Opinion: Takeaways From China’s 2021 Government Work Report
Shen Jianguang is a vice president at JD.com and the chief economist of JD Technology Group.
The 2021 Government Work Report is not only the first one written in the context of China’s emergence from Covid-19 and the normalization of its economy, but also an important channel for observing China’s strategic initiatives over the next five years, as 2021 is the start of the 14th Five-Year Plan period.
The following eight highlights are worthy of our attention:
First, the 2021 Government Work Report sets growth target at no less than 6%. The report, which Premier Li Keqiang delivered on Friday at the fourth session of the 13th National People’s Congress, indicates that the government’s focus has shifted toward high-quality GDP growth. Last year, the Chinese government scrapped the annual economic growth target mainly because of great uncertainty created by Covid-19. This year, with significant progress made in containing the pandemic and a steady rebound in the domestic economy, the report reintroduces the GDP target to help guide market expectations. We believe that there are three main reasons why the report sets the target at a relatively conservative level of “6% and above” (considering the lower base of last year, this year’s growth is likely to be 8% to 9%).
First, there is still great uncertainty in the domestic and overseas economies, so the “Six Stabilities” and “Six Guarantees” are still important policy objectives. Second, it indicates that the government will not deliberately pursue high growth. The goal has shifted from the pursuit of speed to the pursuit of quality. Third, a certain level of economic growth must be maintained to ensure the smooth transition to the economic growth targets in the foreseeable future so that China can achieve its development goals of joining the ranks of moderately developed countries in 2035.
Second, fiscal policy remains vigorous and proactive. The report follows the fiscal policy stance of last year’s Central Economic Work Conference, which is: “proactive fiscal policy must improve quality and efficiency and become more sustainable.” This year, the deficit rate is set at around 3.2%. Special government bonds to fight the pandemic will no longer be issued, while new revenue bonds worth 3.65 trillion yuan will be issued. On the surface, the policy is not as vigorous as last year, but its actual strength has not weakened.
First, the fiscal deficit rate of 3.2%, although lower than last year’s 3.6%, is higher than the level of 2.8% in 2019, the last normal year before the pandemic, and new revenue bond issuance is only 100 billion yuan less than last year. Second, this year’s fiscal revenue growth has recovered and fiscal expenditure is likely to increase over last year, so the support for protecting employment, people’s livelihood and market participants will not be reduced. Third, the establishment of a direct fiscal transfer mechanism with the inclusion of the 2.8 trillion yuan central government fund shows that the central government is worried about the fiscal sustainability of governments at the municipal and county levels. The proactive stance reflects the general tone of the macro policy, i.e. “maintaining necessary support and not making sharp turns.”
Third, the key focus of the monetary policy is further lowering actual lending rates. Given various considerations, monetary policy this year will remain accommodative. The government work report proposes that “the focus this year is to further lower actual lending rates and continue to encourage the financial system to give up some profit in order to support the real economy.” Meanwhile, “the growth of money supply and total social financing must match the nominal economic growth rate.” Taking into account that overseas central banks are still easing, tight fiscal constraints will be the new normal in China, and investment will increase everywhere in the first year of the 14th Five-Year-Plan period, monetary policy is expected to remain supportive. Structurally, loans to the real estate industry will be curtailed while more investment will be devoted to small and midsize businesses, poverty alleviation, manufacturing, rural revitalization and green finance.
Fourth, the report sets out the strategy to further boost domestic demand, create synergy between consumption and investment, and achieve a better dynamic balance between supply and demand. In the context of the strategy publicized in July to accelerate a new, “dual circulation” development model, the report laid out key measures to expand consumption and enhance effective investment. The first measure is to stabilize and expand consumption, such as “improving urban and rural logistics system, speeding up e-commerce, extending express delivery services to rural areas, expanding suburban and rural consumption,” “developing service consumption such as health care, culture, tourism and sports,” and “using ‘Internet+’ to promote broader and deeper integration of online and offline services.” The second measure is to expand effective investment, such as “prioritizing construction already in progress and reasonably expanding the use of proceeds of new revenue bonds,” “promoting new infrastructure, new urbanization and major projects aimed at improving people’s livelihood,” and “investing more to improving public services.”
Fifth, the report emphasizes science and technology innovation, encourages research and development (R&D) investment, and calls for the construction of e-government.
Last year’s Central Economic Work Conference highlighted the strategic supporting role of “science and technology innovation.” This year’s report proposes deep integration of science and technology innovation and the real economy, and supports the construction of international and regional science and technology innovation centers in places where conditions are favorable.
The report supports enterprises to increase investment in research and development and continues to implement the policy of the 75% super deduction rate for research and development expenses. Developing the industrial internet, building more common technology R&D platforms, increasing the construction of 5G networks and gigabit optical networks, enriching application scenarios, strengthening the construction of e-government, establishing and improving the coordination mechanism for sharing government data, and promoting the expansion of the use of electronic certificates and national interoperability and mutual recognition are also covered in the report.
Sixth, the report aims to improve people’s livelihoods and well-being, fully implement the rural revitalization strategy, and increase farmers’ income. In terms of real estate, the report still upholds the view that houses are for living not for flipping. Its emphasis on stable land prices, stable housing prices and stable expectations, as well as solving the acute housing problems in big cities shows that the government is still determined to suppress the real estate bubble. In terms of health care, the report mentions deepening the comprehensive reform of public hospitals, expanding the pilot program of national medical and regional medical centers, and improving the capacity of health care providers at the county level. Meanwhile, it supports private hospitals and promotes the “Internet + health care” development. The report promotes the pooling of pension funds nationwide and the development of third-pillar pension insurance.
Following the completion of the battle against poverty during the 14th Five-Year Plan period, the comprehensive implementation of the rural revitalization strategy has become the focus. The government report also mentions rural revitalization several times, such as increasing the share of land sale proceeds used for agriculture and rural areas. It also aims to improve basic public services and public infrastructure in rural areas to promote the integrated development of urban and rural areas.
Seventh, the report talks about environmental governance, green transformation, peaking carbon emissions and carbon neutrality, as well as promoting economic growth and high-quality development.
The goal of achieving a “carbon peak by 2030 and carbon neutrality by 2060” marks the acceleration of China’s green transformation, which creates thematic investment opportunities in the medium and long term. The report mentions further optimization of the industrial structure and the energy structure.
It promotes the clean and efficient use of coal, the development of renewable energy sources, and the active and orderly development of nuclear power while ensuring safety. It proposes to expand the scope of businesses that enjoy preferential corporate income tax policies such as environmental protection and energy and water conservation, promote the research and application of new energy-saving and environmental protection technology, equipment and products, and grow the energy-saving and environmental protection industry. Speeding up the construction of a national energy-use rights and the carbon emissions trading market can better control the amount and intensity of energy consumption. The financial industry will implement special policies to support green and low-carbon development and provide emission reduction support tools.
Eight, the report highlights the commitment to maintaining a high level of openness, stabilizing and improving the quality of foreign trade and foreign investment, and deepening multilateral and regional economic cooperation.
In 2020, under the coronavirus pandemic, China’s exports actually grew rose against the odds because they filled the supply gap in the global industrial chain. Meanwhile, China actively promoted opening up to the outside world and made progress beyond expectations in bilateral and multilateral economic and trade agreements. This boosted foreign investors’ confidence in China. Therefore, foreign direct investment (FDI) surged despite the headwind and China became the largest FDI destination in the world.
In 2021, against the backdrop of greater uncertainty in China-U.S. relations, China will continue its opening policy. The report mentions promoting the early entry into force of the Regional Comprehensive Economic Partnership, signing the China-EU investment treaty, accelerating negotiations on the China-Japan-Korea free trade agreement, and considering joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Increasing imports of high-quality products and services as well as encouraging the development of new businesses and business models such as cross-border e-commerce is also covered in the report.
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
Read more about Caixin’s coverage of China’s Two Sessions 2021.
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