Xi Jinping, China’s president. (Photographer: Qilai Shen/Bloomberg)

Five Things We Learned About China’s Economy at Xi's Policy Summit

(Bloomberg) -- China’s annual gathering of leaders that started in Beijing this week unleashed a flurry of policy initiatives, key among them a shift that puts fiscal policy decisively at the forefront of measures to shore up growth.

Among other important changes was a ramped up focus on reining in hidden debt, an intensification of the drive to get more funding to private companies, and more evidence that President Xi Jinping’s plan to dominate future industries is very much alive. There also were indications that China is unlikely to make big concessions during trade negotiations with the U.S.

Five Things We Learned About China’s Economy at Xi's Policy Summit

“The government is relying more on fiscal policy to support growth but this is not your old fiscal policy,” said Trey McArver, co-founder of Beijing-based research firm Trivium China. “Instead of big infrastructure outlays, it’s an incredibly pro-business agenda.”

Here are summaries of five key policy shifts that unfolded in the first week:

Fiscal Firing

By turning to fiscal policy to shore up growth, Premier Li Keqiang underscored his determination to avoid a repeat of past credit blowouts. But while the budget deficit target of 2.8 percent of gross domestic product is just 0.2 percent higher than last year’s target, economist say it’s bigger than it looks.

The almost 2 trillion yuan of tax cuts announced is unprecedented and Finance Minister Liu Kun said Thursday the actual amount may be higher. It’s “very challenging” to keep the balance between revenue and expenditure this year as economic growth and inflation weakens, he said. Morgan Stanley says the size of fiscal easing “isn’t small.” Standard Chartered Plc estimates that it amounts to stimulus of almost 2 percent of GDP.

China doesn’t have a great record of actually hitting its budget deficit target, so given the pressures this year a similar miss appears likely.

Five Things We Learned About China’s Economy at Xi's Policy Summit

Private vs State

A campaign to support the struggling private sector loomed large in the fiscal push.
Cuts to value added tax are equivalent to as much as 800 billion yuan ($119 billion) and will boost corporate earnings, according to Morgan Stanley. Li’s annual work report also said some state-owned financial institutions and corporations should provide more dividends to the central government this year.

China’s Record Tax Cuts Spell ‘Tightest Year’ for Local Regions

“Both monetary and fiscal stimulus measures this time around are very much focused on revitalizing the private corporate sector, not the highly leveraged property and state-owned enterprise SOE sectors,” said Qu Hongbin, chief China economist and co-head of Asian economic research at HSBC Holdings Plc in Hong Kong.

Hidden Debt

A campaign to crack down on so-called hidden debts of local governments, referring to off-balance-sheet loans or borrowings of their entities, is being intensified. To that end, the nation’s largest policy bank is being drafted in to help resolve the problem. China Development Bank, one of the nation’s three policy lenders with 16 trillion yuan ($2.4 trillion) in assets at the end of 2017, is working with the Ministry of Finance on some specific cases of hidden local government debt, the bank’s president Zheng Zhijie said in Beijing Tuesday. Zhenjiang, a city in Jiangsu province, has been considered as a test case for debt restructuring with cheap funding from the CDB, Bloomberg reported last month.

Five Things We Learned About China’s Economy at Xi's Policy Summit

Future Industries

Xi’s plan to dominate future industries wasn’t mentioned by name in two main economic planning reports totaling 103 pages. Yet the spirit of the controversial Made in China 2025 plan, a flash point in relations with the U.S. that featured prominently in the reports last year, is still there between the lines. Both reports had the same underlying message about China’s intention to step up research and development into big data and artificial intelligence, as well as fostering emerging industries such as next-generation information technology, high-end equipment, bio-medicine, new energy automobiles and new materials -- all core elements of the Made in China 2025 plan.

Trade

Five Things We Learned About China’s Economy at Xi's Policy Summit

China has been mostly silent on the state of trade negotiations with the U.S. even as Donald Trump urges his negotiators to close a deal with China soon. So it took former finance minister Lou Jiwei to warn the world that China won’t make big concessions. Some U.S. demands are "just nitpicking" while a lot of its demands are things China already plans to reform, said Lou, who was finance minister until 2016 and now runs the social security fund.

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