MNI EXCLUSIVE: China 2020 Plan Requires 3.5-4% Growth-Source

--Despite No GDP Target, China Plan Requires 3.5-4% Growth

--Unemployment Target, Bank Lending, Targets Look Tough

     BEIJING(MNI) - China's economy will need to grow by 3.5-4% in 2020 to meet

objectives set by Premier Li Kequiang's government, even though in a departure

from usual practice it set no formal GDP target, a source close to policy makers

said, in a comment in line with remarks to MNI by policy advisors.

     Goals in the official Government Work Report include a surveyed urban

unemployment rate of about 6%, together with the creation of over 9 million

jobs, and growth in resident income in line with the overall economy. The

employment target will be tough to reach, particularly as migrant workers return

to cities as the pandemic eases, and will require expansion of gross domestic

product of as much as 4%, the source with knowledge of policy making said.

     The fiscal deficit ceiling was set at more than 3.6% of GDP, up from last

year's 2.8%, but planned issuance of CNY1 trillion of special Treasury bonds,

which do not figure in headline deficit calculations, was lower than some

advisors had expected.

     --PBOC

     The government's decision to break with custom by opting not to set a GDP

target was taken in order to avoid any conflict with efforts to limit

coronavirus, said Zhao Quanhou, director of the Financial Research Center at the

Chinese Academy of Fiscal Sciences, noting that the employment goals still

require economic expansion. The report lacks detailed reference to further

economic liberalisation, international relations, or to monetary-fiscal

coordination, the source noted, adding that these omissions will not have a

positive effect on the confidence of private investors.

     A call for the People's Bank of China to "develop new monetary policy

instruments that can directly stimulate the real economy" may refer to accepting

more corporate bonds as collateral, said the source with knowledge of policy.

Chen Daofu, deputy director at the Financial Research Institute of the

Development Research Center of the State Council, said it could point to the

introduction of more relending facilities. The report said the PBOC would

continue to lower real economy lending rates, with a "prudent and flexible

stance", via reductions in banks' reserve requirements and in policy rates, and

by relending.

     Growth in the M2 measure of broad money and in aggregate financing could

approach 10% or more this year, said Chen, after the report anticipated "notably

higher" rates of expansion.

     Both economic leverage and the money multiplier - the ratio of M2 to base

money - will rise, Chen said, noting that it would still be easy to keep

consumer price inflation below the ceiling of 3.5%, thanks to falling pork

prices. CPI inflation could even drop to about 1% by the end of the year, he

said, although some index components, such as grain prices, could potentially

contribute to an upside surprise.

     But the report's call for big state-owned banks to boost loan to small

businesses by 40%, up from 30% loan growth in 2019, will pile a lot of pressure

on lenders, Chen said, noting that authorities have opted to rely heavily on the

PBOC for stimulus.

     The quota for local government special bonds, repaid by the proceeds of

projects they fund, was, at CNY3.75 trillion, less than the CNY4 trillion

recommended by Zhao. This may be due to a shortage of suitable projects, he

said, although he noted that the central government's deficit ceiling of 3.6% of

GDP was higher than his expected range of 3-3.5%. Other policy advisors had

foreseen a deficit ceiling of as much as 4%.

     --LOCAL EMPHASIS

     The expanded deficit will provide an additional CNY1 trillion of spending

over last year, which, in what Zhao called an unexpected move, will be

transferred to local governments. These will also receive the proceeds from the

issuance of special Treasury bonds, meaning that lower levels of government will

take a more prominent role in driving recovery from Covid-19, he said. The

special Treasuries could recapitalise city and rural commercial banks, which

will drive lending to smaller companies, as well recapitalise policy guarantee

institutions and set up anti-virus funds.

     The report calls for further tax and fee cuts for about CNY500 billion, but

Zhao said this will mainly come from implementing or extending current policies,

after CNY2.36 trillion in cuts last year.

     Given this year's uncertainty, and the ongoing challenge from coronavirus,

policy makers set no targets for government revenue, Zhao noted.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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