【Economic Perspectives】China Government Work Report – Consolidate recovery and nurture new drivers

The 2021 Government Work Report (GWR) released on 5 Mar primarily sets out two themes of work this year 1) to solidify post-pandemic recovery in a stable and sustainable way; and 2) to promote new drivers for growth in the 14th five-year period, which were underpinned by scientific innovation, reforms and a stronger domestic market.

 

  • 2021 GDP growth targeted at “above 6.0%”. Previously, the 31 provincial and municipality governments announced their growth target for the year, all pegging at above 6.0%. We forecast the economy is likely to achieve ~8% GDP growth in 2021 given last year’s low base. The 6% target, in addition to specifying this year’s goal, also considers compatibility with growth targets in the 14th five-year period (i.e. “within reasonable range”). Other growth targets also resume normal as the economy recovers from COVID-19. New urban employment is to add 11 million and surveyed urban unemployment rate to stay within 5.5%, same as the goals in 2019. Grain yield target is mentioned for the first time in GWR’s primary targets, underscoring the importance of food security and agricultural development in the new stage.

 

  • Policy – from broad to structural and precise support. The government pledged to maintain “continuity, stability and sustainability” of fiscal, monetary and other policies. However, it is inevitable that it is gradually retreating from pandemic-era broad stimulus to post-pandemic structural and precise support.

 

  • Fiscal support came out a bit exceeding expectation in that 1) arranged deficit is RMB 3.57tn in 2021, only RMB 190bn short of last year’s but RMB 810bn more than deficit in 2019; 2) RMB 3.6tn of special local government bond will be issued, vs. RMB 3.75tn in 2020 and RMB. 2.1tn in 2019. 3) RMB 2.8tn special central budget will be transferred straight to local governments, vs. RMB 2tn last year. The majority of fiscal support gets extended in post-pandemic era and precise tax reduction is stepping up for small businesses and individual merchants, and for R&D expenditures. Overall fiscal policy remains more proactive than that in pre-pandemic years.

 

  • Monetary policy – flexible, precise and appropriate. Directly benefiting the real economy is the priority. M2 and TSF will grow in line with nominal economic growth and macro leverage will be stable. Inclusive loans for small businesses are planned to increase 30% for large commercial banks. These goals are the same as 2019’s.  While policy makers will avoid making U-turn on pledged monetary support, we think they are leaning against speculative asset price bubbles and financial risks.  

 

  • Growth drivers. 1) Technological innovation as the fundamental driver for quality growth. The GWR pledged R&D expenditure to grow at >7% CAGR in the 14th five-year period and central budget for basic research to increase 10.6% in 2021. Manufacturing firms are allowed to deduct 100% of R&D expenses before tax. 2) Enhance reforms to incentivize market participants; 3) Enlarge domestic demand and explore domestic market.
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