By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
KEY TAKEAWAY’S FROM CHINA’S ANNUAL TWO SESSIONS MEETING 2023
What Is China’s Two Sessions?
China’s annual ‘Two Sessions’ meetings refers to two separate meetings (that occur around the same time), made up of the National’s People Congress (NPC) and Chinese People’s Political Consultative Conference (CPPCC). Please note, the CPPCC is an advisory body, and the NPC is China’s top legislative body. These meetings run from 4th March to 13th March, starting with the CPPCC.
Why Are They Important?
It provides a chance for China to analyse its development and set targets and goals for the year ahead for both domestic and foreign affairs. Sectors covered include the economy, environmental protection, and trade issues.
What Have been the Key Highlights so far?
• The release of key economic targets
• President Xi’s Opening Remarks
• National Development and Reform Commission (NDRC) Work Report Word Count
The Release of Key Economic Targets
Markets were disappointed upon the release of China’s annual economic targets, given only a moderate outlook for growth, stimulus, and job creation:
• Firstly, GDP was set at ~5% for 2023, which missed market forecasts (of between 5-6%) and marked the country’s lowest target level of growth in 30 years.
• Fiscal deficit was set at 3% of GDP which was higher than the 2022 target of 2.8%, but in reality, with spending having risen to 4.7% of GDP by year end 2022, this is being seen as a pull back.
• Meanwhile, we have a similar situation for the issuance of special local government bonds (which reflects expected spending on infrastructure), with the target coming in at 3.85Tr (higher than the 3.65Tr target in 2022), but below the actual level of spending of 4.15Tr by year-end 2022.
• New urban job creation, although coming in with a target of 12M (1M higher than the target in 2022), following comments from the Minister of Human Resources, this target is far below what is needed when you account for the influx of new graduates, migrants’ workers and the currently unemployed (with a proposed figure of 16.9M new urban jobs required).
• Coming to energy intensity, following no target set last year (as China concentrated on economic recovery), this year it is being set at ~2%, which is down from 2021 levels of 3%. Here despite a pledge to control fossil fuel use being mentioned, coal was highlighted as the country’s main fuel source for this year.
Aside from events within China, the U.S. has dominated headlines over the last week following Federal Reserve Chairman Jerome Powell’s testimony to Congress on 7th March, in which he opened the door for higher rates for longer, with the U.S. dollar strengthening to its highest level since November 2023.
Key Comments From Powell’s Testimony:
“the latest economic data has come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated”
“if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes”
“Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy”
“we have two or three more very important data releases to analyse before the time of the FOMC meeting”, “those are going to be very important in the assessment we have of this relatively recent data”
Looking ahead, given Powell’s confirmed attention on upcoming economic data releases, we forecast that market volatility is likely in the week ahead, with the correlation between copper and the U.S. dollar maintain a strong negative inverse corelation.
Key Data Releases Ahead of FOMC March Meeting
10th March: The release of NonFarm Payrolls at 13:30 GMT appeared to have swung the advantage in favour of the cautious over the more aggressive rate-watchers, with the markets nearing the end of the week with a more benign outlook that they started, over-riding Chair Powell’s testimony. However, burrowing into the numbers, though, suggests that the Fed will not be impressed and will remain more aggressive than the markets are discounting. A 50-point hike should not come as too much of a surprise.
10th March: The receivership of SVB pushed headlines over Nonfarm Payrolls to the side, with risk-aversion coming to the fore. However, the speed with which Regulators in the United States and beyond suggest that the fall-out from the SVB problems should be relatively limited. Anyway, the larger banks are well-capitalised and maintain prudent balance sheet management policies. U.S. Treasury Secretary Janet Yellen has said that she has “full confidence in banking regulators to take appropriate actions in response”. The lessons of 2018 were harsh, but have been learnt and led, inter alia, to the Dodd-Frank Act of 2010 that is fundamental in bolstering banks’ risk-resilience, notably with respect to capital adequacy and liquidity levels.
14th March: Headline M/M CPI is expected to pull back to 0.4% from 0.5% in January, with core CPI set to remain steady at 0.4% for a second month. However, BBG forecast that both headline and core CPI M/M will rise to 0.5% on the back of higher utility bills upon storms across California (with the Governor Gavin Newson declaring a state of emergency in 34 countries).
15th March: Factory-gate prices to be released for the United States, with a pull back forecast for the headline reading upon cooling energy prices, while the core reading could be sticker given demand in services.
SVB Receivership – Background
Silicon Valley Bank went into receivership with the Federal Deposit Insurance Corporation (FDIC) on Friday 10th March following a run-on deposits as a number of tech start-ups, which were the primary focus of SVB’s operations, removed deposits after the bank had failed to sell a portfolio and needed to plug the ensuing hole in its balance sheet. Assets had been approximately $209Bn and this is being reported as the largest failure of an international bank since 2008.
SVB’s position shines a spotlight on potential systemic risks for parts of the banking system as cheap money disappears – that said, though, SVB is reported to have over-concentrated on one sector, and potentially over-lent likewise.
SVB had earlier in the week tried to sell a portfolio that partly comprised Treasuries, and which was offering a yield of less than 2%, against prevailing rates above 4%; this triggered a run-on deposits and arguably the subsequent bank failure.
The FDIC has said that insured depositors (up to $250,000) should have access to their funds by Monday morning, while uninsured depositors will have a receivership certificate although the amount that will be available is still uncertain.
Government leaders, not just in the United States, have been moving fast to constrain any contagion. The Bank of England, for example, put the UK SVB arm into insolvency on Friday.
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