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China People's Congress

China adds stimulus as it cuts growth target to 6%-6.5% range

Beijing announces tax cuts, increased bond issuance to boost slowing economy

China's President Xi Jinping, left, and Premier Li Keqiang arrive for the opening session of the National People's Congress at the Great Hall of the People in Beijing on March 5. (Photo by Taro Yokosawa)

BEIJING -- With economic momentum continuing to slow from a crackdown on financial leverage and the trade conflict with the U.S., China has set its growth target for this year at a range of 6% to 6.5%.

Last year's official gross domestic product expansion of 6.6% was already the slowest China had posted in 28 years but many economists believe the actual rate was significantly lower. To boost confidence, Premier Li Keqiang on Tuesday unveiled a package of tax cuts to the National People's Congress.

"A full analysis of developments inside and outside China shows that in pursuing development this year, we will face a graver and more complicated environment," Li told the 3,000 gathered delegates in Beijing.

The adjusted growth target however is seen as an important acknowledgment of the dilemmas facing the authorities.

"This change is much needed amid the ever more challenging balancing act between short-term growth and long-term sustainability," wrote economists Wei Yao and Michelle Lam of Societe Generale about the new GDP range before Li's speech.

The planned tax cuts and a boost in government bond issuance would raise the nation's official budget deficit to 2.76 trillion yuan ($411.6 billion) or 2.8% of gross domestic product, up from 2.6% in 2018. Overall government spending is projected to rise 6.5% to 23 trillion yuan.

Analysts Andrew Batson and Chen Long of Gavekal Research in Beijing said Tuesday that the pace of growth in the budget will actually be below 2018.

"Overall the message was far from a 'whatever it takes' fiscal stimulus'," they said. Combining other government accounts with the general budget, the deficit ratio would rise to 4.3% of GDP, they calculated, adding that "fiscal policy remains relatively conservative."

Of the 3.5 trillion yuan allocated for the operations of the central government this year, 1.2 trillion yuan is earmarked for defense as Beijing pursues "military modernization across the board." The defense figure marks a 7.5% increase form 2018, but many observers believe China's total military spending is much higher.

Li said the government would issue 2.15 trillion yuan of bonds, up 800 billion yuan from last year, to fund infrastructure projects and boost confidence in rural areas. Consumer inflation is targeted to reach 3%, as compared with last year's figure of 2.1%.

Addressing concerns about local government debt, the official government work report Li submitted to the legislature Tuesday morning said: "We will resolutely control hidden debt expansion and strengthen risk monitoring and analysis... and urge high-risk cities and counties to reduce the scale of their hidden debts as rapidly as possible."

The top rate of value-added tax assessed on manufacturers will fall 3 percentage points to 13%. Assessed employer contributions to social insurance for workers will also be trimmed to ease the burdens of the corporate sector.

Li said the government aims to create more than 11 million new urban jobs this year while striving to reduce the ranks of the rural poor by at least 10 million.

The government calculates that China needs 12 million to 13 million new jobs a year to maintain social stability. A 1% GDP growth is said to lead to around 2 million jobs, and is likely the basis for the 6%-6.5% growth target.

The government goal of doubling income per capita by 2020 from a decade earlier also requires an average 6.2% growth in the 2019-2020 period.

The government's plans are "ambitious but realistic," Li said, amid its quest to build a "moderately prosperous society in all respects."

Beijing has reportedly offered Washington guarantees during their high-level trade talks that it will not intervene in currency markets to weaken the yuan. Li said Tuesday that officials will "strengthen the market's role in setting interest rates" while improving exchange rate mechanisms to ensure a "generally stable and an adaptive and balanced level" for the yuan.

In a further nod to the talks with Washington, Li noted that a new foreign investment law to be voted on at the end of the congress session will loosen official controls on market access and which sectors foreign companies can enter. He made no mention of Made in China 2025, the government's ambitious technology upgrading program which has come under intense U.S. criticism.

Chinese investors were largely unmoved by Li's announcements, many of which had been well signaled in the days leading up to the congress. The benchmark CSI 300 index of large Chinese stocks was down 0.1% in the afternoon following Li's speech.

"Asia markets are not liking the NPC targets as [they] appear to put a floor to growth rather than reversing the slowing trend," tweeted Trinh Nguyen, senior economist for emerging Asia at investment bank Natixis. "NPC was underwhelming in that everything is basically as expected."

Issaku Harada in Beijing contributed to this report.

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