Local Government Debt And Environmental Issues Will Top Agenda During China's Upcoming National People's Congress
This is the first NPC meeting to follow on the crucial third plenum back in November and will garner a lot of attention.
One of the key things markets will watch for in this meeting are macro targets. Bank of America's Ting Lu expects that Beijing will set a GDP target of 7.5% for the year, the same as 2013.
"The government might emphasize the role of "projection" of growth targeting and Premier Li's growth floor could be different from the growth target in 2014," Ting writes.
He anticipates a consumer price inflation target of 3.5% and M2 (a broad measure of money supply growth) at 13%. Remember, China is trying to curb credit growth, and for now there is some concern that the deleveraging that is under way could trigger a financial crisis.
In terms of reforms and initiatives put in place to bring about those reforms, much of the work was likely done during the closed-door economic work conference back in December.
That being said we can expect to hear more on two key things. 1. Beijing's efforts to rein in local government debt and 2. reforms of the powerful state owned enterprises (SOEs).
Local government debt totaled 17.9 trillion renminbi (about $2.8 trillion), as of mid-2013, according to the latest audit by the National Audit Office. This is up from 10.7 trillion renminbi at the end of 2010. Unsurprisingly, dealing with local government debt is expected to be on top of the agenda. From Ting:
"These reform measures include: (i) opening up of the municipal bond market to local governments; (ii) including local government debt in the budget-making process and tightening up local government bond issuance procedures; and (iii) making provincial governments responsible for the debts of lower-level local governments. At the provincial NPC meetings this year, normally seen as setting the tone of the national NPC, controlling local government debt risks was also mentioned by many delegates.
"We expect local governments will be legally allowed to run fiscal deficits to finance public projects and will be officially given the access to banks and capital markets during the NPC meeting. These measures will provide China's local governments a new source of long-term financing which could help local governments to replace short-term bank and trust loans with longer-duration bonds. This should be one of the key ultimate solutions to China's local government debt issues, in our view."
Environmental protection, with a special focus on smog, water and soil pollution is supposed to be another key priority for the government.
"Less emphasis is put on GDP targets as an assessment for local government officials, while officials and local authorities will be held responsible directly for the pollution caused," writes Ting.
Plans about SOE reform is another thing to watch for. Despite all the hooplah surrounding the announcement that markets would now be allowed to play a more decisive role in the Chinese economy, following the third plenum, SOE reform was largely disappointing.
More recently, some perceived Sinopec's move to sell a 30% stake in oil-retail unit as the beginning of SOE reform. But Laban Yu, a Jefferies analyst, said this seemed more "like stealth capital raising," reports Weiyi Lim at Bloomberg.
Minxin Pei, professor of government at Claremont McKenna College, explained why such reform is harder now that it was 35 years ago, in a Project Syndicate column.
"...Members of the ruling elite benefit directly and immensely from the state-dominated economy. Market-oriented reform, by leveling the competitive playing field, would hurt their interests and reduce their privileges, making fierce opposition likely. Only by mobilizing pressure outside the party-state can these insiders be forced to accept some of the decentralizing and liberalizing reforms that China's economy needs. "
So, what can we expect with regard to SOEs?
Huang Shuhe, the Vice Chairman of the State-owned Assets Supervision and Administration Commission (SASAC) has pointed out four types of SOEs "whose shareholding structure will be further optimized," writes Ting:
- SOEs that are vital to national security will remain solely owned by the state.
- State capital must hold the absolute controlling stake in SOEs in some key industries and sectors.
- The government should also hold a relative majority of shares in SOEs that are in pillar industries and hi-tech industries.
- State capital could totally withdraw from SOEs that are not in the above three categories and give private capital the control.
The SASAC is also working on a plan to increase the SOE dividend payout ratio in 2014 which is currently in the 5-15% range. The 3rd Plenum Decision said it will require SOEs (centrally-administrated) to pay 30% dividend to government by 2020 to replenish public funding for social security.
The NPC is expected to speed up tax reform, replacing business tax with value added tax (VAT). It is expected to carry on with government restructuring, specifically those that have to do with administrative approvals. We might hear details on rural land reforms.
All that being said, Ting writes that this is not expected to have a huge impact on the market. But, "the NPC is still a unique event for markets to observe the macro targets, work focus and a bit more detailed reform agendas of the government."