context: The market has generally expected more stimulus announcements confirmed by the Two Sessions, given the COVID-19 shock. Perverse political incentives—the hide-and-seek games between central and local governments—are a key obstacle in the top-down implementation of stimulus. Strong fiscal discipline from Beijing leads to local inaction, which then motivates the centre to open up ‘back doors’. But acquiescence in grey-area operations may encourage frivolous public spending at the local level.

The 2020 government work report fleshes out a series of stimulus measures

  • raising fiscal deficit to 3.6 percent, 0.8 percent higher than last year, bumps up the total deficit from 1 tn to 3.76 tn; while experts debated the 3 percent threshold several months ago, the announcement is 0.6 percent higher than experts’ expectations
  • 1 tn special national bond for pandemic relief and 3.75 tn special-purpose local government bonds are announced, the latter being a 1.6 tn y-o-y increase
  • 2.5 tn financial relief for corporations

Addressing concerns about fiscal health, Fan Lei 樊磊 Sealand Securities says exceeding the so-called 3 percent redline is a necessity in the current economic situation, but actual expansion may not be that large. COVID-19 brought huge uncertainties, says Yu Xiancai 余显财 Fudan University, which warrant more deficit. The 3.6 percent increase is appropriate and relatively prudent, adds Yu.

Among the ‘three arrows’ of fiscal policy—deficit, special-purpose local bonds, and special national bonds—the 1 tn announced special national bonds for pandemic relief is below market expectations. The semi-official think tank China Finance 40 forum argued for 1-1.5 tn. Most economists in securities companies projected 2 tn. Liu Shangxi 刘尚希 Chinese Academy of Fiscal Sciences suggested 5 tn. Fan argues that 1 tn is enough because special national bonds should be used for projects with returns, which are not that easy to find.

The 2.5 tn announced in tax and fee cuts exceeds market expectation. The market thought that there was little room for further tax cuts considering the 2.3 tn cut last year and fiscal strains inflicted by COVID-19. SMEs are the focus of tax cuts this year, according to Jiemian.

Notably, the 2020 government work report does not specify growth targets, due to uncertainties. However, Jiemian calculates the implicit growth rate bottom line using fiscal deficits. Its estimated nominal GDP growth is 5.41 percent and real GDP is 2.1 percent. Zhang Tao 张涛 China Construction Bank estimates the implicit growth target to be around 2-4 percent.