This month’s session of the National People’s Congress, the legislature that typically rubber stamps the Communist Party’s wishes, made plenty of headlines on personnel and policies. Also telling is what didn’t happen and who didn’t get what job.
Notable omissions send important signals on what type of economy the incoming cabinet envisages and how much latitude the central bank, itself under new leadership, will have to steer it.
The broader task for the People’s Bank of China goes beyond managing short- to medium-term fluctuations in the economy. The country needs a central bank and financial markets geared for world leadership, given projections that the size of China’s will surpass the US in little more than a decade.
Much oxygen at the opening of the legislature was sucked up by the revelation that China’s presidents will no longer face term limits. That’s a big deal -- notably for the current president, Xi Jinping. But it overshadowed a key nuance in Premier Li Keqiang’s remarks at the outset. The government’s growth target for 2018 will remain “around 6.5 percent,” he said. Critically, Li omitted the qualifier “higher if possible in practice.”
This signals comfort with still-slower growth and less of an obsession with an actual target of gross domestic product. If things cool off a bit, don’t anticipate a big response. Given concerns about climbing debt, that nonresponse would be wise; the rash action would be to inflate debt further in order to pump up growth numbers. The Communist Party also places a premium on stability. It’s a question of balance, but Li’s speech gave a glimpse at which way the wind is going.
China’s target for the budget deficit was also shaved, to 2.6 percent of gross domestic product this year, from 3 percent in 2017. As my Bloomberg Economics colleague Tom Orlik notes, the buzz prior to the conclave was that the target might be less aggressive, say 2.9 percent. Li also balked at some key targets for money supply. Restraint seems to be the big theme here.
And what of personnel upsets? That term might be a stretch, but the promotion of People’s Bank of China Deputy Gov. Yi Gang to the top post wasn’t on every observer’s radar screen. Chatter in Hong Kong last month was that top Xi aide Liu He would become both PBOC governor and vice premier simultaneously, which would have boosted the central bank’s standing and clout enormously. (Liu got the vice premier job, but not the PBOC governorship as well.)
Is the world’s second-largest economy ready to act like it? The current central bank is not close to fulfilling that role.
A central bank kitted out for the 21st century is required for the type of more nuanced and sophisticated -- not just bigger -- economy that China is becoming. Though you would never know from most discourse in the US, the old sweatshop manufacturing/export model is history. The main game is more and more about consumer spending, services and technology. Moreover, it’s a society that’s aging quickly.
For all the advances in China’s economy, its capital markets are still relatively small compared with America’s. Foreign participation in them, while slowly rising, is still minute. This was on stark display during February’s market tumult: The commentary was all the Fed, all US data, all Wall Street. Even in Hong Kong. China really wasn’t part of the discussion. Is the world best served by such a unipolar financial system? Probably not.
It’s Xi’s country and party, as the removal of term limits suggests. While the world continues to absorb that break with tradition, observers and investors would do well to also keep in mind other things that happened at the national congress. And those that didn’t.
Daniel Moss Daniel Moss writes and edits articles on economics for Bloomberg View. -- Ed.
