Chinese Premier Li Keqiang presented the 2021 government work report to the National People’s Congress on 5 March, in conjunction with an updated outline of the 14th Five-Year Plan (FYP) for 2021-2025 and “long-range objectives” through 2035.
In the wake of the recovery from COVID-19, the government sees its main task for this year as “pursuing progress while ensuring stability”, with a focus on promoting “high quality development”, “advancing supply side structural reform”, and “harnessing reform and innovation”.
The announcement of a growth target for 2021 indicates that China’s leaders continue to see economic growth as essential and growth targets as key to economic policymaking.
The relatively unambitious goal of growth “above 6%”—we forecast 8.9%—confirms the transition toward more modest but high-quality expansion in the 14th FYP (Exhibit 1). Indeed, the government says that this will “enable all of us to devote full energy to promoting reform, innovation and high-quality development”.
Exhibit 1: A relatively unambitious GDP target this year
Among the other macroeconomic “projected targets” are 11 million new urban jobs, a surveyed unemployment rate of 5.5%, and CPI inflation of around 3% (Exhibit 2). The government is looking for “basic equilibrium” in the balance of payments and a 3% decline in energy consumption per unit of GDP.
The discussion of macroeconomic policy presents a composed stance, “balancing the needs of promoting the economic recovery and preventing risks”. On the fiscal side, while the government continues to describe its fiscal policy as “proactive”, we expect the overall deficit to come down in 2021. The official government deficit is set at 3.2% of GDP, compared to 3.6% last year. The overall fiscal deficit (including local government infrastructure spending financed by special bond issuance and the deficit of government-managed funds, among other things) will again be significantly higher than the official deficit. We expect the overall (broader) fiscal deficit to come down as well this year, although the work report language suggests no desire for drastic fiscal consolidation.
Exhibit 2: Projected targets reflect the theme of stability
Slower credit growth, but some sectors to see a boost in credit
The government intends to continue reducing taxes. It will extend the duration of temporary policies such as VAT relief for small-scale tax payers, pursue structural tax reduction, raise the VAT threshold for small-scale taxpayers and lower the income tax for small firms. As part of an “employment first” policy, unemployment insurance premiums will be reduced again.
In a long-awaited move, the work report also heralds a reform of the intergovernmental fiscal system – the relations and demarcations of power and responsibilities between the central and local governments. This is meant to improve the structural revenue base of local governments which should reduce their reliance on land sales and, possibly, debt issuance.
As we have stressed in recent months, on the monetary policy front the government is aiming to keep macro leverage generally stable, with overall credit growth growing broadly in line with nominal economic growth, after the sharp increase in leverage last year.
The work report points to the need to increase lending to micro and small businesses, including via regulatory forbearance and reforms of regulations that traditionally held loan officers responsible for loans going bad. This has inhibited lending to the private sector, especially to small firms. In addition, the report calls for raising the proportion of loans to the manufacturing sector and increasing credit support to small and medium exporters.
In terms of regulating internet companies, the government aims to strike a balanced position between encouraging innovation and regulation, noting that “the state supports platform enterprises in innovative development and enhancing international competitiveness, while ensuring that their business operations are well-regulated in accordance with the law. We will step up efforts against business monopolies and guard against unregulated expansion of capital, and ensure fair market competition”.
Self-reliance in innovation and supply chains being emphasised again
Amid an emphasis on scientific and technological innovation in the 14th FYP, the work report for 2021 stresses “promoting high quality development of the real economy through innovation and fostering new growth drivers”. Calling for increased capacity to pursue scientific and technological innovation, the report notes that central government expenditure on basic research will rise by 10.6% this year.
Indicating that “market forces will be leveraged” to encourage enterprises to engage in innovation, the government will maintain the policy of granting an extra tax deduction of 75% for firms’ R&D spending and will raise it to 100% in the case of manufacturing firms. The report also commits to stepping up high-tech infrastructure investment, including 5G networks.
In line with the emphasis in the Central Economic Work Conference (CEWC), the report calls for expanding domestic demand, but it is in the structural policy section rather than the macroeconomic section. No macro measures to stimulate consumption were announced. Instead, the government has committed to directing public investment toward “projects that will help significantly increase people’s wellbeing”.
The announcement of a growth target for 2021 indicates that China’s leaders continue to see economic growth as essential and growth targets as key to economic policymaking.
In line with our expectation, the government is calling for “high standard opening up of the economy,” as well as for increased international economic cooperation. This includes possibly joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
The negative list for FDI is to be cut further and the service sector opened “in a well-regulated way”, while the report also calls for “high quality belt-and-road cooperation”.
As expected, the report commits to “solid steps” toward the goals of achieving peak carbon emissions by 2030 and carbon neutrality by 2060.
The section on raising living standards and “advancing social development” features steps toward more equitable and higher quality education as well as improved healthcare.
The section on housing needs re-emphasises the principle that “housing is for living in, not for speculation”. As stressed in the CEWC in December, the report again calls for the development of the long-term rental housing market and reduction of taxes and fees on rental housing as part of the government’s strategy to fulfil housing needs, especially in urban areas and among young people.
Focus on innovation and domestic market development
Following the outline of the 14th FYP released in November, the somewhat more concrete blueprint included in the government work report is clearer on maintaining the emphasis on economic growth. While not announced yet, it is obvious that the 14th Plan will have a GDP growth target again.
In line with the earlier outline, the latest one emphasises innovation-driven development and industrial modernisation. Key aims are to (i) enhance China’s strategic scientific and technological capability; (ii) strive to make breakthroughs in core technologies in key fields; and (iii) formulate and implement a 10-year action plan for basic research. The government aims for an annual increase of R&D spending of 7%.
In the wake of the recovery from COVID-19, the government sees its main task for this year as “pursuing progress while ensuring stability”, with a focus on promoting “high quality development”, “advancing supply side structural reform”, and “harnessing reform and innovation”.
In pursuing economic growth, the government aims to “continue to prioritise the development of the real economy”, “upgrade the industrial base”, “modernise industrial chains”, and keep the share of manufacturing in the economy “basically stable”.
Another key structural objective is to create a robust domestic market and foster synergy between such a domestic market and being an attractive destination for FDI. The report refers to the “domestic circulation” theme discussed in previous policy documents. The idea is that fostering a strong domestic market is not only beneficial in itself, it can also attract “global production factors and resources” – or foreign investment. It can also “promote a positive interplay between domestic circulation and international circulation”.
The government aims to advance rural revitalisation in tandem with improving the urbanisation strategy. A new “people-centred” urbanisation approach features moving faster to grant permanent urban residency to migrants—aiming to raise the share of permanent urban residents to 65% of the total population—to facilitate their access to public services and the attainment of a proper urban lifestyle.
The FYP outline also commits to “advancing reform and opening up across the board”, “protecting intellectual property”, and “promoting green development”.
Louis Kuijs
Louis leads the Asia-Pacific macro team and its research. He contributes to S&P Global Ratings’ macro-credit narrative and represents the firm in events, conferences, and the media, delivering its insights and thought leadership to the marketplace. Before joining S&P Global Ratings in 2022, Louis held senior positions in both the public and private sectors, including at the International Monetary Fund (IMF) in Washington DC, the World Bank in Beijing, and at the Royal Bank of Scotland and Oxford Economics in Hong Kong. While with the World Bank, he led the China Quarterly Update, headed the Bank’s mid-term review of China’s 11th Five Year Plan, and led research on China’s saving and investment, rebalancing, and long-term growth and structural change.
Tommy Wu
Tommy Wu is a lead economist at Oxford Economics. He covers macroeconomic research and forecasting on the Asia-Pacific region and the China economy. Prior to joining Oxford Economics, Tommy was an economist at the research department in Hong Kong Monetary Authority.
