China’s National People Congress (NPC) commenced during the first week of March, where Premier Li Keqiang announced several economic targets for 2016. Most fell in line with expectations, including growth between 6.5% and 7.0%. Despite the well-advertised macro targets, criticism has surfaced that there remains a subtle emphasis on growth, implying that Beijing has chosen economic expansion over reform. This criticism is misplaced, in our view, and instead we argue that the NPC announcements provide Beijing even greater policy maneuvering towards reaching its desired results.
The NPC announcement used the language “between 6.5% and 7.0%” compared to “around” in previous years, which is where the point of contention exists. Some suggests that if Beijing was more adamant towards its reform agenda, the NPC would have reported a slower economic growth, verbiage of “around 6.5%.” What is easily forgotten though is the economic growth target is contingent on job creation. This target is easily achievable mainly because China is experiencing the unwanted desire of a shrinking labor force. Falling since 2012, China’s working age population, which is defined as those between the ages of 15-64, is about 853.7mn in 2015 according to the UN Data, falling about 10mn from the peak. With fewer entering the labor force compared to those retiring, Beijing can then promote an economic policy that fits better with this labor force dynamic, which would likely be closer to the lower end of the NPC’s target, i.e. “around 6.5%.”
However, creating 10m urban jobs is not anodyne for the economy, and instead the focus should be net job creation. The NPC working paper highlighted efforts to further engage in supply side reform. As such, Beijing is taking the unpopular decision to improve the competitiveness of state owned enterprises (SOE), including plans that could lead to 1.3mn job cuts in the coal sector and 500k cuts in the steel industry. With an investment emphasis looking into the new economy of service industries, the challenge will be whether those who are impacted by SOE reforms can be absorbed by the stronger components of the economy.
Christopher Chu, Assistant Fund Manager - Asia