Prudent and Neutral

As in years past, a major focus of the Two Sessions in 2017 was the Government’s Work Report delivered at the NPC session, which provides key insights into the government’s tackling of various issues of public concern.　　

Among all the figures released, the most anticipated was the GDP growth target for the year ahead, which Premier Li Keqiang said in his report would be “6.5 percent or better if possible” for 2017.　　

Marking the lowest forecast in 27 years, the 6.5 percent target is a small adjustment from the last year’s “6.5-7.0” percent. For many analysts, the figure reflects a compromising approach to balance the need to push forward much-expected reform while ensuring economic and political stability at the same time. As the government report put it, the government will “seek progress while maintaining stability.”　　

In the run-up to this year’s Two Sessions, there have been calls from economists both at home and abroad to abolish the practice of setting a GDP growth target, so that the government can have a free hand to take more significant measures to push forward the market-oriented economic restructuring, which the central leadership has established as the hallmark of its economic policy. In 2015, Shanghai became the first major region to ditch an official economic target, which led many to believe that the change would be replicated across China.　　

Huang Shouhong, director of the State Council Research Office, and one of the drafters of the government report, told reporters in a press conference held on March 5 that one major consideration of retaining a GDP growth target is to ensure adequate employment levels across the country.　　

“To be frank, the GDP growth target is set to boost employment,” said Huang. “We estimate that each one percent of GDP growth can create 1.9 to 2 million jobs, and with GDP growth of 6.5 percent, we can create over 11 million jobs, which would meet the government’s employment target.”　　

“As long as the employment level is healthy, we can accept a lower GDP growth rate [at the end of the year],” Huang added. Huang said the GDP growth target also serves to send a strong message to the world that China’s economy will not have a hard landing. “If the economy comes upon any unusual circumstance, we have enough tools and means to deal with it,” said Huang. 　　

Safe as Houses?　

Another major focus of this year’s NPC session is the government’s approach to monetary policy. One of the major reform tasks facing China’s current leadership has been to restructure the country’s growth model into an innovation-driven one from an investment-driven model, which is supported by loose monetary policy.　　

It has long been argued that to restructure China’s economy, the government needs to lower the level of leverage throughout the overall economy and tighten its monetary policy. This appears not to be the case for this year, as the government set a 12 percent target for money supply growth in 2017, which is slightly higher than the 11.3 percent recorded in 2016 and almost double its GDP growth target.　　

According to the government report, its monetary policy follows a “prudent and neutral” approach, which analysts believe means that the government will take measures to channel capital to sectors it deems short of investment, away from already over-extended sectors, or in Li’s words, to encourage “precise investment.”　　

But in an environment of relatively loose monetary policy, a key concern for both the government and the general public is its impact on the real estate sector. In the past few years, China has witnessed runaway housing prices that have led to widespread public anxiety. The government had resorted to tightening measures in the real estate sector to attempt to get soaring housing prices under control. However, as the slowdown in the market has squeezed the economy, the Chinese government kicked off 2016 by loosening its policies to“reduce inventory.” As this led to a fresh round of price surges in the housing market, triggering widespread complaints, the government reverted to its earlier tightening policies.　　

To address concerns regarding the sector, Li Keqiang said the government will tackle soaring house prices by increasing the supply of land for residential use. For some experts, such as Wu Bihu, a city planning professor from Peking University, one major reason behind China’s rocketing house prices is the government’s monopoly of and limits to the supply of land. Wu told NewsChina that Li’s pledge to increase land supply, if implemented, will be a step in the right direction to restore the health of the distorted real estate market.　

However, it appears that the market is not convinced by this approach. Following the release of the government report, house prices in several major cities have soared. For example, prices in Beijing surged by 11.8 percent in a week. Balancing the need to maintain comparatively loose monetary policy without further exacerbating the real estate boom will remain a major challenge for the government this year.　　

The Trump Effect　

In addition to GDP growth that “seeks progress while maintaining stability” and a “prudent and neutral” monetary policy, the government report also maintained the current fiscal policy, setting the government deficit target at 3 percent for the year, the same as that of 2016.　　

The reform that received the most attention was a plan to cut taxes and fees by 550 billion yuan (US$80bn) to boost the private sector. But largely speaking, the Chinese government appears to be taking a risk-averse attitude to its economic policy. No more drastic measures aimed to push forward its pledged reform were announced, nor is it trying to take a more expansionary approach to stimulating the economy.　　

Analysts believe that the apparent preference for stability stems from uncertainties both at home and from abroad. Domestically, it is expected that many of China’s current leaders at both central and local levels will be replaced in the upcoming 19th Party Congress to be held this fall. Internationally, the full impact of the change in the US government under the Trump administration is yet to be seen, although discussion of both issues was studiously avoided in the entire Two Sessions.　　

Without directly referring to the potential impact of the Trump administration on China, Wang Jun, a research fellow with the China Center for International Economic Exchanges, told NewsChina that China’s prudent attitude is due to the need to “gear itself up to prepare for more serious challenges” as “anti-globalization sentiment and protectionism in the world’s major economies are on the rise.”　　

Yet, such concerns over potential friction with the US under the Trump administration may be better reflected in the government’s unusual reluctance to release its military budget this year, probably the most watched figure for international observers.　　

Military Budget　

In previous years, it has been a routine practice for the government report to include its military budget as China has steadily increased transparency around its military expenditure. However, this year, the figure was omitted from the report.　　

Instead of including it in the much-covered and much-watched government report, China chose to release a figure at an NPC press conference on March 4, one day prior to the release of the government report, with Fu Ying, the NPC’s spokesperson announcing that China’s military budget would increase by 7 percent in 2017, down from last year’s 7.6 percent rise and the smallest increase since 2010.　　

Analysts believe that by keeping the defense spending increase largely in line with its GDP growth forecast and by keeping the figure low profile, China is trying to play down the sensitivity of the issue against the backdrop of the more hawkish attitude in the US, where Trump’s administration has proposed a 10 percent increase in military spending.　　

According to an editorial published by the state-owned Global Times, the comparatively low growth rate in the military budget showed that China has taken a “restrained” attitude towards its military development. “It shows that China has no intention to have an arms race with other major powers, nor will China choose to use its military prowess to back its negotiations with other countries,” said the editorial, apparently referring to the Trump administration, which has said that the US would “seek peace through strength.”　　

As China faces challenges on multiple fronts, ranging from a continued economic slowdown, an upcoming reshuffle of its leadership and potential trade frictions with other countries, to rising tensions regarding various security issues such as North Korea, it has yet to be seen how its policy of “prudence” will work out.