Articles
23 February 2022

China: What to expect from the Two Sessions

The highlight of China's 'Two Sessions' for businesses and economists is the government work report, which is usually published on 5 March. It will give us clues about the main direction of government policies. Here's what we expect  

Background to this year's Two Sessions

This year's government work report should continue the central theme set out in the 14th Five Year Plan. This means a continued emphasis on the actionable steps to achieving peak carbon emissions by 2030.

However, economic growth should also feature prominently in the report, as activity was slow in the fourth quarter.

These two goals - reducing carbon emissions and driving economic growth - in some sense conflict with one another, as stronger economic activity would inevitably lead to higher carbon emissions. How the government balances these competing goals will be our main focus.

GDP target at 6%

It is not clear if the government will announce a GDP growth target in its work report. But as it did so last year, we expect it to do so again. And we think this target could be 6% or more, which is consistent with GDP targets from local governments as they prepare for the Two Sessions. Inflation is not a concern right now as it is fairly low at less than 1% year-on-year. And we believe that without a very abrupt increase in energy prices, this low inflation environment should remain for the rest of the year.

Fiscal policy will also be a key focus. The increase in the fiscal deficit should be fairly stable at 3.2% of GDP, but as GDP increased in 2021 from 2020, the size of fiscal deficit will increase as well. We expect a moderate rise in local government special bonds, which are the main source of funds for local government projects. On this front, we believe the Chinese government could try to achieve both of its main aims by building 'green' infrastructure, which both reduces carbon emissions and drives economic growth.

In terms of monetary policy, we expect the government to describe its approach as "proactive and flexible". In other words, China remains in easing mode.

We expect only a very brief mention of international trade as China doesn't want to touch on this topic given that the Phase One trade agreement has come to an end, and talking too much before any formal talks with the US may not be sensible.

What to expect at the Two Sessions

Source: Ministry of Finance China, ING
Ministry of Finance China, ING

Impact on the market

If the government does not set a target for GDP growth, the market will be left to make up its own mind, and uncertainty usually triggers a dip. The size of the fiscal deficit is a double-edged sword; if the deficit is too small, the market may be concerned that the economy lacks the necessary stimulus to drive growth, while too much spending could raise questions about the indebtedness of the government or local governments.

In terms of monetary policy, there is uncertainty about whether the forthcoming RRR cut will be a targeted one for SMEs or a broader cut. We should know more about this from the wording on monetary policy. Any mention of the yuan exchange rate will also catch the attention of market participants. The yuan is very strong right now. If the government work report suggests the need for the currency to "weaken" or "depreciate," this could trigger a dive in the yuan's exchange rate. However, we don't expect such words to appear in the report. Instead, we expect more subtlety, perhaps mentioning "two-way volatility", which would not give away anything about the timing of a possible depreciation in the yuan.


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).