Event

The 13th five-year plan (2016-2020) presented during the yearly National People's Congress confirmed Beijing’s goal to maintain 6.5-7% GDP growth in 2016-2020 to ensure wealth and employment growth continuing at a fast rate. In order to reach this growth goal, Beijing will run an expansionist fiscal policy, through tax cuts and increased infrastructure expenditures and further monetary easing. PM Li Keqiang also reiterated the crucial importance of progressing on economic, financial and energy reforms.

Impact on country risk

Given China’s continued slowdown, sharp contraction in foreign trade and pressure on the RMB, the government goal to maintain strong growth in order to ensure stability is not surprising. Using much central government fiscal space rather than a new large stimulus plan is wise. However, China’s growth target is probably too ambitious and threatens to increase medium- to long-term (MLT) risks. Current policy choices indeed carry the risk of again postponing the necessary deleveraging process and the move to a more consumer-based economy, but also the risk of reverting to fast credit growth to support growth with the underlying risks to financial stability. The already huge debt burden could grow further and make the inevitable adjustments even more painful in future. This is highlighted by Chinese regulators’ recent announcement to allow banks to make bad corporate debt-for-equity swaps. Though it will improve banks’ balance sheets stricto sensu and make capital available for investing in new projects, it might just transfer financial problems from heavily indebted state-owned enterprises (SOEs) to banks, implying higher risks for the latter in case of corporate default. Financial stability is not going to benefit from this measure which might in addition support moral hazard among overborrowing and loss-making companies. Still, the reform process is underway notably on the supply-side with the plan to finally reduce structural overcapacity in industries such as steel and coal. Nevertheless, moving forward in reforming SOEs and tolerating bankruptcies (Beijing having instead opted for mergers) are primarily a political choice which the Communist Party judges too hard for its legitimacy in a time of economic slowdown and rising social protests, and is rather translated in the regime’s growingly authoritarian and repressive policy (e.g. large-scale fight against corruption, rising censorship, etc.). All in all, Beijing’s procrastination tendency in tackling structural problems is one of the factors making China’s MLT political risks look riskier.

Analyst: Raphaël Cecchi, r.cecchi@credendogroup.com