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Two Sessions special: China takes cautious approach to 2021 GDP growth, cuts budget deficit target and local government bond quota

Beijing_Peoples Hall_Two Sessions_575px_adobe_28May20
By Addison Gong
05 Mar 2021

In this special round-up on China’s annual Two Sessions parliamentary meeting, the central government sets a conservative annual growth target for the Chinese economy in 2021, signals a modest tightening in fiscal and monetary policies, and plans to broaden regulatory oversight of the fintech sector.

China kicked off its week-long “Two Sessions” annual parliamentary meeting on Thursday. On Friday morning, premier Li Keqiang delivered the government work report for deliberation at the 13th National People’s Congress (NPC).

In the report, China set an annual economic growth target of “above 6%” for 2021 — a number viewed as a defensive target by economists and analysts.

The Chinese economy delivered a 2.3% year-on-year growth in 2020, though no numeric target was set last year after the outbreak of the Covid-19 pandemic.

The new 2021 target is “a low hanging fruit” because of a low base in 2020, and growth could be 9.2%, said Kevin Xie, senior Asia economist at Commonwealth Bank of Australia, in a Friday afternoon note.

A yearly rate of around 6% for economic growth would be “pretty low”, said a Friday research note from BNY Mellon Investment Management before the official number was announced. The firm’s senior sovereign analyst Aninda Mitra forecasts an 8.4% GDP growth this year, and an around 1.6% rise in inflation.

Liu Ligang, chief China economist at Citi Research, had expected the target to be 7% or above in a note earlier this week.

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The growth target for the consumer price index — a gauge for inflation — is 3%, higher than the 2.5% recorded last year.

Citi’s Liu said earlier this week that the CPI inflation ceiling could be lowered to 3% from last year’s target of 3.5%.

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Beijing aims to create 11m new jobs and for the unemployment rate to be around 5.5% by the end of 2021. The surveyed urban unemployment rate was 5.2% at the end of 2020. Last year, there were 11.86m new jobs created, versus the 9m target.

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The government plans to narrow its 2021 budget deficit to 3.2% of GDP, from a previous target of above 3.6%. It will not issue more special treasury bonds to fight the pandemic, after Rmb1tr of such issuance last year.

This year’s local government bond quota has been lowered to Rmb3.65tr from the Rmb3.75tr last year. The official figure defied some market rumours of a 20% drop in quota. The limit for local government issuance was set at Rmb2.15tr in 2019.

“The announced fiscal policy targets imply a modest rather than sharp tightening,” said CBA’s Xie, pointing out that the lower 3.2% budget deficit is still the second highest in recent years, and the new local government bond quota is much higher than what was assigned in 2019.

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Li said Beijing will continue to improve and implement tax cuts to “lend a helping hand” in “restoring vitality” in the Chinese market.

More support measures were announced for small and individual businesses. To encourage innovation, companies will continue to get an extra 75% tax deduction on their research and development expenses.

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China will keep its “prudent” monetary policy targeted, flexible and appropriate. This year’s money supply and total social financing growth should be largely in line with nominal GDP growth, the liquidity “reasonably ample”, the macro leverage ratio stable, and the renminbi exchange rate “basically stable”, according to the government work report.

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Beijing also aims to further help small and micro-sized enterprises to raise funding. It will allow these companies to continue deferring loan principal and interest payments, while increasing support through the central bank’s relending and rediscount programme.

Large commercial banks have been told to provide at least 30% more loans to small businesses this year, having already boosted their lending by 50% year-on-year in 2020.

China is guiding its financial system to continue capping their profit growth to further support the real economy and lower the cost of borrowings. Financial institutions had been instructed to forgo Rmb1.5tr in profits last year.

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China’s opening up policies will be implemented “with a wider scope, in broader areas and at a deeper level” this year, Li said. The government vowed a stable development in international trade, to shorten the foreign investment negative list, gradually open up the services sector, and release the negative list for cross-border trade in services.

China will ensure fair competition among domestic and foreign companies, protect the legitimate rights of foreign firms, and welcomes more foreign investments.

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The government has said it will deepen domestic reforms, including at state-owned enterprises. It will step up anti-monopoly work and prevent the “unruly expansion” of capital and unfair competition.

Chinese regulators plan to continue to help recapitalise smaller banks and strengthen their corporate governance. They will also steadily push forward the implementation of a registration-based system for domestic fundraising, improve the delisting mechanism onshore as well as bond market infrastructure, and create more funding avenues for Chinese institutions.

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Beijing will also increase regulatory oversight of financial holding companies and financial technology, and make sure financial innovation has prudent supervision. Systemic risks in the financial sector must be prevented, the government work report said.

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The government work report touched on initiatives such as Belt and Road and bilateral, multilateral and regional economic co-operations. These include the signing of the Comprehensive Agreement on Investment between China and the European Union, and negotiations for the China–Japan–South Korea Free Trade Agreement. Beijing is also actively considering joining the Comprehensive and Progressive Agreement for Trans‑Pacific Partnership.

Li said China is willing to develop the Sino-US relationship around economy and trade based on “mutual respect”. But he warned against foreign involvement in issues relating to Taiwan and the special administrative regions of Hong Kong and Macau.

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The country has further emphasised sustainable development and a green transformation onshore. China vowed to “vigorously develop” new energy sources including nuclear power, and has set a target for 70% of heating in northern China to come from clean energy.

The government will work around its goal to reach ‘carbon neutrality’ by 2060, including forming a working plan for the country to reach peak carbon dioxide emissions by 2030. It will come up with policies to increase financial support in green and low-carbon development.

As part of the 14th five year plan, which will also be deliberated by the NPC, China will explore the development of the ocean economy.

By Addison Gong
05 Mar 2021