of GDP targets will precisely show the scope of China’s macroeconomic policies and what the government has to trade off to maintain its growth,” Bruce Pang, head of Greater China research and chief economist at JLL, told Dow Jones Newswires.

A target of 5% or more could signal strong determination to revive the economy, suggesting more aggressive stimulus ahead, analysts say. One below 5% would likely be seen as more bearish, suggesting policy restraint.

The key to interpreting the target will be the accompanying measures, which will shed light on how Beijing plans to deliver.

DEFLATION & CONSUMPTION: Another important thing to watch is Beijing’s willingness to roll out more aggressive stimulus to boost consumer spending, said Tommy Wu, senior China economist at Commerzbank AG. “That will provide a bigger bang for the buck than additional infrastructure spending,” he told Dow Jones Newswires.

Beijing is expected to set its consumer inflation target at around 3% this year, as it has since 2015.

Investors have become increasingly concerned about the strength of China’s consumer demand, a key engine of economic growth. China’s consumer inflation in January fell at the fastest pace in over 14 years, underlining continued weakness in demand.

“Investors should look for measures to stimulate consumption including through trade-in programs, incentives to upgrade large-scale equipment as well as moves to attract foreign investment and reform the financial sector and capital markets,” DB Research said in a note.

PROPERTY: Policymakers will doubtless address the property sector, but how policies are phrased will be under scrutiny.

China is likely to rely on state-owned enterprises to help indebted developers finish housing projects. Investors will watch whether Premier Li omits the phrase “housing are for living in, not for speculation,” for clues about upcoming property-sector policies, Neil Thomas and Jing Qian from Asia Society said in a report.

Top policymakers started emphasizing that line in late 2016 as they sought to tighten control over the property market. When they left the line out of the Politburo statement in July last year, it was seen as a sign of a tilt toward easing.

If Li doesn’t mention the phrase at the Two Sessions, it could suggest that China is going to relax property policies even further, JLL’s Bruce Pang says.

Moody’s Analytics sees scope for “a lifeline for real estate,” with announcements of widening support and clear market interventions. Authorities could help supply with more property-sector funding to expedite construction of unfinished properties, says Moody’s. Delays in delivering projects has sapped confidence and weakened demand. “Efforts to boost demand could bring another easing of restrictions for first-time home buyers and a reduction of the down payment ratio,” they add.

FISCAL BUDGET: Market watchers are also looking if there is more fiscal support for the economy, while keeping an eye on growing levels of local-government debt.

Goldman Sachs strategists think the government will set a 2024 deficit target at 3% of GDP. China set the same target last March but revised it to 3.8% after issuing one trillion yuan ($139.12 billion) of special bonds to support disaster relief.

Any upside surprises, like a deficit target bigger than 3%-3.5% of GDP or a central government special bond issuance quota exceeding CNY1 trillion, “could help improve confidence towards the economic outlook this year,” GS said in a note.

REACTION: With so many announcements to consider, investors will ponder how to trade the news.

Much depends on whether authorities convince investors that they are serious about restarting the “stalled engines of economic growth: consumption and investment,” UBS analysts and strategists said in a note.

In the event of moderately supportive policy, UBS suggests a so-called barbell strategy—investing equally in high- and low-risk securities—with a tilt to defensive, high-yielding dividend stocks. “This segment, which overlaps heavily with state-owned enterprises (SOEs), is likely to benefit disproportionately from both targeted easing and National Team buying,” they add, referring to market-supportive stock purchases by government-related entities. If policymakers deliver a positive surprise, cheap valuations offer an opportunity to “position in recovery-sensitive internet and consumer sectors, as well as medium- to longer-term beneficiaries of China’s growth drivers of the future, like consumption, green tech, and high-tech industries.”

What’s clear for analysts is that without a step-up in support, the status quo will persist.

“Beijing will likely need to take bolder measures to put a floor on growth and to revive market confidence,” Commerzbank’s Wu said.

Write to Jiahui Huang at Jiahui.Huang@wsj.com and Fabiana Negrin Ochoa at fabiana.negrinochoa@wsj.com



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