China’s annual theatrical production of transparency, “The Two Sessions,” opened today (March 3) in Beijing. Starting Friday, the National People’s Congress (NPC), China’s legislature and nominally highest political body, will air some of the current policy debates within the Communist Party (and their predetermined solutions). Today’s Chinese People’s Political Consultative Conference (CPPCC) will demonstrate the Party’s willingness to hear suggestions from a carefully cultivated group of outsiders. Clearly the NPC is the more important of the two meetings, though its impact on actual governance remains negligible as decisions are ultimately taken by the State Council. Here’s RGE’s take on what to look for behind the stagecraft: some modest shifts away from the loose monetary policy language used last year, a reiteration of efforts to contain the housing bubble and a push to loosen the household registration system for migrant workers.
Few Surprises at the NPC
Premier Wen Jiabao will kick off the NPC by delivering the government’s work report to the nearly 3,000 representatives. The outlines of the work report were sketched out at the Central Economic Work Conference in December, and then were filled in at the ministerial work conferences that followed. The work report will officially set the government’s targets for various indicators like new bank lending (RMB7.5 trillion, about 20% lower than the actual 2009 figure, but well above last year’s target), money supply (M2 growth of 17%), and GDP growth (once again, 8%).
The money supply and new lending targets suggest that policymakers will largely maintain their expansionary monetary stance this year. RGE has argued (subscription only) that the hikes to banks’ required reserves have not really restricted the credit supply, and we expect only modest tightening measures over the course of the year, starting with a 27 basis point rate hike in Q2.
Foreign observers will pay close attention to Wen’s remarks on currency appreciation. Last year, when the renminbi was re-pegged to the U.S. dollar, the government pledged to keep its valuation “basically stable, at a reasonable and balanced level.” Any mention of “flexibility” could push non-deliverable forward rates further upward, though RGE continues to expect only modest renminbi appreciation this year.
There will be some attention paid to the financing woes of local governments, and the Ministry of Finance may expand its bond sales program on behalf of local governments this year. Last year RMB200 billion worth of these bonds were sold, but local governments still relied heavily on land sales and quasi-official local investment companies to fund the bulk of their stimulus contributions. The debt load these companies took on last year has sparked worries in Beijing, but national officials still don’t have a grip on how large of a problem they are dealing with. Expect serious local government finance reforms to be put off for a later date, perhaps even until after the change of leadership in 2012.
Efforts to cool the housing bubble will make headlines, but RGE does not expect any meaningful reforms to come out of the meeting. The State Council, China’s cabinet, has increased its supervision of local housing markets and banking regulators will scrutinize loans to developers more carefully. At least for the near term these policies will only slow the bubble’s growth. January’s lending data showed long-term loans to households, mostly mortgages, reached a record high (RMB343 billion). Until credit to households is tightened, or a property tax introduced, the near-term forecast looks rather frothy. A massive oversupply of luxury and commercial real estate, however, will probably prove the bears right in the long run.
As laid out at the December conference, the household registration system will be loosened for migrant workers in tier-2 and tier-3 cities this year. Some local media outlets recently called for the government to scrap the hukou system entirely as it limits migrant workers’ access to social services and has bifurcated society along a largely obsolete distinction between rural and urban households. A more radical change along these lines will be put off until at least the government’s next Five-Year Plan, which will kick off next year.
Along with Wen’s work report, the Ministry of Finance will present the 2010 budget. RGE expects the government will once again aim for a 3% deficit, which it undershot in 2009. More infrastructure investment seems unlikely (though most of the stimulus projects still await completion), but increased spending on the social safety net and education should rise. Increased healthcare spending would be particularly welcome as a boost for domestic consumption, though on a per-capita basis the funds allocated will likely be minimal.
The National Development and Reform Commission (NDRC) will also submit an economic report to the legislature. This is expected to highlight China’s push to expand its clean-energy production in relative and absolute terms, which the newly-created “super ministry” headed by Wen will oversee. The report will once again highlight the NDRC’s efforts to rein in overcapacities in steel, aluminum, cement and other heavy industries. RGE doesn’t expect much here, though the rate of newly-added capacity may come down in 2010. The agency will also seek to improve income disparities between coastal and interior regions, though any new major initiatives will probably wait for the next Five-Year Plan.
Wen will close the meeting with a press conference. Local media will be told what to ask, and the government will request that foreign media outlets submit their questions in advance. Wen may strut a bit more confidently this year, now that China seems to be leading the world out of recession, but expect him to highlight the challenges that await China’s exit from the ridiculously-loose monetary policies of 2009. Too confident a posture would increase foreign expectations for China to rebalance. Last year Wen expressed worries about the U.S. dollar as a reserve currency. This may have been an attempt to dampen the dollar’s appreciation after the global flight for safety, which pulled the renminbi along for the ride. Although the dollar is up once again against the euro, Wen will probably avoid bashing the dollar when the renminbi is under increased pressure to appreciate. In fact last year’s dollar concerns meant China ended up purchasing even more U.S. assets, taking its official Treasury haul to over US$900 billion.
The agenda (and outcome) of the NPC may be predetermined, but the legislature is an opportunity for the government to lay out its plans to the population. To this effect, Wen held a carefully orchestrated online chat with China’s netizens last week. Although largely stagecraft, this does show the government’s increasing need to at least look like it is seeking feedback from its citizens. Though the Economist and others lament China’s backsliding on democratic reforms in recent years, the Party mostly has pushed forward on enabling citizens to better monitor government officials. The NPC is where the government lays out the goals to which it hopes to be held to account. (Thou
gh the consistent 8% GDP growth target is a good example of where the government prefers to set the bar.)
The meeting is also perhaps the best way for Party leaders to meet with their support networks and angle for promotions. This year’s intrigue will be heightened by the coming Party congress in 2012 that will hand power over to the next generation of leaders. While Xi Jinping and Li Keqiang look to have secured their spots as President and Premier, respectively, others will be gunning for a seat on the Politburo Standing Committee. Look for Bo Xilai, the gangster-fighting Party Secretary in Chongqing, to steal any camera time he can get. Meanwhile, Wang Yang, the former Secretary of Chongqing now working in Guangdong, will look for any opening he can find to block Bo’s promotion. Wang has the backing of President Hu, but Bo, at least for now, seems to have people.
It’s a shame that the most interesting plotlines will happen offstage.
All rights reserved, Roubini Global Economics, LLC. Opinions expressed on RGE EconoMonitors are those of individual analysts and may or may not express RGE’s own consensus view. RGE is not a certified investment advisory service and aims to create an intellectual framework for informed financial decisions by its clients.