China unveils new economic targets
The annual meeting of China’s National People’s Congress is being held in Beijing on 4-11 March. This year’s meeting is especially important not only because it is the first one since the covid crisis, but also because 2021 marks the first year of China’s 14th Five-Year Plan covering the period 2021-2025. As usual, the government’s GDP growth target attracted the most attention. According to premier Li Keqiang, this year’s growth target was set at ‘over 6%’, which appears to us very conservative. It seems the government may want to avoid large swings in its objectives for annual growth, especially in light of the extremely favourable base effect that will be evident this year. Given the slump in growth in 2020 (2.3% vs. 6.0% in 2019) and the resulting very favourable base effect, China’s growth in 2021 could be significantly higher than 6%. Our current central forecast, for example, is that Chinese GDP will expand by 9.3% in 2021, in large part due to the base effect.
Normalisation will be the theme of Chinese macro policies in 2021. On the fiscal front, the government has pledged that there will be no major change in policy. In other words, the decline in support will be moderate in order to avoid a fiscal cliff and be only a slight drag on growth in 2021. The People’s Bank of China (PBoC) has been normalising monetary policy since May last year when recovery started to gain traction. Interbank interest rates have risen close to pre-covid levels and growth in aggregate credit (total social financing) peaked at the end of 2020. We do not expect the PBoC either to hike or to cut its policy rate. Instead, it will likely mainly resort to liquidity management to fine-tune financial conditions.
The Chinese government is placing more emphasis on innovation over the next five years. For the first time the government has set a specific growth target for R&D expenditure, at over 7% per annum in the period 2021-2025. In 2021, the central government’s spending on fundamental research is expected to grow by 10.6%, according to Li.
The next five years will be the first stage of China’s energy transition since such President Xi Jinping’s announced the aim to achieve carbon neutrality by 2060. In line with this long-term commitment, China’s energy use and CO2 emission per unit of GDP are expected to decline by 13.5% and 18%, respectively, over the period 2021-2025, according to Li. Further details of China’s plans for carbon emissions will likely be released over the coming weeks. In our view, fighting climate change to achieve more sustainable growth will be an important theme for the Chinese economy in the coming years.