Growth at all costs

For Beijing the battle against Covid-19 is being fought on two fronts


President Xi Jinping says China can still meet its economic goals for 2020

China’s parliament – consisting of the twin meetings of the National People’s Congress (NPC) and its lesser peer, the Chinese People’s Political Consultative Conference (CPPCC) – has evolved over the decades. The CPPCC was formed in 1949 from businesspeople and non-Party members. Its first session concluded a day before Mao Zedong founded the People’s Republic of China in his Tiananmen Square proclamation. The second gathering would take place five years later, although by then the NPC – represented predominantly by Party members ‘elected’ nationwide – had demoted the CPPCC to a purely consultative role.

For a long time there were no fixed dates for the parliament’s annual gathering and it was suspended altogether at the height of the Cultural Revolution. The gathering was only given its so-called ‘Two Sessions’ format in 1998, when the CPPCC and NPC meetings were set to convene in Beijing on March 3 and March 5 respectively.

Since then China’s parliament has stuck to that schedule and the annual gathering even went ahead in March 2003 as the SARS virus began to spread nationwide. More than 5,000 delegates turn up each year, including the most senior politicians and government heads. Together with support staff and journalists, the Great Hall of the People is crowded with 10,000 people during the fortnight-long event.

This year the Two Sessions is almost certainly going to be postponed because of the severity of coronavirus outbreak. Xinhua reported on Monday that the Standing Committee of the NPC would discuss a delay later this month, with a spokesman telling the news agency that deferral would allow officials to concentrate on fighting the outbreak that started in Hubei’s provincial capital Wuhan in December last year.

According to HK01, Hong Kong delegates have been told they shouldn’t make travel plans to go to Beijing as normal and that they only need to make themselves available for video conferencing. The risks of going ahead were seen as too high, the Hong Kong-based news website claims, and no new date for the Two Sessions has been set.

The break from political tradition should allow the government more time to focus on the fallout facing the economy from the Covid-19 crisis as well. According to a poll of 40 economists by Reuters, Chinese GDP is going to grow at its slowest pace since the credit crunch in 2008. The fear is that it could slump to 4.5% from 6% in the previous quarter because of the chilling effects of the efforts to stop the outbreak. In an even more bearish forecast, Ed Hyman, an economist at Evercore ISI, told CNBC to expect no growth at all in the first quarter. China’s economic think tanks aren’t quite as worried, although they still see challenging times ahead. The National Institute for Finance and Development says the current crisis could take a percentage point off GDP growth for the year as a whole, for instance.

The SARS outbreak slowed Chinese growth by two percentage points to 9.1% in the first quarter of 2003. Retail sales and industrial production were hit, but exports stayed robust and growth rebounded quickly after the virus was brought under control in June of that year. Strong fundamentals helped the economy roar back, China Entrepreneur magazine says, helped by China’s entry into the WTO in 2000. The same pattern may not be repeated this time, it warns.

Other newspapers took a more positive line, including Xinhua. Chinese GDP was less than Rmb14 trillion ($2.03 trillion) back in 2003 when SARS broke out, it argued. Today it is nearly Rmb100 trillion – an increase that has created more of a buffer to handle shocks like the coronavirus, it observed.

The message from the top is that the epidemic won’t stop China from achieving its economic targets this year. Indeed, President Xi Jinping has said on several occasions that government is sticking to its goals for 2020 and that the impact of Covid-19 would be short-lived.

That was his message in a phone call with French President Emmanuel Macron on Tuesday, for instance, when he predicted that the impact of the virus would be “temporary” and that China “will still be able to achieve this year’s goals set for economic and social development,” Xinhua reported.

Xi has ordered officials to fight the Covid-19 challenge on the economic front as well as the health one. One immediate challenge is getting factories back to fuller operations. In recent years, some manufacturers had already found it harder to man their production lines after the Chinese New Year as migrant workers have been reluctant to return from annual visits to their hometowns (see WiC444). But the situation this year is a lot worse after the extended break imposed by the State Council. Post-holiday travel has been more daunting on quarantine concerns, stranding workers in their home provinces.

In one makeshift measure to resume factory production, 21CN Business Herald reported, local governments have been coordinating “point-to-point” pairings, where a city with a labour shortage pairs up with nearby towns that can supply the necessary manpower. Central government ministries have also been rolling out relief measures. In a temporary move, the central bank said last week that it would tolerate a higher ratio of non-performing loans at the commercial banks (specific details were not announced). On Thursday it also cut the prime lending rate by 10 basis points to 4.05% to cut borrowing costs.

More than 25 businesses have also raised more than Rmb24 billion in capital from so-called “virus bonds”, the Financial Times reported this week. Regulators have encouraged such sales by cutting the approval process for new issuance from weeks to days, and by urging the state banks to buy the bonds, the newspaper said. Low coupons are being paid on the debt, although at least a tenth of the proceeds have to be spent on combating the epidemic.

There is an additional political reason for propping up the economy this year: the Communist Party’s so-called “two centennial goals”. The aim is to build a “moderately prosperous society” by the start of 2021, by which point the Party has also promised to double per capita income from 2010 levels. That would require GDP growth of no less than 5.5% over the 12 months of 2020. At the outset of the year this looked achievable but the hit from Covid-19 has created new uncertainties, especially when the economy grew 6.1% in 2019, the slowest percentage rate since 1990.

Chinese Premier Li Keqiang was scheduled to unveil the growth target for 2020 during the Two Sessions – so any delays to that gathering could also hold back the release of the GDP goal too.

But a report this week by a group of senior officials and economists implied that one way of meeting the growth goals was to increase the fiscal deficit to 3.5% of GDP this year, contravening another government ‘red line’ that the deficit should be no more than 3%.

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