Asia Insights:China,Challenging targets,easing policies and supply-side reforms

A preview of the National People’s Congress.

    We expect the government to lower its 2016 GDP growth target to 6.5-7.0% at the fourth annual session of the 12th National People’s Congress (NPC), which will start on 5 March and likely conclude around the middle of the month.

    The government may widen the budgeted deficit to 3.0% of GDP in 2016, with higher infrastructure spending and more tax cuts, while leaving its M2 growth target and CPI inflation target unchanged at 12% and 3%, respectively.

    We expect more growth-supporting policies to be rolled out aimed at stabilising investment growth, increasing demand for real estate and supporting private consumption.

    Supply-side reforms will be an important theme of this NPC, with more measures aimed at reducing overcapacity, cutting taxes, encouraging urbanisation, promoting innovation and protecting the environment.

    We maintain our GDP growth forecast of 5.8% for 2016 but acknowledge some upside risks from stronger-than-expected policy easing.

    FX strategy: We expect market-based reform of the CNY exchange rate to continue in the medium-term, but there is a short-term risk of increased supervision of capital flight and some possible tightening of capital controls to target speculative flows.

    Equity strategy: We believe that details on supply side reforms may show that Beijing is finally making meaningful economic reforms, besides anti-corruption measures inside the Chinese Communist Party (CCP) and a re-shuffling of military and judiciary forces. Should fiscal and monetary easing be implemented following the NPC, and as there is a lower likelihood of a March 2016 US Fed rate hike, perceived macro risks associated with Chinese equities may ease at the margin through April 2016. We note that Chinese equities valuations look undemanding, with the MSCI-China, the HSCEI and the CSI-300 all trading below our full-year trough targets.

    Rates strategy: We continue to see room for CGB yields to decline and do not expect supply risks to reverse this trend. We continue to target 2.50% for 10yr CGB by year end.

    The 12th NPC convenes its fourth annual session on 5 March, which is likely to conclude around the middle of the month. Premier Li’s Government Working Report will unveil a few key macroeconomic targets and some major reform issues for 2016, while the details of the Thirteenth Five-Year Plan (13FYP) should also be submitted to the NPC for approval. Here we offer a preview and our thoughts on these policy issues.