China’s Policy Summit in Spotlight as Economy Seeks Stability

(Bloomberg) -- A crucial eleven days for China’s economy begins next week when leaders gather to detail priorities for the year just as they try to stabilize growth amid concerns over trade and debt.

The event kicks off Tuesday morning with Premier Li Keqiang’s work report outlining 2019 goals for economic expansion, the fiscal balance, inflation, money supply, credit growth and other areas. There will be press conferences by key ministries and the central bank, and it wraps up March 15 with Li’s annual press briefing.

The meeting may provide more insights into how officials will balance debt risks against the need for growth after Xi last week hinted that he may be toning down a long-running crackdown on leverage. It’s also another opportunity for leaders to send a message to the world about their plans for reform and opening up, conscious that those plans will also feed into the ongoing negotiations with the U.S. to defuse the two nations’ standoff.

The centerpiece though is the setting of the annual growth target, around which other economic policies orbit. Some economists expect China to set a lower growth target of either about 6 percent, or from 6 to 6.5 percent -- down from around 6.5 percent for the past two years.

“There’s a strong indication of increased tolerance for lower growth,” said Yao Wei, chief China economist at Societe Generale SA in Paris. “This change is much needed amid the ever more challenging balancing act between short-term growth and long-term sustainability.”

Even so, policy makers will have one eye on how financial markets digest such a substantial notch down in the growth outlook. A sudden bull market in Chinese shares on the back of better trade news this week raises the risk of equally abrupt reversals.

The gathering comes amid mixed signals on whether targeted stimulus is succeeding in stabilizing the slowing economy and after an extension of the trade war truce with the U.S. temporarily eased pressure on President Xi Jinping.

Growth decelerated to the slowest pace in almost three decades last year and the first official gauge of manufacturing in February contracted further with an export orders index plunging to the lowest in a decade. Still, data for credit and trade both perked up in January and a Bloomberg Economics gauge of early economic measures this week indicated the economy overall is showing its first signs of recovery after months of slowing.

That leaves investors wondering exactly how policy makers will calibrate key settings at the meeting. The possible stabilization of the slowdown and the extended trade truce may reduce the need for supportive policies, while evidence is mounting that the debt Xi vowed to rein in is growing again.

"Managing expectations around growth is critical to maintain confidence in the economy," said Katrina Ell, an economist with Moody’s Analytics in Sydney. “The fiscal and monetary stimulus being unleashed is to prop up, rather than reinvigorate, the growth engine.”

The inflation ceiling may again be set at 3 percent, the target for the budget deficit is likely to be raised to 3 percent of GDP from 2.6 percent last year, while the job creation goal will stay at 11 million, says economists at Citigroup Inc. They say the government will likely reiterate its "prudent" monetary policy stance without specifying targets for M2 money supply growth or aggregate finance.

The issuance of special local government bonds may increase substantially to 2 trillion yuan ($300 billion) from 1.35 trillion yuan last year, says China International Capital Corp. It’s likely there will be bigger tax and fee cuts this year, including a two percentage point cut to the value-added tax rate for the top bracket and a potential cut to the corporate tax rate.

China’s policy makers continue to underline that their approach to supporting the economy is now different to the flood-style stimulus of the past.

Accepting a lower growth target “reflects the reality that China faces a range of cyclical headwinds and isn’t immune from the laws of economic gravity which slowed growth in other Asian economies as they grew richer,” said David Loevinger, a former China specialist at the U.S. Treasury and now an analyst at fund manager TCW Group Inc. in Los Angeles.

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