Investors are underestimating Beijing's response to the pandemic

Investors took fright as they took note of the worried demeanour of Chinese Premier Li Keqiang as he delivered his activity report to the 2897 masked lawmakers attending the 13th National People's Congress on Friday.

Not only was his speech unusually brief, lasting a mere 55 minutes, but for the first time in more than a quarter-century, the Premier didn't issue an economic growth target for the year.

For weeks, economists and political analysts had been debating how Beijing would acknowledge the magnitude of the challenges facing the world's second largest economy as a result of the coronavirus pandemic.

Some believed the Chinese leadership would try to mask the extent of the downturn by issuing a combined growth target for 2020 and 2021.

Others argued that Beijing would be forced to abandon its growth target altogether – especially after the Chinese economy shrank by 6.8 per cent in the first quarter of the year, the first contraction since at least 1992, when Beijing started releasing quarterly economic growth figures.

And the International Monetary Fund made Beijing's predicament even more difficult with its prediction that China's growth would drop from 6.1 per cent last year to 1.2 per cent in 2020.

Some China watchers believe that it would be a mistake to underestimate Beijing's determination to support economic activity.

The knee-jerk reaction of financial markets was one of huge disappointment. Investors interpreted Beijing's decision not to set an economic growth target for 2020 as an indication of its deep-seated reluctance to contemplate a large-scale stimulus of the type it unleashed during the global financial crisis.

In 2009, China's growth rate was little changed at 9.4 per cent, largely because of a massive fiscal stimulus amounting to about 8 per cent of GDP.

Party centenary

But some China watchers believe that it would be a mistake to underestimate Beijing's determination to support economic activity.

After all, they point out that 2021 is a symbolically important year for the Chinese Communist Party, which is planning lavish celebrations to mark the centenary of its creation in Shanghai.

And although it's unlikely that the Chinese government will achieve the objective set by former Chinese president Hu Jintao – Xi Jinping's predecessor – of doubling the size of its economy between 2010 and 2020, Beijing does want to announce this year that extreme poverty has now been officially eradicated in the country.

Beijing is also anxious to limit a spike in unemployment triggering a wave of social unrest.

The Chinese government is aiming to cap the urban surveyed jobless rate at 6.0 per cent in 2020, which is higher than last year's 5.5 per cent target.

According to the official figures, the jobless rate climbed to 5.9 per cent in March, from 5.2 per cent at the end of 2019. That means that an extra 3 million people joined the ranks of the unemployed, bringing the total number of jobless to 26 million.

But most analysts agree that real unemployment is much, much higher.

There is a lot of pressure on Beijing to provide a substantial stimulus in order to stimulate economic activity.

They argue that the measure of the urban jobless rate in China is clearly distorted by the huge number of migrant workers, estimated to be as high as 290 million.

These are usually unskilled workers who hold precarious jobs with companies that often fail to make the necessary social security contributions. As a result, these workers are locked out from receiving social security benefits.

But even those working for companies that do make the social security contributions are often excluded from receiving benefits because they don't hold the requisite residence permit, and is difficult to transfer.

A large pool of unemployed workers could create major social discontent in a country where the social security network is underdeveloped, and where support for the Communist Party depends on its ability to continually boost living standards.

Pundits point out that in the late 1990s, in the aftermath of the Asian debt crisis, mass lay-offs triggered a wave of social unrest and a steep rise in crime rates.

Economists point out that Beijing has unveiled plans to step up its borrowing to rescue the stricken Chinese economy.

And this means there is a lot of pressure on Beijing to provide a substantial stimulus in order to stimulate economic activity.

Economists argue that, although they're not explicitly acknowledging the fact, this is exactly what Chinese leaders are doing.

China's Finance Ministry said on Friday that the country's budget deficit this year will grow from about 2.8 per cent of gross domestic product in 2019 to more than 3.6 per cent of GDP this year, or an increase of about 1 trillion yuan ($214.3 billion).

But economists point out that the actual deficit will be significantly higher than 3.6 per cent of GDP because Beijing is also diverting 1 trillion yuan from its state-owned enterprise fund to boost government spending.

What's more, economists point out that Beijing has unveiled plans to step up its borrowing to rescue the stricken Chinese economy.

On Sunday, China's chief economic planner argued that Beijing had plenty of room to borrow, given its debt levels remain low by international standards.

Burgeoning debt burden

The head of the National Development and Reform Commission, Cong Liang, told a press conference it was "viable, safe and necessary" for the Chinese government to increase its borrowing to bolster the ailing economy.

His comments come amid concerns over China's burgeoning debt burden, which the IMF estimates stands at more than 80 per cent of GDP if the borrowings of local government financing vehicles is counted.

The issuing of 1 trillion yuan worth of special bonds "is an exceptional measure limited to this exceptional period".
— Li Keqiang, Chinese Premier

Economists point out that Beijing is proposing to issue 1 trillion yuan worth of special bonds, and will use the funds raised to cushion the impact of the coronavirus. "This is an exceptional measure limited to this exceptional period", Li Keqiang said on Friday.

Beijing has also given the green light to local authorities to issue special bonds worth 3.75 trillion yuan, a significant increase from the 2.15 trillion issued last year.

According to Li Keqiang, the funds raised will be used to boost consumption and also to facilitate structural adjustments and boost the sustainability of growth.

The money will be used, he said, to build new types of infrastructure, to develop new generation computer networks, to extend the use of 5G and to set up charging stations and to encourage the wider use of new-energy automobiles.

And Beijing is also boosting its military spending, boosting its military budget by 6.6 per cent to 1.3 trillion yuan for 2020.