Tax, housing policies parts of key measures for China to meet 5.5% growth target
By Jimmy Zhu

Editor's note: Jimmy Zhu is chief strategist at Fullerton Research. The article reflects the author's opinions, and not necessarily those of CGTN.

China set the full-year growth target at 5.5 percent at the [annual session of] the National People's Congress (NPC). The new target showed that policymakers are unwilling to sacrifice much of the growth even with multiple domestic and external threats weighing on, increasing the expectations on more policy supports to arrive this year.

The country achieved an 8.1 percent growth figure for 2021, but the GDP growth was below the 5.5 percent level in the last two quarters of 2021, suggesting the recovery momentum has been fading since the beginning of the second half of 2021. The weaker housing market, power supply shortage and rising COVID-19 infections were the main downside risks in this period.

The power supply shortage has been largely improved since the late fourth quarter last year, but commodity prices continue surging this year amid rising international energy prices, and the Russia-Ukraine crisis has made the situation worse as commodity prices are surging.

To counter those growth challenges, we expect the Chinese central bank to cut further the key policy rates, as well as the reserve requirement ratio for major banks to ease the credit condition, particularly in the first half of 2022. On the fiscal measures, the government plans to increase the fiscal spending by 8.4 percent this year, 2.9 percentage points higher than the GDP target would help to stabilize the growth activities.

However, those traditional policy tools wouldn't be sufficient to help the economy to achieve the 5.5 percent growth target, as broad-based easing always tend to favor large companies more. After the People's Bank of China (PBOC) has cut the rates and reserve requirement ratio in the past a few months, the gap between the large companies and small companies' PMI was at 6.7 in February, which was the widest in three years.

Having that said, more specific measures to boost the domestic activities and housing market slowdown are much needed. We expect the tax rebates and relaxation in the property market will play key roles in achieving broader recovery to reach the full-year growth target.

Tax rebates needed to counter energy cost

ANZ Bank China Commodity Index, tracking the prices of a group of commodities, has climbed around 27 percent since the beginning of the year, and over 10 percent rises in the first week of March as Russia-Ukraine tension escalating.

Many small and medium-sized enterprises' (SMEs) profit margins will be significantly hurt by the rising commodity prices, as many of them belong to the downstream sectors. With no sign of international commodity prices easing in the near future, policy support for SMEs is expected to be more intensified this year, including more tax benefits and easier credit access. 

As stated in the government work report at the opening of the annual NPC session on Saturday, China pledged to provide more tax rebates to the private sectors. Also, Minister of Finance Liu Kun said over the weekend that China's tax refunds and cuts will reach a record high this year in an effort to relieve the burden on market entities. We expect these measures would be useful to improve the companies' cashflows, leading to more employment opportunities and investments. Besides that, the Chinese central bank is expected to lower more reserve requirement ratio for some smaller banks and to encourage more lending to those SMEs.

Currently, SMEs represent more than 90 percent of the enterprises in the country and account for 80 percent of nationwide jobs in the country, according to data from data provider Statista. It's worth mentioning that the unemployment rate's target this year is "below 5.5 percent" versus "around 5.5 percent" in 2021. Having that said, policymakers' determination to support the private sectors will be strong for this year.

Tweaks in housing market policies

Domestic and external demand faces some uncertainties due to geopolitical tension and virus spreading, recovery in the domestic housing market may hold the key on growth rate this year. The principle of "housing is for living in, not speculation" remains in the government work report, but there are some new highlights.

The report highlights the reaffirms prudent easing stance on properties and to support new urban residents to buy homes, and keeping the housing prices stable. The authorities also mentioned to tailor its property policies to conditions in different cities. Recently, more cities have relaxed curbs on housing purchases and lowered thresholds for down payments.

These moves are likely to improve housing sales and bring more investment in property sectors. Any pick-up in property investment may easily translate into GDP growth, according to the previous pattern. Data shows that the correlation between the China GDP growth rate and nation's property investment stood at 0.603 over the past 10 years.

Onshore assets outlook promising

It's worth highlighting that China rarely missed its growth target in past decades, except for 1998 (severe flooding) and 2020 (no target set for that year as the COVID-19 virus hit). A growth target at 5.5 percent prompts wide range of policy tools from fiscal measures to modest relaxation in housing markets, which may make onshore yuan-denominated assets more attractive.

Even with the dollar index gaining over 3 percent since the beginning of this year amid a much more hawkish U.S. Fed, the onshore yuan still rose 0.6 percent in this period and outperformed most of its peers in the region. The appreciation in yuan versus a strong dollar reflects a healthy economic outlook by currency traders.

The onshore bond market also expresses the view that growth is going to improve. Spread between the 10-year and 1-year government bond yield widens to 75bps from 58 bps earlier this year, signaling the economic situation to improve.

The global stocks market is facing tremendous downward pressure driven by the Fed to aggressively raise rates and the Russia-Ukraine crisis, with many benchmark equity indices declining more than 10 percent since the beginning of the year.

Many investors are desperately seeking safer assets with a relatively low valuation, given global growth is set for slowing down this year. Price-earnings ratio for Shanghai composite index now comes to 14.6X, much more attractive than many stocks in developed markets. Thus, a more promising growth picture in China is likely to attract more inflows into domestic capital market and further support the onshore assets' prices.

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