Politics

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NewsChina scours China’s latest annual government report for clues to the direction of macro-economic policies in 2021

By Xu Dawei Updated Jun.1

China released its yearly budget in the government work report delivered during the annual National People’s Congress (NPC) held in March. In 2020, China is perhaps the world’s only major economy to expand, posting GDP growth of 2.3 percent. 　

As the global economy is expected to gradually recover from the coronavirus pandemic, many are closely watching China’s economic policy for 2021, to which the annual government work report provides major clues. 　

GDP Growth

For the past several decades, China’s annual GDP growth target has been the figure to watch, as the country’s overall economic policy was primarily focused on the absolute growth of its economy. In 2020, given the impact of the pandemic, China did not release a specific GDP growth target for the first time in decades. Following the economic slowdown in recent years, China has downplayed the importance of GDP growth. As the government stressed the need to shift focus to quality development rather than quantity, many said the absence of a GDP growth target for 2020 could become the norm. 　

But in this year’s government work report, the annual GDP growth target reappeared, this time as “no less than 6 percent.” According to Jia Kang, chief economist at the China Academy of New Supply-side Economics, the return of a GDP growth target signals that China is falling back on pre-pandemic modes rather than continuing with its investment-driven development model.

“The absence of a GDP growth rate in 2020 was only due to the uncertainty posed by the global pandemic,” Jia said, “Given the enduring impact of the pandemic, China had to focus its policy on livelihood issues such as protecting and boosting employment.” 　

According to Shen Minggao, chief economist of GF Securities, this year’s 6 percent growth rate target is rather conservative, as it is widely projected that China’s growth rate could be much higher. 　

The International Monetary Fund (IMF) projected in April that China’s economy would grow by 8.4 percent in 2021, up 0.3 percentage points from its January forecast. 　

“The relatively low figure gives the government ample room for flexibility in its policies this year,” said Shen. 　

Zhang Liqun, a research fellow with the Development Research Center of the State Council, agreed. “China has set a bottom-line goal rather than an ambitious target, which suggests that the central government has adopted a rather prudent approach,” Zhang said. 　

According to Professor Liu Yuanchun, vice president of the Renmin University of China, achieving 6 percent GDP growth in 2021 would grow per capita income by 5 percent, nominal profits of enterprises by 7-8 percent, and government revenue by 5-6 percent. By Liu’s calculations, these figures would ensure the return of China’s macro-economy and its development momentum to pre-pandemic levels. 　

A job seeker at a women’s job fair for the services industry in Yinchuan, Ningxia Hui Autonomous Region, March 6, 2021

Monetary and Fiscal Policies

The government report said that China will “maintain the continuity, stability and sustainability” of its macro-economic policies. Experts believe that China will take a cautious approach to monetary and fiscal policies. 　

The report set the Consumer Price Index (CPI) target at 3 percent. Figures show that China’s CPI has hovered around 2-3 percent over the last 10 years. The only exception was in 2015, when a surge in food prices pushed the CPI to 5.4 percent. But as governments around the globe have adopted liberal monetary policies which are pushing up commodity prices in recent months, bringing inflation rates under control may be one of the greatest challenges in 2021. 　

“Compared to most advanced economies, China’s monetary policy will be relatively conservative,” Shen Minggao said. “But in a global environment of extremely liberal monetary policies, China now faces great uncertainty regarding the inflation rate.” 　

As for the fiscal policy, the government work report set the deficit ratio at 3.2 percent. According to Shen Jianguang, chief economist at JD.com’s fintech arm JD Digits, this is a balanced approach. “It’s lower than the deficit ratio of 3.6 percent last year, but higher than the 2.8 percent pre-pandemic level in 2019,” Shen said. 　

In the meantime, the central government will stop issuance of pandemic-related bonds in 2021, which means that central government bond supply will decrease from last year’s 4.1 trillion yuan (US$624b) to 2.75 trillion yuan (US$419b). 　

Bond issuance quotas for local governments fell from 4.75 trillion yuan (US$723b) in 2020 to 4.47 trillion yuan (US$680b). This is the first time since 2015 that China has lowered the quota for local government bonds, indicating that control of local government debt remains a policy priority. 　

The government work report also states that the central government will reduce its overall spending by cutting “non-essential expenditure.” 　

By comparison, the central government will increase transfer payments to local governments by 7.8 percent. The budget also appropriates 2.8 trillion yuan (US$426b) in direct payments from the central government to local governments. According to Shen, this move means that China’s policy priorities will continue to support employment and livelihoods at the grassroots level in 2021. 　

A worker in a factory which exports offshore wind power technology at Taicang Economic and Technical Development Zone, Jiangsu Province, February 8, 2021

Employment Goals

According to Liu Shijin, vice president of the Committee for Economic Affairs of the Chinese People’s Political Consultative Conference (CPPCC), employment figures will replace GDP growth rate as the top priority of China’s central leadership. In the work report, China said it aims to generate at least 11 million jobs in 2021 and maintain the official surveyed unemployment rate in urban regions at no more than 5.5 percent. 　

Despite the impact of the global pandemic, China created 11.9 million jobs in urban regions in 2020, while the official surveyed urban unemployment rate was steady at 5.2 percent at the end of 2020. But as the pandemic continues, China, like most countries around the globe, is facing the threat of widespread unemployment. 　

According to the Purchasing Manager’s Index (PMI) employment data released by the National Bureau of Statistics, China’s employment index has been below the 50 neutral mark since April 2020. Despite the economic recovery, the employment index dipped from 49.6 in December 2020 to 48.1 in February. 　

In Q4 2020, there were 169.6 million employed migrant workers, 2.7 percent (4.66 million) less than the same period the previous year. At the same time, wages for migrant workers increased by only 2.8 percent from last year, considerably lower than the 6 percent increase in 2019. 　

Zhong Wei, professor and director of the Research Centre for International Finance at Beijing Normal University, told NewsChina that employment in China can be measured by starting salaries and services consumption. Zhong said that while starting salaries have not changed in the last two years, service consumption such as dining and entertainment has declined, indicating a deteriorating job market. 　

According to Jia Kang, chief economist at the China Academy of New Supply-side Economics, the key to boosting the job market is supporting small businesses. The private sector generates an estimated 90 percent of employment, 80 percent of which is generated by micro, small and medium-sized businesses. 　

To boost employment, the government report included a new tax cut package for small businesses. For example, the value-added tax threshold will be raised to 150,000 yuan (US$22,800) from 100,000 yuan (US$15,200). Small and micro-businesses with annual taxable earnings under 1 million yuan (US$152,611) will be eligible for a 50-percent income tax reduction. 　

In a government meeting on March 31, Chinese Premier Li Keqiang announced the measures would go into effect on April 1 and would result in tax reductions of about 550 billion yuan (US$83.7b) in 2021. 　

But according to Guo Wei, deputy director of the State Council Research Office, the unemployment situation could worsen in 2021 as 15 million people are expected to enter the job market. The number of new college graduates alone will amount to about nine million. 　

“Generating 11 million jobs, which would restore the job market to pre-pandemic levels, is a real challenge as there are still a lot of uncertainties,” Guo said.　

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Resetting the Bar