28 Mar, 2016
The NPC and CPPCCsessions in 2016 have concluded with the following annual objectives: GDP growth expected to range between 6.5% - 7%, a slight downward adjustment as compared to 2015 (approximately 7%); CPI kept at approximately 3%, or at the same level as in 2015; a prudent monetary policy but with slightly loose orientation, with M2 forecasted to grow by 1 percentage point to approximately 13%; a more proactive fiscal policy, with the government deficit projected to be RMB 2.18 trillion, an increase of RMB 560 billion over last year. This means the fiscal deficit ratio will rise to 3%, which is a significant year-on-year increase of 0.6 point. In terms of investment, more than RMB 800 billion will be invested in railway construction in 2016, and investment in road construction will reach RMB 1.65 trillion. Another 20 water conservancy projects will be carried out and central government budgetary investment will increase to RMB 500 billion.
圖Fig 1 2016 Guidance for China
Source: Phillip Securities Research / Guohe Fan
Phillip Capital Group
Analyst
Tel: (86) 21 5169400-110
Fig 2 CPI Guidance VS CPI YoY (%)
Source: WIND, Phillip Securities Research
Fig 3 M2 Guidance VS M2 YoY (%)
Source: WIND, Phillip Securities Research
In terms of reform, while working to achieve an appropriate expansion of aggregate demand, particular emphasis will be given to structural reform on the supply side, reducing supply in some areas while increasing it in others. This means that the government will concentrate on the reduction of ineffective and lower-end supply. In 2016, focus will be placed on addressing the overcapacity in the steel, coal, and other industries facing difficulties and efforts will be made to strictly control the expansion of production capacity, shut down outdated production facilities, and eliminate overcapacity in a planned way. The government will address the issue of "zombie enterprises" proactively yet prudently by using measures such as mergers, reorganizations, debt restructurings, and bankruptcy liquidations. RMB one hundred billion in rewards and subsidies will be provided by the central government to be mainly used to resettle employees laid off from these enterprises. This reduction of production capacity on the basis of an appropriate expansion of demand is expected to create the potential for bounces for cyclical industries.
Meanwhile, the government will work to increase medium- and high-end supply, increase the supply of public goods and services, ensure that development is driven by both supply and demand, and improve total-factor productivity. The major areas of work for 2016 include: see that the quality of consumer goods is improved; work to upgrade manufacturing, intensify efforts to promote the integrated development of Made in China and the Internet Plus action plan, launch projects to build a more solid foundation for industry development, promote green manufacturing, and develop high-end equipment; accelerate the development of the modern service sector by relaxing restrictions on market access to the sector; fiber-optic networks will be developed in a number of cities in order to enable more urban and rural residents to enjoy a more digital way of life.
On the other hand, fiscal and tax reforms will be stepped up. The government will determine the proportion of VAT revenue received by the central and local governments appropriately and handover the corresponding administrative powers to local governments. Central government special transfer payments to local governments will be further reduced, which means that this year's general transfer payments will be increased by 12.2%. Meanwhile, business tax will be replaced with VAT in all sectors. Starting from May 1st, the scope of work to pilot this measure will be extended to the construction, real estate, financial, and consumer service industries, and VAT deductions will cover all new immovable property of enterprises to ensure that the tax burdens on all industries are reduced. According to estimates, the tax and fee reductions will reach RMB 0.5 trillion, meaning that 2016 will be a fruitful year in this respect and that the burdens of enterprises are expected to be significantly reduced.
In terms of the real estate market, different policies will be adopted in different cities as appropriate to their local conditions in order to cut housing inventory and promote stability in the real estate market. Due to the continued increase in the housing prices of first- and second-tier cities, the strengthening of control to stabilize housing prices has become the major policy direction, including tightening the house purchase quota policy, increasing land supply, prohibiting down payment loan etc. On March 25, Shanghai Municipal Housing policy was issued as expected. Considering the difficulties in cutting inventory in third- and fourth-tier cities and given people's demand for buying homes or improving their housing situation, the government will continue to improve the tax and credit policies to support justified personal housing consumption. We anticipate that such classified policies will stabilize the real estate market in China and the risk for drastic price hikes or declines will be small.
Fig 4 Significantly increased new house price in Tier-1 cities (%)Source: WIND, Phillip Securities Research
Additionally, it has been learned that the central bank of China will moreover draft relevant documents on bank debt for equity swap, allowing commercial banks to swap the NPLs of enterprises for equity. Resolving NPLs in such an original manner, debt for equity swap will facilitate the reduction of bad loan ratio in banks and debt ratio in enterprises, mitigate systematic risks and reduce the debt burdens of the enterprises involved, thus making it easier for them to improve business. For enterprises with good long-term prospects yet stuck in temporary operational difficulties and struggling with the payment of interest, this might bring structural opportunities.
In terms of the capital market, the government will work to create conditions for the implementation of the registration-based initial public offering (IPO) system, which means that this is not possible under the current circumstances and will therefore be deferred. Meanwhile, at the suggestion of CSRC, the section on the "Establishment of the Strategic Emerging Board" has been deleted from the draft. This will create such structural opportunities as concerning the shell value of small and medium sized enterprises, merger & acquisition. Besides, asset securitization of infrastructures has been specially noted in the report, along with the launch of Shenzhen-Hong Kong Stock Connect in due course. This is expected to benefit such sectors as the securities companies.
In conclusion, the policy direction is to promote such key reforms concerning tax, finance and state-owned enterprises on the basis of stabilizing growth while not incurring systematic risks, thus substantially implementing the supply-side reform featuring "reducing supply in some areas while increasing it in others". According to our estimates, the overall economy growth will keep low, but bonus from the reforms might be released in a continuous manner in order to promote the development of industries toward the medium-high end and the continued growth of emerging industries. The proportion of the service sector will increase further and consumption will play a greater role in economic growth.
For details, please contact
UT Department
Phillip Securities Group
11-12/F, United Centre, 95 Queensway, Admiralty, Hong Kong
Hotline : +852 2277 6777
Fax : +852 2287 4554
Website : www.poems.com.hk
The above is for informational purposes only and should not be interpreted as an offer or solicitation to buy or sell any investment products, and does not constitute any form of investment advice. Investment involves risks. The value of investments may be volatile and past performance is not indicative of future performance. Before making an decision to invest, investors should refer to the relevant offering documents to understand the risks associated with the investment products, fund characteristics and limitations, and pay attention to personal financial situation and risk tolerance. Research or analysis used in this article is based on sources that Phillip believes is reliable and for reference purposes only. Phillip doesn’t make any representations or warranties as to the accuracy or completeness of the information. Any opinions, estimates or forecasts may be changed without notice. Phillip Securities (HK) Limited and its subsidiaries may provide investment advice or other services to the company described in the research (whether or not as owner or a principal) and may be hold the above company securities.