Q+A: What markets should expect from China’s parliament

(BestGrowthStock) – The annual session of the National People’s Congress, China’s largely ceremonial parliament, opens on Friday with a report on policy from Premier Wen Jiabao. Here are some of the issues he is likely to address:


Investors want an idea of how quickly the central bank plans to “normalize” monetary and credit policy after the extraordinary stimulus it provided to counter the global credit crunch.

China adopted a “moderately easy” monetary stance in late 2008, and Wen described current policy in the same terms in an online chat on Saturday.

But the phrase was omitted in a recent official statement, reinforcing the belief of some economists that policy in practice has already shifted. After all, the People’s Bank of China has raised banks’ required reserves twice this year and has been nudging up money market rates.

Moreover, regulators have said they want banks to reduce the volume of net new loans in 2010 to 7.5 trillion yuan from last year’s record 9.6 trillion yuan.

But forecasts of the timing of a rise in interest rates range widely. Some economists expect an increase in coming weeks, others not until the fourth quarter. Few, though, expect a dramatic shift.

“Policies will stay ready and flexible to tackle unexpected shocks,” Citigroup said in a report. “Possible policy fine-tuning will depend on how policy makers are viewing the threat from inflation expectations or real inflation.”


China is fundamentally conservative in its budgeting.

Whereas deficit spending soared in the West during the downturn, China’s budget shortfall last year came in lower than expected despite the government’s “proactive” fiscal policy.

The deficit was 740 billion yuan, or about 2.2 percent of gross domestic product, compared with a target of 950 billion yuan, according to Ministry of Finance figures.

Yin Zhongqing, deputy head of the financial and economic committee of the NPC, has said China will aim for a 2010 deficit of over 1 trillion yuan ($146.5 billion) and extend a pilot programme to let provinces issue their own bonds.

But economists expect Beijing to keep the deficit to within 3 percent of GDP — coincidentally, the ceiling that euro zone members like Greece are supposed to respect.

The 4 trillion yuan ($585 billion) stimulus plan that Beijing launched in November 2008 expires at the end of 2010, and Wen is likely to emphasize completing infrastructure projects under way rather than approving new ones.

He is also expected to keep the focus of Beijing’s budget on programmes to improve low-income housing, rural living standards, education, health care and environmental protection.


In last year’s NPC report, Wen said China would keep the yuan’s exchange rate “basically stable at an appropriate and balanced level.”

The premier was true to his word. Since then, the yuan has been rooted to the spot near 6.83 per dollar, where it has been fixed since mid-2008 to help China’s exporters weather the global downturn.

Now that exports are recovering and inflationary pressures are on the rise, many economists say it would be in China’s self-interest to resume a gradual appreciation of the yuan.

If the Communist Party has such a plan in mind, Wen could revert to language like that of his 2008 NPC report, in which he spoke of “increasing the flexibility of the yuan exchange rate.”


Probably no issue exercises ordinary Chinese more than the price of property. Official figures show real estate inflation is modest nationwide, but in some big cities prices have soared beyond the reach of the man in the street.

Economists furiously debate whether China is already experiencing a property bubble that is doomed to burst with terrible consequences for home owners, banks and the broader economy.

But the government is not hanging around to find out. Beijing has started to tweak the many administrative levers at its disposal — for example, by tightening rules on second mortgages and targeting developers who hoard land or completed houses.

Recent evidence suggests transactions and prices have started to fall, but Wen is likely to promise further steps to keep the housing market “heathy and stable” — code for cracking down on speculators while ensuring China’s growing middle class can still afford to get their foot on the property ladder.


As well as the 7.5 billion yuan new credit target, the central bank has already set a 2010 goal of 17 percent growth in the broad M2 measure of money supply — the same as last year, when M2 actually soared 27.7 percent.

The growth and inflation targets that Wen will disclose should also be treated with caution. They are more guidelines, or aspirations, than must-hit objectives.

Expect Wen to reaffirm the long-standing but always-surpassed goal of 8 percent GDP growth — last year growth was 8.7 percent — and to eye inflation of 3-4 percent. Last year’s report projected inflation of 4 percent, but consumer prices actually fell 0.7 percent on average in 2009.

Stock Market

(Reporting by Alan Wheatley)

Q+A: What markets should expect from China’s parliament