What it means for Asia fixed income investors
Social and economic stability are key areas of focus for the Chinese Government in 2019, following China’s slowdown due to its deleveraging efforts. The National People’s Congress (NPC) policy announcements are in line with our expectations, where monetary easing bias will continue, combined with limited fiscal stimulus and tax incentives.
The first-time inclusion of unemployment as an official macro policy priority also echoes the importance of social stability and support for domestic consumption. The reiteration of financial system support for privately-owned enterprises should release further refinancing pressure as the year progresses. Looking ahead, we will closely monitor China’s onshore liquidity and credit conditions and focus on forward-looking 2019 corporate earnings expectations.
What it means for Asia equities investors
Both monetary and fiscal policies are important for China’s growth trajectory this year. The overall tone from the NPC reflects a prudent monetary policy and an active fiscal policy approach.
This leads us to address two key issues:
First, are we likely to see a reversal in the clamp down on shadow banking? We believe this is unlikely, as the tone for 2019 is “prudent” versus the liquidity super boom seen in 2015. We are also seeing positive developments on the Sino-US trade dialogue so far. Second, on the fiscal front, we have seen a slowdown in growth, a moderate rise in fiscal deficit from 2.6 per cent to 2.9 per cent, and aggressive tax cuts.
To make up for the shortfall, we believe that China will need to undergo a series of state-owned enterprises reforms, asset disposals and expense control. We can expect a downward revision to growth targets, as China has been on this controlled growth deceleration path for a few years.
The government has set a lower GDP target of 6-6.5 per cent (6.5 per cent in 2018) largely given domestic and external headwinds, but the overall tone of the speech was accommodating, aiming for stability. On the fiscal side, it announced 2 trillion yuan worth of corporate tax cuts, notably the VAT tax cut being greater than expected, which will be of most benefit to the manufacturing sector.
On the monetary side, it outlined a measured approach and interest rate cuts as a policy option. Another positive was the government plan to ensure growth in household income is in line with GDP growth, as a way to boost household purchasing power.