China’s government set a conservative economic growth target for this year, shifting its focus from recovery mode to longer-term challenges like reining in debt and reducing technological dependence on the US. The growth target was set at above 6%, well below economists’ forecasts, with the budget deficit expected to fall to 3.2% of gross domestic product, Premier Li Keqiang said yesterday at the opening of the National People’s Congress.
In sharp contrast to places like the US, where the Biden administration is trying to push through a new $1.9tn stimulus package, Beijing outlined a plan to normalise policy now that the pandemic is under control domestically and the economy has bounced back.
The target for 2021 stands in contrast to the 8.4% expansion that economists predict, allowing officials to focus on longer-term ambitions, like developing hi-tech industries and supporting consumer spending.
“A target of over 6% will enable all of us to devote full energy to promoting reform, innovation, and high-quality development,” said Li.
With the economy growing faster than its pre-pandemic rates in the final months of last year, the target can be met without any quarter-on-quarter growth for the rest of 2021.
“The government has set a more flexible economic growth target to leave room for structural reform and pandemic uncertainties,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong.
Beijing’s tech push was outlined in a new five-year plan covering 2021-2025, which calls for increased investment and research on cutting-edge chips and artificial intelligence. Spending on research and development is set to increase by more than 7% annually over the period.
China was the only major economy to expand last year and its V-shaped recovery alongside economic contractions in the US and elsewhere puts it on course to become the world’s largest by 2028, two years earlier than expected, according to projections by several banks including Nomura Holdings Inc.
“Setting the target more in line with the economy’s potential rate avoids the risk of a volatile target path as growth falls back to its slower long-term trend in the coming years.
This suggests that China is increasingly shifting its attention from pandemic recovery to managing the economy in more normal conditions”, says Chang Shu, chief Asia economist at Bloomberg.
Officials are worried about the build-up of debt and asset bubbles and have begun signalling a withdrawal of the monetary and fiscal stimulus unleashed last year.
“In forestalling and defusing risks in the financial sector and other areas, we face formidable tasks,” Li told thousands of delegates gathered at the cavernous Great Hall of the People in Beijing. He listed low consumer spending, unsustainable investment, lack of innovation and the debt-burdens of local governments as challenges for the economy.
The fiscal deficit remains above pre-pandemic levels, with spending weighted toward projects which “significantly improve the people’s wellbeing” such as renovation of old housing, public services such as health and childcare in smaller towns, and pension increases, said Li. “The government is seeing domestic consumption not picking up strongly enough, so they need to keep government spending going to offset the downside risks,” said Bo Zhuang, chief China economist at TS Lombard.
Beijing must grapple with cutting the piles of debt amassed by local governments and state-owned companies, while maintaining short-term economic growth. The central bank has been gradually withdrawing liquidity, but has pledged no sharp turn on policies.
Li said monetary policy will continue to be “prudent,” aimed at “preventing risks” as well as stabilising the exchange rate and overall levels of debt in the economy.
To help reduce debt, the government will transfer more funds to local governments to allow them to provide social services. The annual quota for bond sales by local governments was cut, though by less than forecast by analysts. Much of that will likely be used to roll over existing debts and resolve “hidden” liabilities which local governments hold through off-balance sheet vehicles.
“The gradual exit of fiscal support is a clear sign of no U-turn of macro policy,” Tommy Xie, head of Greater China research at Oversea-Chinese Banking Corp wrote in a note. “However, China’s intention to keep its macro leverage ratio stable may be the cause for more market volatility going forwards,” he said, adding that it’s a sign that room for further easing is limited.
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