China: China's leadership sets conservative 6% growth target for 2021; fiscal policy to remain fairly supportive
March 18, 2021
China’s main annual political meetings—known as the Two Sessions—took place in March. Premier Li Keqiang delivered the government work report setting out the key policy objectives for 2021, while the National People’s Congress approved the 14th Five-Year Plan (FYP) covering the period to 2025. The decision to set a cautious 6.0% real GDP growth target for this year—and avoiding a firm target at all in the FYP—shows the authorities’ overriding focus on ensuring financial stability and avoiding systemic risks over a growth-at-all-costs approach. That said, fiscal policy should remain broadly supportive this year, as the government looks to avoid choking off the economic recovery.
In the FYP, the government reiterated its focus on boosting the domestic manufacturing sector, particularly in emerging technologies and those judged to be key to national security such as semiconductors, with state firms set to play a leading role. However, this could intensify concerns over capital misallocation and potentially reduce competitive pressures, while further stoking tensions with developed nations. Lastly, the government discussed structural factors that are likely to hold back growth in the coming years, such as a low fertility rate, stating its aim to find workable solutions.
The emphasis on stability over high short-term growth was exemplified by the government’s relatively modest stimulus last year, and by recent moves to rein in the surging property sector and introduce new regulations for fintech firms, amid concerns over the build-up of corporate debt. Moreover, authorities are increasingly prioritizing a broader range of metrics—in particular relating to the labor market—over GDP. That said, budget numbers for 2021 suggest the government is looking to avoid a sharp fiscal tightening: The headline fiscal deficit is seen declining from 3.6% to 3.2%, with the effective fiscal deficit tracked by FocusEconomics set to narrow from 6.2% to 4.7% (our panelists project a slightly larger effective fiscal deficit of 5.6% this year).
According to analysts at Fitch Ratings:
“The authorities will adopt a cautious approach to the withdrawal of fiscal policy support as they look to ensure the economy’s sustained recovery from the coronavirus shock. In line with the goal of supporting growth, the government’s planned fiscal consolidation in 2021 will be more modest than we had previously anticipated, although the starting position is also stronger thanks to robust land sales and lower-than-expected public spending last year. […] We expect the government to gradually place less emphasis on GDP growth targets in the coming years, in line with its growing focus on job creation and unemployment.”
Turning to the FYP, the government is aiming to spur domestic innovation and development in key sectors such as artificial intelligence, integrated circuits and biomedicine, in part by boosting R&D spending by at least 7% per year. The main objectives are to reduce reliance on foreign countries for key industrial components—particularly pressing given ongoing tensions with the U.S.—and arrest the sharp decline in productivity growth in recent years. However, this push could lead to increased capital misallocation, particularly given state firms are likely to play a larger role in development in coming years. Moreover, building end-to-end domestic supply chains could reduce efficiency and the quality of end products relative to foreign alternatives. Efforts to grab more market share in areas where developed economies currently dominate—such as semiconductors—could also raise international tensions.
The EIU gave their take on the FYP:
“[The FYP indicates] strong policy support for manufacturing in 202125, particularly as China aims to build on its existing competitiveness by building “complete” domestic supply chains in sectors ranging from technology to high-speed railways, power equipment, renewable energy and ship manufacturing. […] The FYP also emphasises the importance of retaining key industrial chains onshore, suggesting policy support to counter the ongoing exodus of certain industries, such as low-end electronics, to South-east Asia. In situations where relocation (or near-shoring) is unavoidable, China will aim to direct these activities to countries with which it enjoys stable trade relations; its membership in the Regional Comprehensive Economic Partnership may play a key facilitating role here. China’s aim of retaining its competitiveness in manufacturing will keep the country’s goods trade surplus substantial, particularly as its importance in global and regional supply chains deepens in 202125.”
During the Two Sessions, the government also touched on key structural impediments to growth such as low fertility and the Hukou system, which limits the rights of rural residents who move to cities. Li Keqiang stated the government would “work to achieve an appropriate” fertility rate, while the FYP aims to loosen restrictions on rural residents moving to most urban areas. That said, more comprehensive measures to boost fertility are still lacking, and implementation of the Hukou reforms will be key. In any case, China’s economic expansion is likely to gradually slow over the medium to long term as the factors which spurred past growth, such as huge capital accumulation, technology catch-up and favorable demographics, fade.
As analysts at Oxford Economics comment:
“The next decade will see much slower growth in China compared with the last 10 years. […] We expect TFP growth to be more modest in the future. The contribution of the labour supply to growth will be negligible given a declining working-age population from 2016 onwards.”