China lowers the economic growth target and will support the economy with counter-cyclical macro policies. The Chinese government has lowered its GDP growth target from around 6.5% in 2018 to 6-6.5% in 2019, in line with market expectation. Its 2019 targets for new jobs, unemployment rate, CPI, balance of payments, exports and imports, macro leverage ratio, poverty reduction and environmental protection remain largely the same as 2018. The projected budget deficit and deficit-to-GDP ratio imply a projected 2019 nominal GDP growth rate of 9.5%, close to the 2018 growth rate of 9.7%. The government proposes to continue a proactive fiscal policy and a prudent monetary policy, support the economy with counter-cyclical macro policies, and make policies more forward-looking, targeted and effective, to keep economic growth in a healthy range.

Proactive fiscal policy will be more forceful and effective. The government proposes to continue a proactive fiscal policy in 2019. Although the projected deficit-to-GDP ratio does not rise much, we believe fiscal policy will provide significantly stronger support for the economy in 2019.

The projected deficit-to-GDP ratio rises to 2.8%. The projected budget deficit in 2019 is Rmb2.76trn, Rmb380bn more than the Rmb2.38trn in 2018. The projected deficit-to-GDP ratio in 2019 is 2.8%, up 0.2ppt from that in 2018, in line with market expectation.

The issuance of special local government bonds will increase substantially. The issuance of special local government bonds in 2019 will reach Rmb2.15trn, Rmb800bn more than that in 2018, in line with market expectation; the ratio of special local government bond to GDP in 2019 rises 0.9ppt from that in 2018. Taking into account both general public budget deficit and special local government bonds, the projected broad deficit-to-GDP ratio in 2019 is 5.2%, up 1.1ppt from 4.1% in 2018.

Infrastructure investment will increase. The government plans to complete Rmb800bn of railway investment and Rmb1.8trn of highway and waterway investment. The central budget for investment in 2019 increases 7.4% YoY to Rmb577.6bn, faster than the growth of 5.9% in 2018. The government proposes to adopt innovative project financing methods, lower the capital requirement of infrastructure projects, make good use of development finance tools, and attract more private capital to projects in key areas.

There will be greater tax and fee cuts this year. The focus of proactive fiscal policy in 2019 will be on tax and fee cuts. The government proposes to reduce the tax and social insurance contribution burdens of enterprises by nearly Rmb2trn in 2019, vs. the reduction of about Rmb1.3trn realized in 2018.

Value-added tax (VAT) rates will be slashed. The government proposes to cut the VAT rate for the top bracket by 3ppt (from 16% to 13%), and the cut reaches the high end of the 2-3ppt range expected by the market. In addition, the government will cut the VAT rate for the middle bracket by 1ppt (from 10% to 9%), while leaving the VAT rate for the lower bracket unchanged at 6%. We estimate that the VAT rate reductions may lead to about Rmb800bn in tax cuts.

Enterprises’ social insurance contribution burdens will be significantly reduced. The government proposes to lower the corporate contribution rate for the basic pension insurance scheme to 16% in 2019 from current 19% for most regions. The existing methods of collecting social insurance contributions should be kept and local governments’ reforms to the collection system shall not lead to an increase in the contribution burdens of small enterprises. We estimate that a 3ppt cut may reduce the contribution burdens of enterprises by Rmb360bn.

Monetary policy will remain prudent and M2 and total social financing (TSF) growth are likely to stabilize and pick up. The government work report says that M2 and TSF growth should be commensurate with nominal GDP growth. Monetary policy should be neither too tight nor too loose. It is necessary to control money supply and avoid aggressive stimulus policies. At the same time, the central bank should flexibly use various monetary policy tools to remove obstacles to monetary policy transmission and keep liquidity reasonably ample. TSF grew strongly in January 2019 and the sharp decline in off-balance sheet financing moderated. We expect M2 and TSF growth to stabilize and pick up in 2019.

The government also proposes to deepen reforms in key sectors. 1) Reform of the state-owned sector and state-owned enterprises: The government will strengthen and improve the supervision of state-owned assets and establish pilot state-owned capital investment and operation companies. It will promote mixed ownership reform to improve the corporate governance structure and the market-oriented operating mechanism and establish a professional manager system and other systems. It will also deepen reforms in the electricity, oil & gas and railway sectors to fully open competitive businesses to market competition. 2) Reform of the fiscal and taxation system: The government will further make public the budget and rationalize the division of revenue sources and expenditure responsibilities between central and local governments. It will improve the local tax system, advance property tax legislation and regulate local governments’ debt financing mechanism. 3) Reform of the financial system: The government will optimize the structure of financial system and develop privately owned banks and community banks. It will promote the healthy and steady development of multi-level capital markets and increase the proportion of direct financing, especially equity financing. It will also promote the development of insurance industry and strengthen financial risk monitoring and control.