Author: Bert Hofman, NUS East Asian Institute

The annual gathering of China’s National People’s Congress (NPC) took place in March, at the usual time this year. Premier Li Keqiang’s speech and government documents presented showed confidence about past achievements. China’s management of the pandemic and its standing as the only major economy to achieve positive GDP growth in 2020, at 2.3 per cent, were high on the list.

Despite the cheer, the indicative growth target for 2021 was only a modest ‘more than 6 per cent’. This target would not require much growth until the end of 2021 because of the sharp drop in GDP in early 2020. Li Keqiang argued the target is not low and that this year’s focus is to consolidate China’s economic recovery. Setting hugely different growth targets year to year would only ‘disturb’ market expectations, he said.

GDP growth itself was de-emphasised in the 14th Five Year Plan (FYP). Unlike the past, no target for GDP growth over this plan period was presented. Instead, the plan announced a yearly target would be crafted annually ‘in line with the situation’.

Macroeconomic policy for 2021 is set for consolidation. The fiscal deficit as a share of GDP will aim some 3.6 percentage points below that of the 2020 budget, declining from a budgeted deficit of 11.4 per cent of GDP to a projected 7.8 per cent of GDP. The cut in deficit is less steep compared to the outcome of 2020, estimated to have been a deficit of 9 per cent of GDP because last year’s budget was underspent.

The headline number in the budget speech suggests a more modest consolidation, from 3.6 per cent of GDP in 2020 to 3.2 per cent this year. But this number has little to do with the government’s overall fiscal stance. The convoluted budget structure — with four separate budgets — does not help in communicating policy messages.

Li Keqiang also announced monetary policy that keeps aggregate financing in line with nominal GDP growth — in contrast to last year when such growth was to be ‘significantly above’ levels seen previously. Monetary policy will be less expansionary and China’s total debt-to-GDP ratio is projected to move sideways after rising by almost 25 percentage points in 2020.

The 14th FYP — discussed and approved at the NPC — centres around the ‘new development concept’ of dual circulation. President Xi Jinping first presented this idea in a politburo meeting in May 2020. It’s still evolving and opinions differ on implications.

Dual circulation, according to Vice Premier Liu He, emphasises ‘domestic circulation’ by increasing domestic demand, reinforcing domestic supply chains and promoting indigenous innovation, while still seeking further opening up and supply-side reforms. This has already been happening over the past decade.

Tensions with the United States and the post-COVID-19 global economic outlook have increased the perceived need to move towards a dual circulation approach. It can be considered a risk management strategy in case the external environment deteriorates further. The 14th FYP also included targets on food and energy security. ‘We will give priority to domestic circulation’, said Li Keqiang in his government work report. A concern is that dual circulation in the hands of local officials across China may simply become import substitution.

A critical link in the strategy is consumer demand. China’s high savings fuelled a strong investment rate, but intermediation through the banking system has been piling up debt. High investment also came with inefficiency and waste. Heavier reliance on consumption (and lower savings) is key then, but the 14th FYP offers little to address this. Pension and social welfare reforms, better health insurance and more equal development, as announced, could help but are also hard to do.

As part of the strategy, China announced its intentions to rely more on ‘indigenous innovation’ and aims for foundational technology breakthroughs, an area currently more dependent on foreign knowledge. It is in technology that Chinese companies were most vulnerable to actions taken by the US government under the Trump administration — measures yet to be reversed by the Biden team.

The 14th FYP makes an effort to reduce technological dependence. While the target on increases in research and development spending is modest, at 7 per cent growth, the plans are not. More details should follow in the forthcoming Medium and Long-Term Plan for Science and Technology 2021–35, but the 14th FYP is filled with initiatives and…

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