China’s Government Work Report, made by Premier Li Keqiang on 5^th March, released several important economic signals.

1. The Economic Growth Target Reduced Again;

The Government Work Report of 2016 has firstly been clear: the economic growth target has reduced from about 7% of last year to 6.5%—7%. The floor level of the target is on the basis of completing the overall target of the 13^th Five Years Plan, with the annual average economic growth rate no less than 6.5%.

In addition, the main reasons for the relatively low economic growth target of 2016 can be categorized into the following aspects:

Firstly, China’s economic growth rate hasn’t reached the median of expected value for two consecutive years. In 2014, the expected growth rate was about 7.5%, while the actual growth rate was 7.4%; in 2015, the expected growth rate was about 7%, while the actual figure was 6.9%; and the performance of the real economy was even worse if the growth of financial industry was not taken into account.

It is quite difficult to achieve the goal if the growth target maintained 7% as that of last year in 2016. The government cannot over-intensify the measure of the Stabilizing Growth just for a higher economic growth target, or the space for structural adjustment would be narrow.

Secondly, the government must release explicit signal to the public. The policy goal of the government, which has not all the way swung to the side of Structural Adjustment, still lies in the balance between short-and-medium term Stabilizing Growth and medium-and-long term Structural Adjustment.

2. Macro Regulation came up with New Methodology;

The Report has adopted new elaboration in the summery of the work of 2015 for describing the work of macro regulation.

In 2015’s Government Work Report emphasized that macroeconomic regulation and control was “timed regulation on the basis of range-based regulation”, while in this year, the Report has claimed to “conduct timed and well-targeted regulation on the basis of range-based regulation”..

The transformation from the “range-based and targeted regulation” to “range-based, targeted and well-timed regulation” mainly emphasized on government seizing opportunities in terms of fiscal policy and monetary policy, which is of great significance in stabilizing economy and finance situation. In terms of methodology, the government has to fully integrate the overall regulation goal and the short-term well-timed regulation, which means that government will conduct the well-timed regulation that aimed to deal with short-and-medium debt and liquctidity risk and take the implementation steps of the regulation policy and the domestic and foreign environment into consideration in 2016. 

2. Respond to the Doubt from the Economy Doomsayers

The domestic and foreign public opinions on China’s economic growth situation are quite different before the convening of the National People’s Congress and the Chinese Political Consultative Conference, which also has been called two sessions. Moody, the internationally renowned rating agency, has recently downgraded ratings for Chinese sovereign to minus, which has brought about widespread concerns from outside in terms of China’s slowdown economic growth.

Li Keqiang specially explained the reasons for China’s economic growth slowdown of last year in the Government Work Report.

The international situations of 2015 were complicated and severe; meanwhile, the domestic deep-seated problems also emerged from surface. The combination of those international and domestic factors has aggravated the difficult situation of China’s economy. The growth rate of 6.9% was achieved on the basis of high cardinality of more than RMB60 trillion economic aggregate. “Every percentage point of GDP growth today is equivalent to 1.5 percentage points of growth five years ago or 2.5 percentage points of growth ten years ago.”

The signal Li Keqiang wanted to release is clear: it is very normal that China’s economy growth appeared to be slow down under the integration of short-term negative factors and long-term pressure of slowdown; generally, the fundamentals of China’s economy are still positive.

4. Fiscal Policy would Comprehensively Implemented, while the Monetary Policy would Easier than that of Last Year

The privileged direction of the macro policy in 2016 is fiscal policy.

The national financial deficit target of 2016 increased to RMB2.18 trillion, which means RMB56 billion more than that of last year; the increase in the number is RMB290 billion,  more than that of last year, which is 107% in proportion. What’s more, the deficit ratio also increased from 2.3% of 2015 to 3%.

Meanwhile, the expansion of local government financial deficit is obviously bigger than that of central government in 2016, which reflected the worries central government on the lower fiscal income of local government under the situation of economic downturn and provided local government with more space for dealing with potential debt risk.

Li Keqiang declared in the Report that the government would fully implement the policy of levying value added tax in lieu of business tax since 1^st May to reduce the tax burden of the whole society, he ensured that “the tax burdens on all industries are reduced”, which is no doubt a good news for stabilizing industries of real estate, finance, architect, and service for life.

It is also showed a new adjustment in fiscal expansion for government to stimulate economic growth has gradually transferred from expanding government spending to reducing government revenue thus to alleviate enterprises’ burden.

5.”Stabilizing Growth” Featured Finance and State-Owned Enterprises;

In expressing monetary policy, the expression of this year is “flexible and appropriate” rather than “prudent and balanced” monetary policy of last year, which is tend to focus on the characteristic of “flexible”; and it is also emphasized on “maintain sufficient liquidity at a proper level”, while the word “sufficient” was not appeared in the Report of 2015.

This year, the growth target of broad money supply increased from 12% of last year to 13% of previous years, which also released signal of easy monetary policy.

As a matter of fact, both China’s finance minister Lou Jiwei and central bank governor Zhou Xiaochuan have already made statements that China’s monetary policy was actually “prudent but slightly easy” under the circumstance of the overall easy mood among the global monetary policy  around the G20 summit. And the expressions and targets in the Government Work Report confirmed the signal once again.

However, Government Work Report also emphasized that the government should maintain the basic stability of the RMB exchange rate, especially under the circumstances when China presented G20 summit as a rotating presidency. It is unlikely that China’s government would indulge the continuously sharp depreciation of RMB exchange rate.

Monetary easing policy, especially the reduction of interest, may cause huge pressure on exchange rate, and therefore, government would pay more attention on the strength and pace that imposed on the implementation of monetary easing policy. It will integrate the measures of reducing interest, reducing required reserve ratio and open market operation, among which the use of reducing required reserve ratio may be more frequent than that of the measure of reducing interest.

*This article is an edited and translated version by CCM. The original version comes for Sohu.com.

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