China ENG Macro Analysis

China: Key takeaways from the Government Work Report for 2021 (政府工作报告)

Premier Li Keqiang first outlined the measures taken by the Chinese government in the context of the Covid-19 pandemic whose origin is still unclear but whose first outburst has been witnessed in Wuhan, China.

In the face of the pandemic, and in accordance with Party guidelines, the State has formulated and implemented macroeconomic policies which have stabilized the Chinese economy. This included the gradual implementation of large-scale tax and fee reductions, combined with institutional arrangements, which represented altogether a total fiscal support of 2.6 trillion yuan in 2020, including 1.7 trillion yuan of waved social insurance premiums. An additional 2 trillion yuan of fiscal funds, which were directly allocated by the central government to provincial governments, cities and rural counties

The government has also directed the large commercial banks to increase loans in a targeted manner and lower interest rates, postpone repayment of principal and interest for loans to small, medium and micro enterprises, and to increase inclusive loans to small and micro enterprises by more than 50%, and transfer 1.5 trillion yuan in profits from the financial system to the real economy. As a result, the economic recovery was better than expected. The annual GDP grew by 2.3%. The government acquired more experience in macro-control and achieved more for a reasonable cost.

The priority has been given to the stability of employment and people’s livelihood. This entailed the creation of 11.86 million new urban jobs in 2020 [significantly higher than the 9 million new jobs target set in March 2020], and the reduction of the surveyed unemployment rate in cities and towns nationwide to 5.2% in December 2020, down from a (very relative) peak of 6.5% in February 2020.

The government is set to “unswervingly promote reform and opening up”, and further move in the direction of a market-oriented allocation of production factors. The government is also intent to “vigorously promote technological innovation and accelerate the pace of industrial transformation and upgrading.

While reaffirming the results achieved in the fight against the pandemic and the attainment of the previously fixated development targets, the Premier also acknowledged the prevailing difficulties and challenges.

Indeed, “MSMEs and self-employed individuals are still finding the going tough, and the pressure in maintaining stable employment is mounting. Our innovation capacity in key areas needs to be improved. Some local governments have serious budgetary deficits. In forestalling and defusing risks in the financial sector and other areas, we face formidable tasks. We still have a long way to go in protecting the environment.

14th Five year plan priorities

The priorities and targets for the 14th five year plan over 2021-2025 have been fixated as follow:

  • Improving the quality and effectiveness of development and maintaining sustained and healthy economic growth: keep major economic indicators within an appropriate range, set annual targets for economic growth in light of actual conditions, ensure that overall labor productivity grows faster than GDP, keep the surveyed urban unemployment rate within 5.5 percent, and keep prices generally stable.
  • Pursuing innovation-driven development and accelerating modernization of the industrial system: China’s R&D spending will increase by more than seven percent per year, which is expected to account for a higher percentage of GDP
  • Creating a robust domestic market and fostering a new development pattern: put in place frameworks to effectively expand domestic demand, boost consumer spending across the board, and unlock the potential for investment, thus accelerating the establishment of a complete system of domestic demand
  • Advancing rural revitalization across the board and improving the new urbanization strategy: move faster to grant permanent urban residency to people who move to cities from rural areas, and raise the percentage of permanent urban residents to 65 percent of the population.
  • Improving regional economic structures and promoting coordinated regional development: promote the coordinated development of the Beijing-Tianjin-Hebei region, the development of the Yangtze Economic Belt and the Guangdong-Hong Kong-Macao Greater Bay Area, integrated development in the Yangtze River Delta, and ecological protection and high-quality development in the Yellow River basin. Build Xiongan New Area to a high standard.
  • Advancing reform and opening up across the board and bolstering the momentum and vitality of development: modernize fiscal, taxation, and financial systems, and improve government capacity to conduct economic governance. In addition, this entails the promotion of the BRI, and building a globally oriented network of free trade zones.
  • Promoting green development and ensuring harmony between humanity and nature: Energy consumption per unit of GDP and carbon dioxide emissions per unit of GDP will be reduced by 13.5 percent and 18 percent
  • Improving people’s wellbeing and striving for common prosperity: the average number of years of schooling among the working-age population will rise to 11.3 and the multi-tiered social security system will be improved, with coverage of basic old-age insurance reaching 95 percent of the population.

Major tasks for 2021

The main projected targets for development this year are as follows:

GDP growth of over 6 percent  over 11 million new urban jobs
– Surveyed urban unemployment rate of around 5.5 percent

– CPI increase of around 3 percent
Deficit-to-GDP ratio for the year at around 3.2 percent,
– steady increases in both the volume and quality of imports and exports
–  a basic equilibrium in the balance of payments
–  steady growth in personal income
–  a further improvement in the environment
–  A drop of around 3 percent in energy consumption per unit of GDP
–  a continued reduction in the discharge of major pollutants
–  grain output of over 650 million metric tons

The government is poised to ensure “the continuity, consistency, and sustainability of macro policies” to keep the major economic indicators (i.e. GDP growth, employment, and CPI) within an appropriate range around the aforementioned targets. This includes avoiding “sharp turns in policy”. [a discrete message to the Chinese Tech sector and to investors?]

On the fiscal policy level, non essential current government expenditures will be further reduced while tax reductions and transfers to targeted beneficiaries will be maintained.

General transfer payments to local governments will be increased by 7.8 percent, which is significantly higher than last year. 2.8 trillion yuan of central government funding, a figure much larger than last year, will be allocated directly to prefecture- and county-level governments.

On the monetary policy level, the government is looking to “increases in money supply and aggregate financing are generally in step with economic growth in nominal terms, maintain a proper and adequate level of liquidity supply, and keep the macro leverage ratio generally stable.” The RMB exchange rate is also expected to remain stable at an adaptive, balanced level.

Banks will be encouraged to increase credit loans and first-time loans. Pay-as-you-go lending models will be extended and more funds will be channeled into scientific and technological innovation, green development initiatives, micro and small enterprises, self-employed individuals, and new types of agribusiness. Inclusive loans to micro and small businesses by large commercial banks will increase by over 30 percent this year.

The government intends to “improve the regulation over deposit rates, further lower loan interest rates in real terms, and continue to guide the financial sector in giving more to the real economy.”

The reform to establish a registration-based IPO system will be advanced, alongside making delisting a normal practice, and stepping up development of the bond market, so as to better exert the role of multi-level capital markets and open up more financing channels for market entities.

As for the market-based reforms, the government is set to streamline administration and cut the red tape by separating operating permits from business licenses and reducing the procedures, documents, and time required in conducting government review of applications made by enterprises.

Regarding the Tech sector and the Internet, the government vows to “advance the Internet plus regulation model to enhance our capacity for conducting regulation” and carry out regulation in an impartial way to ensure that well-performing businesses succeed in market competition and those which are poorly run are eliminated.

More specifically, the state “supports platform enterprises in pursuing innovative development and enhancing international competitiveness, while ensuring that their business operations are well-regulated in accordance with the law.” But it will “step up efforts against business monopolies and guard against unregulated expansion of capital, and ensure fair market competition.”

In addition, it is stated in the report that the the government will “strengthen regulation over financial holding companies and financial technology to ensure that financial innovations are made under prudent regulation.

In the field of R&D and innovation, the Central government will increase expenditures on basic research by 10.6 percent. It will grant an extra tax deduction of 75 percent on enterprises’ R&D costs, and will raise this to 100 percent for manufacturing enterprises.

Consumption of services such as healthcare – including through the development of private hospitals, and promote well-regulated growth of Internet Plus Healthcare initiatives -, culture, tourism, and sports will be promoted.

Use the Internet Plus model to promote integrated development of online and offline businesses in more fields and create new forms and models of business, thus providing more convenient and satisfying services, while encouraging platform companies to reduce their service fees as appropriate.

3.65 trillion yuan of local government special-purpose bonds will be issued, with priority given to funding for key projects already under construction. The central government will earmark a total of 610 billion yuan for investment in its budget.

The negative list for foreign investment will be further cut. China will actively consider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

An action plan will be drawn for carbon emissions to peak by 2030