China and Consumption
China National People’s Congress started on Wednesday, 5th March. Premier Li Qiang addressed the Congress yesterday announcing a 5% GDP target for 2025. He mentioned the word consumption twenty-seven times – a record high according to Bloomberg. Indeed, the Party leadership has consciously made boosting consumption the top priority for the first time since President Xi Jinping came to power over a decade ago with President Li specifically citing domestic demand as a top priority.
Most economists are forecasting 4.5% growth in GDP at best, especially given the onset of the Trump trade war. The target of lifting inflation to around 2% is also seen as optimistic by many.
What the Government can control is the budget. The GDP growth target is set to be underpinned by the central government’s highest fiscal deficit target in over three decades (4% of GDP) combined with a pledge to raise local government bond issuance to record levels. Somewhat back of the envelope calculations suggest that the total central and local government deficit will approach 10% of GDP in 2025.
Monetary policy will remain loose with Rmb500bn of new special sovereign bond for big banks, allowing the reserve ratio requirement to be further reduced, while interest rates will also decline further.
Infrastructure spending will continue to play a significant role. The National Development and Reform Commission signalled a new hydropower project in Tibet in its annual report to the National People’s Congress China. This ‘mega dam’ will test both engineering and diplomatic skills. The dam will be constructed on the lower reaches of the Yarlung Tsangpo River in Tibet while a power transmission project from Tibet to Guangzhou province will be built concurrently.
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