Top news of the week
What to watch at this year's National People's Congress? It's that time of the year again. Every March, lawmakers and representatives across China will gather in Beijing to review, debate, and vote on the government budget as well as major laws and policies. Top priority for this year will likely be the property market, but we expect delegates to also focus on issues such as income tax reform, and financing gaps faced by local governments.
In his annual address to the congress delegates, Chinese premier Wen Jiabao set the target economic growth rate at 8% for 2010, and expected the inflation rate to be controlled within 3%. The budget deficit is estimated at CNY 1.05 trillion this year, or less than 3% of the GDP assuming the economy can expand 8% this year. To the relief of the market, premier Wen seemed committed to a moderately loose monetary policy, describing the current economic situation as highly complicated and needing cautious monitoring. This indicates that the government is in no hurry to exit from its massive stimulus plans. The premier also pledged to increase spending on agriculture, healthcare, and education to improve the lives of ordinary people, as senior officials publicly admitted that the yawning income disparity has become a major problem in China.
As expected, delegates tabled various proposals aimed at cooling the speculative property market and bringing down housing prices. Some suggested higher government spending to build more affordable housing for lower-income people, but more seemed to have warmed to the idea of a property tax that is not being collected in China right now. They think a property tax would raise the cost of speculation and help "deflate" the investment bubbles somewhat. More importantly, property taxes should provide a steady source of revenue for local governments, which now depend heavily on land sales and are therefore incentivised to help sustain housing prices at elevated levels. If the property tax proposal can be adopted, such taxes will likely be levied on a pilot project basis, on commercial properties in major cities such as Beijing and Shenzhen before the end of this year.
Income tax reform is another hotly contested topic at the meetings. Delegates said that the current tax system does not function well as an equitable income redistribution mechanism, and suggested that wage taxes should be lowered, tax deductibles be added, and tax codes for corporations revised. Others expressed concerns about massive hidden debts taken by local government investment vehicles last year to finance infrastructure projects. The central government has said it will issue bonds on behalf of local governments this year to help lower their borrowing costs and make such borrowing more transparent. However, murky borrowing numbers from the past year may have become a headache to the banks across the country, which have been told to tally their exposure to the local government lending by the end of June.
Market recap
The stock market fluctuated last week depending on what topics were being discussed each day at the national people's congress meetings. Investors were encouraged by government signals that it is too early to consider an exit from the stimulus, but the market was temporarily in a panic after an order was given to the banks to track lending that might have been funneled into the stock market. The Shanghai Composite Index fell 1% to close at 3,023 points on Friday, while the Shenzhen Composite Index also dipped 1% to 12,313.
Macro and industry updates
February PMI slowed to 52: China's official Purchasing Managers' Index (PMI) fell to 52 in February, down from 55.8 recorded a month earlier. The February reading indicates that China's manufacturing sector has remained in the expansion mode for 12 consecutive months, although the index has seen the second dip in a row this year. Statistics show that output and new orders continued to show signs of expansion, while order backlogs, employment and purchases contracted slightly. Slowing activities before the Chinese New Year holidays, which fell in February this year, may be part of the reason behind the weaker numbers for February.
Down payment on second home raised to 40% in Beijing: The new policy is part of a series of new measures announced to slow the continuous upward spiral in housing prices in the Chinese capital. Beijing also reinstalled restrictions on foreign buyers that were temporarily suspended in 2008. Qualified foreign buyers are allowed to purchase one home per household after they stay in China for more than one year and can sell their properties only if their employers relocate them elsewhere. Other major cities such as Hangzhou and Tianjin, which also witnessed steep housing price appreciation over the past year, took similar measures recently.
China Mobile to invest in Shanghai Pudong Development Bank: China Mobile confirmed that it is in talks with Shanghai-listed Shanghai Pudong Development Bank for a strategic investment in the bank. According to various reports, the operator may spend up to CNY 40 billion for a 20% stake in the mid-sized bank. China Mobile is expected to work with SPDB to expand mobile payment and other services delivered via handsets.
