China’s 2021 Government Report: 2021 targets to be read with a focus on 2022
As the market closely watches the Two Sessions in China, the government report finally confirms a series of supporting measures for the upcoming year, especially in terms of fiscal policy, but it also deliberately set a very conservative GDP target (only over 6% for 2021). The question is what message shall we get from the seemingly inconsistent announcements?
First, the base effect is so massive that growth in 2021 is clearly going to surpass the floor target announced (6%). In fact, virtually all forecasts are above (e.g. 8.1% for IMF). Therefore, the 6% minimum target does not necessarily help lead the market expectation as it did before 2019 and is more consistent with our earlier view that the government will try to tone down the GDP target this year. The conservative target is also helpful for the future as it leaves more policy room for supporting growth in 2022 and beyond, which will be needed.
Even as China is bracing for an economic rebound in 2021, the scheduled general public deficit over GDP is only moderately lowered to 3.2%. It is well known that this is just part of the actual consolidated deficit but we also receive some more details about the issuance of local government special bond to 3.65 trillion (the value was 3.75 trillion in 2020). As such, the government views the continuation of the fiscal support as important guarantee for China to gradually converge to its long-term potential growth rate in the post-Covid era without causing unexpected disruptions.
All in all, the GDP target, together with the announced fiscal measures shows the government’s long-term considerations beyond 2021. In fact, the message is also reflected in the other dimensions of structural adjustment. For example, the government has made clear that it will start to deal with the population aging issue. The rise in the statutory retirement age will be implemented in a phased manner. Furthermore, policies to increase the fertility rate are to be expected. Another example is the objective to raise the “capacity” for scientific and technological innovation by particularly focusing on basic research and encouraging manufacturing companies to engage through increasing their R&D expenditure.
Last but not least, the government report reaffirms China’s stance to embrace global trade and investment through opening up the economy to attract foreign capital and promote competition. The government also shows its interest in expanding regional agreements with the key trading partners, such as accelerating free trade negotiations with Japan and Korea and even joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
In sum, while the government report sets particular targets for 2021, our reading tends to be more structural which should be analyzed together with the 14th Five Year Plan which is scheduled to help China embark on a more sustainable trajectory over the long term.