Why China’s work report is more important than Australia’s federal budget
5 Mar 2017
Looking through the platitudes and Communist Party rhetoric which inevitably filled Sunday’s annual speech to parliament by Chinese Premier Li Keqiang, Australians should feel relatively comfortable.
While the “work report” receives scant attention compared to America’s State of the Union or our federal budget, it is arguably far more important for Australians.
The stellar fourth quarter growth numbers reported by Canberra on Wednesday had their origin in Mr Li’s work report this time last year.
In that speech, Beijing signalled it would be going for growth and in doing so triggered an unexpected rally in commodity prices that 12 months later delivered Australia its biggest boost to national income in 6½ years.
So those thinking about what the year ahead might hold for Australia could do worse than consider the plan Mr Li laid out for China on Sunday morning.
In stressing “stability” the Premier has indicated official growth and the alternative activity indicators used by economists would not slow rapidly this year – the official growth target is “around” 6.5 per cent.
This suggests the sharp fall in commodity prices forecast by some is unlikely to eventuate this year as Beijing wants minimal disruptions ahead of the five-yearly National Party Congress in November.
At that meeting President Xi Jinping is expected to stack the Politburo Standing Committee, China’s top leadership body, with his allies, a task which will be more difficult if there is a major economic disruption.
Given the old industrial economy was responsible for the upswing in activity in the second half of last year the government is unlikely to disrupt its momentum ahead of November.
That means continuing to make credit available for local governments to build infrastructure, which should flow through to robust steel production, even if this number is slightly lower than last year.
Upbeat for commodity prices – for now
Canberra should therefore be able to factor in relatively strong commodity prices through much of this year, albeit lower than the recent highs experienced by coal and iron ore.
The mistake however would be to assume these prices can be sustained into 2018, given the Chinese economy is very much in a holding pattern this year.
Beijing has been successful in holding off dealing with the major challenges of high corporate debt levels and over-capacity, but it can’t do this indefinitely.
And while there was no indication these issues would be dealt with this year, the Premier did spend much of his speech talking about ways in which the service sector could be encouraged to play a bigger role in the economy.
He outlined tax cuts for small firms and pledged to boost consumption.
While he was short on details, it suggests this is the government’s focus in the years ahead.
Efforts to boost consumption and rebalance the economy away from investment will inevitably mean a downward shift in the old industrial economy, which will put pressure on commodity prices.
The big question is whether the government will have the political will to carry through on these plans, as we’ve been here before.
In early 2015 the “rebalancing” was well underway until Beijing blinked and fell back on old habits of using credit to stimulate the economy.
China’s ability to have another crack at such reforms will largely fall to President Xi.
Even though he’s the country’s top leader he was expected to get little more than a passing reference in the Premier’s work report.
But this year, Mr Xi received no fewer than eight mentions, six of which held him up as the Party’s “core leader”.
Reading the tea leaves this suggests Mr Xi is well advanced in his consolidation of power and may therefore have the political capital to eventually implement some of the economic reforms he promised when coming to power four years ago.