China’s NPC offers more clarity on stimulus than reform – Fitch

The annual meeting of China’s National People’s Congress (NPC) that ended this week has resulted in no major surprises or changes to macroeconomic targets and policy priorities, Fitch ratings said.

It said key questions on the pace and content of structural reforms – and how potential asset quality problems in the financial system are to be addressed – remain substantially unanswered.

Fitch Ratings believes that the Chinese authorities face a sharpening dilemma between recognising the costs of the imbalances that have built up in the economy and allowing vulnerabilities to intensify further.

The first week of the NPC seemed to indicate a broader focus on stimulus over reform, it said in a statement, adding that notably, the authorities have conceded that the economy will continue to add to leverage in 2016 – with a total social financing (TSF) growth target of 13 percent versus an implied nominal GDP growth target in the single digits.

“The focus on stimulus in conjunction with China’s broader economic challenges could have an effect on the sovereign, with increased government borrowing targeted this year. Fitch expects the authorities will ultimately have to fiscalise more of the cost of China’s imbalances.”

Fitch said the commitment by authorities on the nature and pace of supply-side reforms at the NPC has remained broadly vague. Reducing excess supply in certain sectors is a theme which was reinforced at the NPC, for example, but the 100 billion yuan ($16 billion) in resources pledged are small within the context of China’s $11t trillion economy.

“More broadly, the slogan of “supply side reform” remains a fairly general term that could mean various different kinds of policies. Furthermore, China continues to lack a comprehensive framework on how to address the potentially significant asset-quality problems in the financial system,” Fitch said.

Fitch maintains that we do not expect a hard-landing growth scenario for China in the near term, as the agency believes authorities still have the administrative and financial resources to avert a disruptive outcome. That said, Fitch believes that the economy could face a bleaker medium-term outlook without structural adjustment and macroeconomic rebalancing, which would be likely to require major structural reforms

Fitch forecasts real GDP growth to slow to 6.2 percent this year from 6.9 percent in 2015. We caution against reading too much into the data around Chinese New Year, but the growth pattern indicated thus far has not been constructive for rebalancing away from investment towards consumption.

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