The 3rd plenary session of the 19th CPC Central Committee launches a new round of structural reforms. The plenum has reviewed structural reform plans for the Party and state institutions. While previous reforms have reduced the number of government bodies under China’s State Council, we believe this round of structural reforms will be broader and more substantial. We expect the government to streamline its functions and administration, and allow the market to play a decisive role in resource allocation. In addition, we believe the reforms may help curb excessive growth of bank deposits held by government departments and organizations.

More substantial reforms and further opening-up. The year 2018 marks the 40th anniversary of the reform-and-opening policy. A key reform initiative introduced this year aims to better divide between central and local governments the expenditures and responsibilities for basic public services. In addition, we expect China to further open up its financial sector and lower entry barriers. We believe that SOEs will implement mixed ownership reforms by bringing in non-state-owned capital, and deleverage through market-oriented debt-to-equity swaps. We also expect reforms to the IPO system, the NEEQ market, social security, household registration (hukou), the land system and property taxes.

Target for 2018 GDP growth to stay around 6.5%. Local governments’ 2018 work reports show that 15 provincial-level governments lowered their targets for 2018 GDP growth, while 15 kept their growth targets unchanged. Shanxi is the only province to have raised its growth target, while Tianjin lowered its growth target from 8% to 5%, sharper than other regions. Gansu, Chongqing, Inner Mongolia, Jilin and Tibet lowered their growth targets by 1 percentage point or more. Most of the provinces that lowered their 2018 growth targets failed to meet their 2017 targets. Although Liaoning did not meet its 2017 growth target (actual growth at only 4.2%), it kept its 2018 growth target unchanged at 6.5%. As China’s 2017 GDP growth (6.9%) exceeds the target (6.5%), we expect the country’s 2018 growth target to stay around 6.5%.

Budget deficit ratio to stay around 3%, but local governments may issue more bonds. China’s 2017 budget deficit was Rmb2.38trn, and the budget deficit ratio was 3% based on forecasted 2017 GDP, or 2.9% based on the actual 2017 GDP. China will maintain its proactive fiscal policy in 2018. We expect the country’s 2018 budget deficit to rise to around Rmb2.6trn, with its ratio to GDP staying around 3%. Meanwhile, we expect local governments to issue more bonds as their off-balance-sheet financing, or hidden debt, faces hurdles due to a document (No. 194) issued on February 8 by the Ministry of Finance and the National Development and Reform Commission. While the general bonds issued by local governments are included in the deficits of general public budgets, increasing special bond issuance by local governments may drive up the budget deficit for government-managed funds.

M2 growth target less important, growth target for total social financing to stay around 12%. China will continue to implement a prudent monetary policy in 2018. The country’s actual 2017 M2 growth was only 8.2%, well below the target (12%). In its 4Q17 Monetary Policy Report, the PBoC noted that slower growth of money supply is not only sufficient to support high-quality economic growth thanks to improving economic structures, but also helpful to the deleveraging of the economy. The PBoC also pointed out that increasingly complex financial products and markets make M2 less measurable, less controllable, and less relevant to the real economy, implying that M2 growth is less important to its monetary policy. We believe that the 2018 government work report may play down the importance of the M2 growth target. However, we expect the government to keep its 2018 growth target for total social financing at around 12%.