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But he swears off large-scale stimulus to revive it
CHINA’S RUBBER-STAMP parliament can seem unchanging from one year to the next. Shortly past 9am on March 5th—the same date and time as always—Li Keqiang, the prime minister, rose in Beijing’s Great Hall of the People to deliver his annual work report (after delegates had sung the national anthem, accompanied by a military band—pictured). His speech took, as ever, nearly two hours. He reviewed the government’s targets last year for growth, investment, employment and more, all of which it had reached. He also announced another series of targets that, as sure as stiff-backed soldiers hoist up the country’s flag in Tiananmen Square every morning, China will achieve again. Mr Li closed with a customary rousing pledge to bring about the “Chinese dream of national rejuvenation”. Delegates, having made a good show of listening raptly throughout, dutifully applauded (see Chaguan).
Yet despite all the familiar pomp and well-worn phrases, there were enough new policies and numbers in Mr Li’s speech to highlight the economic uncertainty now facing many in China, including the government itself. The report, which marked the start of the legislature’s annual ten-day session, was laced with caution. Mr Li said China would aim for GDP growth of between 6% and 6.5% this year, down from 6.6% in 2018. Though still strong for an economy of China’s size, it would be the slowest rate in nearly 30 years. Many economists think the official figures exaggerate the pace (see article).
Some details were even more revealing. Mr Li declared that economic policy would have an “employment first” focus: the government would strive to keep the unemployment rate below 5.5% and provide training for those out of work. The official jobless rate has remained steady at about 5%, but manufacturing and tech firms have recently started laying off employees. Lest the public think that officials are living high off the hog while others face straitened times, Mr Li ordered bureaucrats to cut spending on travel, cars and entertainment by 3%.
He also acknowledged the suffering of private firms. Over the past year, there has been growing disquiet among entrepreneurs, fearful that the government is turning against them. Mr Li’s speech was, in part, aimed at countering that perception. Local governments, he said, were part of the problem. Too many owed money to contractors and were dragging out repayment. He promised to help private companies obtain loans—the difficulty of doing so has been a long-standing grievance. He accepted that trade tensions with America had hurt some companies—a frank admission for a Chinese leader.
The big economic question is what the government’s concerns mean for its fiscal and monetary policies. Whenever growth has slowed in the past decade, China has reliably responded with hefty spending on infrastructure and a strong nudge to banks to lend more money. The signals are less clear this time around.
Before this parliamentary session, some observers had thought that the central government was reverting to type. Since late last year its planning agency has been fast-tracking approvals for new infrastructure projects. Banks issued 3.2trn yuan ($477bn) of new loans in January, the most ever in a single month. Stockmarket investors have been turning bullish. The CSI 300, an index of shares in big Chinese firms, has soared by nearly 30% this year.
But the leadership is in fact much warier of stimulus than it once was. It worries that debt levels are already too high. After the loan explosion in January, Mr Li warned that it could create “new potential risks” in the economy.?(The central bank countered that the surge occurred for seasonal reasons.) For months Mr Li has sworn off what he calls “flood-style stimulus”, (ie, deluging the economy with cash as if irrigating a rice paddy). He repeated that phrase in his speech. He also mentioned “risks” 24 times, more than in any such report for at least a decade. Dangers, he said, could emanate from financial frailties, from wasteful local governments and from abroad (ie, the trade war with America). His message to Chinese officials was to prepare for the worst. His message to investors was that they should not bank on another big rise in government spending.
But the Communist Party is still looking for ways to pep up the economy. Conveniently, there is one policy tool that does not involve building yet more bridges, and that has the added benefit of being popular: reducing tax. Mr Li unveiled cuts, mostly for firms, that should total nearly 2trn yuan this year, or more than 2% of forecast GDP. Economists at HSBC, a bank, called it China’s most sweeping corporate-tax cut in a decade. Including provincial bonds, the fiscal deficit is set to rise to about 5% of GDP this year, up from 4.1% in 2018. This is, however, a far cry from stimulus packages of yore. The government is still refraining from steps to boost the property market, which it has always done in the past when revving up growth.
A big reason for China’s hesitation is the trade war with America. Many now assume that an agreement is only a matter of time. The two countries are reportedly working on the final touches. During this session, the legislature is set to approve a foreign-investment law that will respond to some of America’s main complaints—for example, by barring officials from requiring foreign investors to transfer technology to Chinese firms. Even if there is scepticism about how China will implement the law, it is an attempt to reduce trade tensions.
America’s president, Donald Trump, and his Chinese counterpart, Xi Jinping, could meet this month to shake hands on a formal deal. But Chinese officials are well aware that Mr Trump is wont to change his mind. So they are trying to leave wriggle room as they devise economic policy. If the trade war is resolved, they can conserve their fiscal firepower. But if it worsens, they have scope to increase their spending. China’s plans depend partly on the caprices of America’s president.