Abstract: This article discusses three key takeaways from the 2021 Government Work Report. First, under the 6% growth target, local governments will face much less pressure to stabilize growth and therefore have more room to deepen the comprehensive reform. Second, as policy directions become clear, external uncertainty will be the key factor affecting the pace of macro policies in China. Third, new policies rolled out to help China reach carbon emissions peak and carbon neutrality will bring structural effects.
There are three key takeaways from the 2021 Government Work Report (hereinafter referred to as the "Report"). First, a lower growth target provides room for reform. Second, with policy directions basically set, external uncertainty will be the key factor affecting policy pace. Third, the target for carbon emissions to peak will lead to the introduction of a series of new policies, and the ensuing structural effects deserve attention.
I. With the growth target set at 6%, the pressure for local governments to stabilize growth will drop significantly, which will provide room for deepening the comprehensive reform
In 2020, COVID-19 brought a huge shock to the global economy.
To ensure macroeconomic stability and complete the task of ensuring stability on six key fronts and maintaining security in six key areas, China adopted much more forceful macro policy than in the past few years. Thanks to the expansionary policies which played an important role in stabilizing the economy and the driving effect of export and real estate investment, the Chinese economy stabilized and began to pick up in the second quarter last year, registering an annual growth of 2.3% in real terms, making China the only major economy in the world to achieve positive growth.
Given the low base in 2020, there is little doubt that the 6% growth target can be achieved in 2021.
The Report makes it clear that there are two reasons for setting a lower target: first, maintain continuity of the growth target; second, provide room for further reform.
Local governments will face the lowest pressure to stabilize growth in 2021 in nearly a decade. This will provide ample room for advancing comprehensive reform.
For example, when the pressure to stabilize growth is high, local governments will be more dependent on land finance, which virtually increases the difficulty in establishing a long-term regulation mechanism for the real estate market. If local governments have less pressure to maintain growth, they can focus on structural adjustment, and more financial resources can be allocated to sectors that are more efficient, such as high-tech industries and green industries, thereby helping promote high-quality economic development.
II. With policy direction basically set, external uncertainty will be the key determinant of policy pace
In recent years, China has pursued flexible and appropriate macro policies which are more oriented towards improving quality and efficiency, and placed greater emphasis on foresight and fine-tuning in policymaking. In the past two months, the market has seen a lot of discussions around the policy statement of "avoid sharp turns".
The Report gave a clear answer:
In terms of fiscal policy, this year’s budget deficit rate is set slightly higher than the market expectation of 3%, but lower than that of last year. The quota for local government special-purpose bonds is slightly lowered from last year’s level, and special government bonds will no longer be issued. The overall fiscal deficit will shrink by about 1.5 trillion yuan compared with last year.
In terms of monetary policy, the Report states that “we will see that increases in money supply and aggregate financing are generally in step with economic growth in nominal terms.” From this statement, we may conclude that a M2 growth rate of about 10% is seen appropriate, at least there will not be much deviation from this rate. However, social financing growth rate of 13% may be too high a level.
"Keep the macro leverage ratio generally stable" implies an upper limit of the debt expansion rate of about 10%-12%.
Combining the above statements, we can conclude that credit expansion peaked in the fourth quarter of 2020. For 2021, the slowing down of credit expansion is a relatively certain direction.
External uncertainty is a key variable that determines the pace of macro policy this year. This uncertainty comes from both trade and finance.
The pace of global economic recovery is to a large extent determined by the progress of vaccination. But even in the best-case scenario, vaccines will be widely available only in developed countries.
Global economic recovery will influence the Chinese economy through exports, but via a different mechanism than before.
On one hand, a reviving global economy will produce greater international demand for exports from China;
But on the other hand, suppliers in developed countries will also recover from the pandemic’s blow. As a result, China will no longer enjoy the additional share of global export or at least part of the share that it had amid the pandemic, which will repress its total export. That means the export trajectory in 2020 will be reversed this year.
At the same time, the global financial market is seeing huge volatilities recently, while the conflicts between central banks and the market in developed countries are escalating, adding to the possibility of further financial turbulences going forward.
Given that external uncertainties could disturb economic recovery and financial stability at home, it’s critical that China implements macro policies at a proper pace with the directions given.
The Report indicates that policy rollouts in China will basically keep pace with its economic recovery. It stresses that the prudent monetary policies will be kept flexible, targeted and at a reasonable and appropriate level. This could mean there will be adjustments at any time. The market may find it hard to develop a stable expectation, and disagreements in the market risk aggravating asset price fluctuations.
III. New policies in support of achieving peak carbon emissions and carbon neutrality will bring structural effects.
Chinese President Xi Jinping announced the goal of reaching peak carbon emissions and carbon neutrality at the United Nations General Assembly last September, receiving considerable attention at home and abroad. The Report proposes “to draw up an action plan for carbon emissions to peak by 2030.”
It is highly possible that peaking carbon emissions and achieving carbon neutrality will become the goal and basis for drafting structural policies in the next 5 to 10 years.
Chinese ministries and local governments have made corresponding policy plans since the beginning of the year, unveiling a series of policy orientations.
The Ministry of Industry and Information Technology, for example, clearly stated at a news conference on January 26 that “to reduce steel production is an important step towards reaching peak carbon emissions and carbon neutrality” and announced the plan to “ensure year-on-year decline of steel production in 2021.”
This could mean an end to the decade-long continuous growth of steel production in China in 2021.
Provinces like Gansu and Inner Mongolia have raised the electricity prices for energy-intensive industries, while Shandong is accelerating reduction in coal-fired power.
Unlike macro policies, these policy actions could come with many structural effects.
Industries that are listed as energy-intensive or carbon-intensive would be subject to more restrictions on investment and financing, which might promote concentration in these industries. In order to reduce carbon emissions, output of industrial products might be subject to a new round of regulatory controls possibly as aggressive as the 2017 capacity cuts.
In the meantime, green financing, clean energy, energy conservation, and environmental protection may become trending topics in market. Therefore, we could expect more industrial policies to be released and potentials to be tapped in relevant industries and enterprises.
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