Interestingly, the President of ICBC Yang Kaisheng said that lending had increased by 15 billion yuan (+10 percent) in January and February to 165bn yuan, and stated that notions that bank lending had fallen in the first two months of the year were incorrect. We expect new yuan-denominated lending to come in near 800bn yuan in February.

Stabilization in the run-up to the leadership transition does not equal policy inertia, but deeper structural reform will wait. That said, it does seem as though policy priorities for this year focus on what has already started, leaving the deeper structural issues, notably financial sector reform, which lies at the heart of correcting both the internal and external imbalances, will be tentative until after the leadership change.

Fiscal policy will be less supportive than expected — albeit still “fine-tuned” and “proactive”. If autonomous growth fails to generate the energy needed for the economy, fiscal policy would have to plug the gap. But, the 800bn yuan budget deficit penned in for the year is less than the 1tr yuan expected. Granted, at 1.5 percent of GDP the deficit is expected to widen from last year’s actual deficit 1.1 percent. However, markets anticipated that 2 percent of GDP would be tolerated (and some believed 2.5 percent was feasible).

The lower growth target, combined with a conservative deficit, should anchor expectations, reducing the likelihood for a large-scale stimulus package. Furthermore, incremental demand for commodities will continue to decrease, especially as the pursuit of more efficient production process is part of the 2012 calculus too.

Fiscal spending will be better linked to how people live. Fiscal spending will be rebalanced towards the areas that will have the largest marginal impact on living standards, including culture, education, employment, low income housing, health care and medical services.

Structural policies supporting consumption to take center stage. (a) Raising incomes of middle and low-income groups; (b) expanding consumer credit, (c) developing new forms of consumption, like online shopping, (d) supporting the consumption of green goods and water-saving sanitation, and (e) building-out the social safety net.

The focus of the social safety system has shifted from universal reach to quality. China has committed to “near” universal coverage of basic pension and medical insurance by 2015. Beijing will raise subsidies for medical insurance for non-working urban residents and the new type of rural cooperative medical care system to 240 yuan per person per year.

Promoting steady growth of agriculture and sustained increases in rural incomes. Beijing aims to develop agricultural production and increase farmers' incomes by raising the price floor for minimum purchase for grain (+7.4 yuan), wheat (+16 yuan) and rice (+16 yuan) per 50 kilograms respectively. In addition, China will accelerate progress in agricultural science and technology and strengthen agricultural and rural infrastructure. Overall, the central government allocates 1.23tr yuan for agriculture, rural areas and farmers (+17 percent y/y).

Tax policy aim to put money in the consumer’s pocket, support SME development and expand the services sector. Tax cuts this year as revenue outperformance continued last year. All SMEs will receive preferential taxes and Beijing commits to carrying out pilot projects to swap business tax with VAT. However, tax policy won’t be one-way with some taxes, for instance connected to resource consumption and/ or property development, rising to boost the revenue base.

Enhancing private investment. Two years ago, the State Council announced the “New 36 Clause” which would buttress private investment into previously state protected/monopolized sectors, including infrastructure, utilities, public and social services, financial and logistics. Recently the NDRC has been working with local governments on issues relating to the clause. Today, Wen stated that it would be fully implemented this year.

No respite for property developers, but social housing gained support. Social housing received an allocation, boosting spending on the sector by 25 percent in 2012. In contrast, over-speculation in real estate is a “public concern”. Therefore, the numerous regulatory measures that have been introduced to bring prices back to a “rational” level will remain.

Beijing also committed to accelerating the "go global" strategy. Currently, China’s FDI stock is about the size of Sweden’s and it is clear that China is underweight in terms of outward investment. Yesterday, CIC confirmed that SAFE had given them another $30 billion to invest abroad. Today, Beijing committed to enhance macro-guidance, increase policy support, streamline approval procedures, and improve services for Chinese investors. In addition, restrictions on individuals investing overseas will be relaxed.

Conclusion

Beijing realizes that it is better to deal with the numerous problems that have piled up in recent years. Rightly so, as it is better to do it at your own pace. To this end, Wen’s “Report on the work of the government” delivered at the NPC provides the political cover for agents to stop being gung-ho about growth. The state will support the development of some sectors and limiting the growth in others. The aim is to adjust the economic structure and improve the quality and efficiency of economic growth. Markets may start off unimpressed, but these are steps in the right direction.