What’s in the ‘stimulus package’ the Chinese parliament is set to approve?

China’s parliament is anticipated to reveal “moderate stimulus plans” during an annual meeting commencing on Tuesday, aimed at stabilizing growth. However, it may fall short of expectations for a detailed roadmap of bold policies to address the country’s deep structural imbalances.

Premier Li Qiang will present economic targets for the year and deliver his inaugural work report to the National People’s Congress (NPC), China’s rubber-stamp legislature, at the vast Great Hall of the People on the western side of Tiananmen Square.

Mounting pressure from a property crisis, worsening deflation, a tumultuous stock market, and escalating local government debt issues necessitates significant policy decisions from China’s leaders to secure the economy’s long-term stability.

Analysts and policy advisers anticipate the NPC agenda will prioritize short-term support for the struggling economy following a post-pandemic resurgence that quickly faltered.

While Li may mention measures to enhance the business environment and promote technological innovation, significant reforms requiring approval from the Chinese Communist Party are unlikely to be unveiled.

“The top priority is to stabilize the economy,” stated Zong Liang, chief of research at the state-owned Bank of China.

Li is expected to maintain a growth target of approximately 5% for 2024, aligning with last year’s target, in pursuit of President Xi Jinping’s ambition to double the economy by 2035 and achieve “Chinese-style modernization.”

Achieving this goal necessitates further fiscal stimulus, given that last year’s 5.2% growth rate was likely inflated due to comparisons with the COVID-impacted 2022.

“We face more pressure to hit a 5% target this year,” noted a policy adviser who preferred anonymity.

China is anticipated to set a budget deficit target of 3% of economic output and announce plans to issue 1 trillion yuan ($139 billion) in off-budget special sovereign bonds, primarily allocated to strategically important sectors such as food and energy.

According to Citi analysts, these anticipated special bonds, alongside the 3% deficit and a steady issuance quota for local governments at 3.8 trillion yuan, could contribute approximately 1 percentage point to GDP growth.

With diminishing returns from investments in infrastructure like roads, railways, and bridges, investment spending may pivot towards “new infrastructure” such as 5G telecommunications, artificial intelligence, and big data, according to policy advisers.

China will persist in allocating resources to technological innovation and advanced manufacturing in line with Xi’s advocacy for “new productive forces.” However, some analysts criticize this policy, arguing that it exacerbates industrial overcapacity, worsens deflation, and heightens trade tensions with the West.

The People’s Bank of China, which recently announced its largest-ever cut to a key mortgage reference rate, is expected to continue gradually easing policies to avoid triggering further capital outflows and yuan depreciation.

However, the central bank is likely to expand its pledged supplementary lending (PSL) scheme to support the property sector, crucial for stabilizing the economy.

Despite these measures, the additional stimulus is expected to be more restrained compared to responses to previous market turmoil, as excessively large moves could threaten financial stability.

While advocates for reform emphasize the urgency of addressing record-low consumer confidence and plummeting investor and business sentiment, the NPC typically serves as a forum for gradual policy adjustments rather than sharp shifts, which are typically reserved for Communist Party plenums held between five-year congresses.

Although a plenum was initially anticipated in late 2023, its absence from the schedule has heightened concerns about policy inaction among investors. However, it could still take place later this year if top leaders reach consensus on the necessary steps.

A recent meeting of the party’s Central Commission for Comprehensively Deepening Reforms, chaired by Xi, reaffirmed the commitment to using reform and opening up as key strategies to address development challenges.

Nonetheless, concerns over national security, social stability, and uncertainty surrounding a potential return of Donald Trump to the White House weigh against bold reform initiatives.

“Reforms are urgently needed, but consensus must be reached,” emphasized a second policy adviser.