The unexpected aspect of the Two Sessions: Reform of the normal wage growth mechanism

Core Views

1. The setting of major targets such as GDP aligns with market expectations and plays a role in stabilizing expectations. The government work report calls for the implementation of policies as early as possible, seizing time against various uncertainties, providing sufficient support at once when the opportunity arises, and emphasizes dynamically adjusting policies based on changing circumstances. If external shocks such as tariffs exceed expectations, there is a possibility that the Chinese government may introduce additional policies in the second half of the year to counteract them, ensuring the smooth achievement of targets.

2. The highlights of proactive fiscal policy include increasing the deficit, enhancing transfer payments, and maintaining a balance between tight and loose government spending. The deficit target is set at 4%, the highest since 2010. The central government increases general transfer payments to local governments to supplement their insufficient revenue. It continues to emphasize "the government should live a frugal life," but has removed last year's statement of "strict control over general expenditures."

3. A moderately loose monetary policy may focus more on broadening credit. The report emphasizes "timely cuts in reserve requirements and interest rates," and while interest rate and reserve requirement cuts are still expected throughout the year, the term "timely" indicates that the timing of implementation will depend on internal and external conditions. The report has removed the expression "activate existing stock" and emphasizes stabilizing the exchange rate, suggesting that the priority of short-term broad credit may be higher than that of broad monetary policy.

4. The report mentions an unexpected reform measure, namely the reform of the normal growth mechanism for workers' wages. The specific reform plan may involve "capping high, expanding middle, and raising low," which is beneficial for the majority of low- and middle-income groups and conducive to forming expectations of stable growth in residents' income, fundamentally boosting consumption.

5. The focus on promoting consumption will not be on consumer goods subsidies, but on service consumption.

6. Attention is drawn to the "local championship" of new productive forces, with industries such as artificial intelligence, robotics, and biomanufacturing being highly valued across various regions.

7. The report adds "enhancing the overall effectiveness of the national innovation system" as a key task, which is also worthy of high attention.

8. Real estate remains a bottom-line requirement for risk prevention, aiming for stability rather than stimulation.

9. There is a high demand for policies to stabilize the stock market, which may form a "technology + consumption" dual-driven pattern.

Main Text

First, the setting of major targets such as GDP aligns with market expectations and plays a role in stabilizing expectations.

The report proposes that by 2025, it is necessary to stabilize expectations, stimulate vitality, and promote sustained economic recovery and improvement, presenting several major targets. Among them, the GDP target is set at around 5% for the third consecutive year, indicating that economic growth in 2025 is expected to be roughly on par with 2024, better than the declining trend of the past decade (Figure 1), truly reflecting the requirement for "stability," with local targets also generally set around 5% or higher (Figure 2); the CPI target is lowered from 3% to 2% for the first time, with Chen Changsheng, a member of the drafting group and deputy director of the State Council Research Office, stating that this is mainly due to the current downward pressure on prices being greater than the upward pressure. Setting this target aims to convey a signal to society that we must strive to promote a moderate recovery in prices through various policies; the urban surveyed unemployment rate is around 5.5%, and over 12 million new urban jobs are expected, both remaining the same as the previous year Overall, the setting of major targets aligns with market expectations and plays a role in stabilizing expectations.**

Will external shocks such as tariffs affect the realization of China's economic targets? The report has fully considered external shocks, emphasizing in the "Issues and Challenges" analysis that the external environment is complex and severe, with increasing tariff barriers and numerous geopolitical tensions. To cope with external uncertainties, the report has made corresponding arrangements: on one hand, it calls for the implementation of policies as early as possible, prioritizing timeliness to counter various uncertainties, and providing sufficient support all at once when the situation is clear to enhance policy effectiveness; on the other hand, it emphasizes dynamically adjusting policies based on changing circumstances to improve the foresight, targeting, and effectiveness of macroeconomic regulation. In summary, we judge that if external shocks such as tariffs exceed expectations, there is a possibility that the Chinese government may introduce additional policies in the second half of the year to counteract them and ensure the smooth realization of targets.

Second, the highlights of proactive fiscal policy include increasing the deficit, increasing transfer payments, and maintaining a balance between tight and loose government spending.

Highlight 1: Increase the deficit. The deficit ratio is planned to be arranged at around 4%, an increase of 1 percentage point from the previous year, reaching a new high since 2010, with the deficit scale increasing by 1.6 trillion yuan compared to the previous year; special long-term government bonds of 1.3 trillion yuan, an increase of 300 billion yuan from the previous year, and an additional issuance of special government bonds (to support banks in replenishing capital) of 500 billion yuan; local special bonds of 4.4 trillion yuan, an increase of 500 billion yuan from the previous year. Overall, the total scale of government debt (deficit scale + special long-term government bonds + special government bonds + local special bonds) has increased by 2.9 trillion yuan compared to the previous year, which meets market expectations for proactive fiscal policy.

Highlight 2: Increase transfer payments. In previous local two sessions, the revenue targets for general public budgets in various regions were generally low, mostly set at 2-3%. Local revenue mainly includes two parts: its own general public budget revenue and transfer payments from the central government. With limited local revenue, economic growth will increasingly rely on central transfer payments. The report proposes that the central government increase the general transfer payments to local governments, with a tilt towards difficult and underdeveloped areas. This ensures the intensity of local fiscal spending, thereby supporting economic growth Highlight 3: Government spending is tight yet flexible. The report continues to emphasize "the government should live a frugal life," but has removed last year's statement of "strict control over general expenditures."

Third, moderately loose monetary policy, with priority on credit expansion over monetary easing.

There is still room for reserve requirement ratio cuts and interest rate reductions throughout the year. The report emphasizes timely reserve requirement ratio cuts and interest rate reductions to maintain ample liquidity, ensuring that the growth of social financing scale and money supply aligns with economic growth and overall price level expectations. Interest rate cuts and reserve requirement ratio reductions can still be expected throughout the year, but the term "timely" indicates that the timing of implementation should still depend on internal and external conditions. In our annual outlook, we estimated that the reserve requirement gap in 2025 would be about 1.2 trillion yuan, and a 1 percentage point reduction in the reserve requirement ratio throughout the year would be sufficient to address this gap with some surplus; a reduction exceeding 1 percentage point may not be necessary (see the previously released report "China-U.S. Game, Consumption Recovery—2025 China Macroeconomic Outlook").

In the short term, the priority for credit expansion may be higher than for monetary easing. The report has removed last year's expression of "activating existing stock" and emphasizes greater efforts to promote the healthy development of the real estate and stock markets, increasing support for technological innovation, green development, boosting consumption, and supporting private and small micro-enterprises, indicating a higher demand for credit expansion in policy thinking. Li Yunze, director of the National Financial Supervision and Administration Bureau, stated that to address long-term large consumption demands, they will study increasing the limits and extending the terms of consumer loans. At the same time, the report continues to emphasize maintaining the basic stability of the RMB exchange rate, as short-term monetary easing may face constraints.

Fourth, the report mentions an unexpected reform measure, namely the reform of the normal wage growth mechanism for workers.

The report proposes to promote income growth through multiple channels, supporting income growth and reducing burdens for low- and middle-income groups, and improving the normal wage growth mechanism for workers. There have been several signals pointing to this reform: first, in local two sessions, more than 10 regions have coincidentally proposed "improving the normal wage growth mechanism" (see Figure 3); second, on February 10, the State Council meeting proposed to vigorously support residents' income growth and promote reasonable growth in wage income; third, the Central Economic Work Conference at the end of last year proposed to promote income growth and reduce burdens for low- and middle-income groups, making the implementation of the central spirit an important task for the national two sessions.

The specific reform plan may be "limit high, expand middle, raise low," that is, to limit the excessive income of high-income groups, expand the scale of the middle-income group, and increase the income of low-income groups.

This reform is beneficial for the majority of low- and middle-income groups, helping to form expectations of stable income growth for residents, fundamentally boosting consumption

Fifth, the focus of promoting consumption will shift from consumer goods subsidies to service consumption.

Regarding consumer goods subsidies, the report proposes to allocate 300 billion yuan in ultra-long-term special government bonds to support the replacement of old consumer goods with new ones. The scale of subsidies has doubled compared to last year's 150 billion yuan, but last year's subsidies were mainly implemented in the second half of the year, while this year's began at the beginning of the year, with an average intensity basically on par with last year, not exceeding expectations.

At the same time, the report outlines various measures to promote service consumption: first, expanding the supply of diversified services such as health, elderly care, childcare, and domestic services by relaxing access, reducing restrictions, and optimizing regulation; second, innovating and enriching consumption scenarios, accelerating the development of new types of consumption such as digital, green, and intelligent; third, implementing and optimizing vacation systems to unleash the consumption potential of culture, tourism, and sports. In the local two sessions, all 31 provinces and municipalities have made key deployments to expand service consumption (Figure 4).

Overall, we believe that service consumption may be the focus of promoting consumption going forward and is expected to become a new growth point in the consumption sector.

Sixth, pay attention to the "local championship" of new quality productivity.

The report suggests developing new quality productivity according to local conditions and accelerating the construction of a modern industrial system. It promotes the integrated development of technological innovation and industrial innovation, facilitating the accumulation of new momentum and the renewal and upgrading of traditional momentum.

Since the reform and opening up, the "local government championship" has been an important mechanism for promoting rapid economic growth in China. During the high-speed growth phase, the core of local competition was GDP growth rate, while in the high-quality development phase, the core of local competition has shifted to the development of new quality productivity. At this stage, the "local championship" of new quality productivity helps to promote continuous progress in Chinese technology, achieve breakthroughs, solidify the foundation for China's economic transformation and upgrading, and continuously create investment opportunities in the capital market. In conjunction with the local two sessions, the industries that various regions generally attach great importance to include artificial intelligence, robotics, and biomanufacturing.

Seventh, the report adds "enhancing the overall effectiveness of the national innovation system" as a key task, which is also worth noting.

Compared to the nine key tasks deployed at the end of last year's Central Economic Work Conference, the government work report has deployed ten key tasks, with the additional one being " deeply implement the strategy of revitalizing the country through science and education, and enhance the overall effectiveness of the national innovation system." The report emphasizes adhering to innovation-driven development, promoting the integrated advancement of education development, technological innovation, and talent cultivation, and strengthening the foundational and strategic support for Chinese-style modernization. The work measures include accelerating the construction of a high-quality education system, promoting high-level technological self-reliance and self-improvement, and comprehensively improving the quality of the talent pool Among them, "expanding the supply of high school education degrees," "gradually implementing free preschool education," and "solidly promoting the expansion of high-quality undergraduate education" are new statements compared to last year and are worth noting. Recently, Tsinghua University decided to orderly and moderately expand its undergraduate enrollment scale, planning to increase approximately 150 undergraduate enrollment slots by 2025, focusing on cultivating interdisciplinary talents in artificial intelligence, reflecting that "the expansion of high-quality undergraduate education" is beginning to be implemented in an orderly manner.

Eighth, real estate remains a bottom-line requirement for risk prevention, aiming for stability rather than stimulation.

The report states "continuously pushing the real estate market to stop declining and stabilize" in the section on preventing and resolving risks in key areas, indicating that real estate remains a bottom-line requirement for risk prevention, aiming for stability rather than stimulation. In terms of specific policy measures, the report has made the following deployments:

• Subtracting measures, adjusting restrictive measures based on local conditions.

• Adding measures, strengthening the implementation of urban village and dilapidated housing renovation.

• Controlling land, reasonably controlling the supply of new real estate land.

• Expanding reserves, promoting the acquisition of existing commercial housing, and granting greater autonomy to city governments regarding acquisition subjects, prices, and uses. Funding may be allocated from local special bonds, with the report proposing an increase of 500 billion in special bonds focused on investment construction, land reserves, acquisition of existing commercial housing, and settling local government debts to enterprises, indicating that the increased funding scale for acquiring existing commercial housing should not exceed 500 billion.

• Continuing financial support, broadening the scope of re-loan usage for affordable housing, and leveraging the role of the real estate financing coordination mechanism.

Ninth, policies have a high demand for stabilizing the stock market, which may form a "technology + consumption" dual-driven pattern.

Chen Changsheng, a member of the drafting group and deputy director of the State Council Research Office, emphasized that the importance of asset prices in macro-control and including "stabilizing the real estate and stock markets" in the overall economic work requirements is a first. Under this idea, the stock market has support downward and space upward . Considering that technology and consumption are key areas of policy support in 2025, the stock market may form a "technology + consumption" dual-driven pattern.

Key industries in the technology sector include artificial intelligence, robotics, and biomanufacturing, but caution is needed regarding the pressure of phased adjustments after rapid rises in certain industries.

The consumption sector needs to closely observe the implementation of reforms in the normal wage growth mechanism and the relaxation of access restrictions in key service industries (including culture and tourism, health, sports, elderly care, childcare, domestic services, digital, green, etc.).

Authors of this article: Xie Yunliang, Mai Linyue, Source: Macro Bright Words, Original Title: "Unexpected Aspects of the Two Sessions: Reform of the Normal Wage Growth Mechanism | Cinda Macro"

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