TOKYO/HONG KONG -- China is set to turn on the fiscal spigots to stimulate a slowing economy hit by cool domestic consumption and the simmering trade war with the U.S.
At next week's National People's Congress, the country's biggest annual political event, China is expected to scale back its gross domestic product target on the back of last year's 6.6% growth -- its lowest in 28 years. Many analysts see Beijing shooting for about 6.0% to 6.5%, with a median forecast of 6.3% in a Reuters poll of 85 economists. The announcement is expected on Tuesday.
To help fuel the economy, China is likely to raise its budget deficit-to-GDP target from last year's 2.6%. But while this will allow more fiscal stimulus to spark more corporate and consumer spending, it will also raise questions about the country's finances.
Yusuke Miura, senior economist of Mizuho Research Institute, told the Nikkei Asian Review that concerns over fiscal soundness mean policy makers will limit the increase to 3%. But others, including Carlos Casanova, an Asia-Pacific expert at risk analyst Coface, forecast a rise to 4%.
"We are expecting Beijing to announce additional infrastructure investments that ought to be financed via more local government bond issuance," Casanova told Nikkei.
Miura said the added issuance could total more than 2 trillion yuan ($298 billion) from 1.35 trillion yuan in 2018.
Economists at Societe Generale, however, wrote in a note that the budget deficit target will likely be below 3% of GDP.
Shen Jianguang at digital technology company JD Digits is concerned. The chief economist said China has completed almost all its economically efficient projects, and a further push on infrastructure investment may squander resources and deepen government debt.
Rather than splurging on infrastructure, Shen said Beijing should enable the rural population to pump up the economy.
"The first thing I'll be watching during the two sessions [of the NPC] will be reform of China's rural land use," Shen said. He added that easing restrictions on rural residential land sales will increase incomes outside of cities, turning country backwaters into engines of growth.
Per capita consumption expenditure in rural China last year rose by about 9% compared with roughly 5% in cities, according to government data.
"If that holds up, I think it can stabilize the economy," Shen said.
More tax cuts for individuals and companies could also be in the cards at the NPC. Shen calculated that personal income tax, pension fund contributions and other deductions shave about 25% off a salary of 10,000 yuan ($1,489). With the figure higher for corporates, Shen said that reducing the burden on both could encourage companies and households to spend more.
Miura also said the target for the unemployment rate will also be important. While the goal of 5.5% was met last year, he said that a higher figure this year would mean the government "admits that the job market is unstable."
Looming over the NPC will be the specter of the trade war with Washington.
While U.S. President Donald Trump announced on Sunday that trade talks had advanced far enough to justify delaying a planned March 1 tariff increase, the devil is in the details.
In response to U.S. demands, China has promised to stabilize the yuan and increase purchases of American goods. But the two sides remain far apart over structural issues such as intellectual property protection and forced technology transfers. Meanwhile, Washington continues to regard China's subsidies to companies -- especially state-owned enterprises -- as distorting the market.
Casanova said it will be important to look at the NPC for any signs of the reforms sought by the U.S.
"Our baseline scenario is for the authorities to intensify efforts to restructure state-owned enterprises and further liberalize some sectors," he said. "This is in line with measures implemented last year to remove limits to foreign ownership in the automotive, banking and insurance sectors. However, [Beijing] will pursue these reforms while simultaneously supporting strategic industries under the 'Made in China 2025' plan."
But the Coface economist warned that if relations with Washington continue to sour, Beijing could favor self-sufficiency over structural reform.
"This would have negative implications for global trade and result in a downside revision to China's potential growth," he said.
Nikkei Asian Review deputy editor Zach Coleman in Hong Kong contributed to this report.