Two Sessions preview
1. Two Sessions Preview
March Madness is upon us – and we ain’t talking basketball.
No, no – we are talking juicy, high-level, rip-roaring Chinese government meetings, baby!
That’s right: The annual meetings of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Congress (CPPCC) – colloquially known as the Two Sessions – kick off next week.
- The CPPCC will start things off with a plenary session on March 4.
- Then the real action will begin on March 5 – when Premier Li Keqiang will deliver his annual Government Work Report (GWR) to the NPC.
- The balance of the Two Sessions will go on until around March 15.
To help our readers steel themselves for the upcoming bacchanal of government policy initiatives and target setting, we offer this special edition of China Markets Dispatch.
- Our goal is to provide a framework of things to watch for over the next two weeks – for companies, investors, and foreign government officials (aka the Trivium readership).
Get smart: The 2021 Two Sessions carries even more import than usual, as it is the first year of the new phase of China’s development.
We’ll explain exactly why that matters later in this note.
2. One target to rule them all
The Two Sessions will be chock full of long-term policy initiatives – with the official unveiling of the 14th Five-Year Plan being perhaps the most consequential (more on that later).
But equally important will be the short-term policy setting that will guide macroeconomic policy making over the next 12 months.
And that’s where we start.
First up: The annual GDP growth target.
What we are hearing: Our best intel indicates that senior officials will decline to set an official GDP growth target for the second consecutive year.
Why’s that? While the leadership feels confident in the economy trajectory – and is overall quite content with the post-pandemic recovery so far – there is still a lot of economic uncertainty.
- For Chinese leaders, it’s better to drop the target altogether than to set a target they’re not sure they can hit.
Some context: Over the past several weeks there has been a raging debate in Chinese policy circles around what types of new economic targets could replace the GDP target.
- Most suggestions center around measuring quality of growth, rather than quantity.
Get smart: The lack of a growth target will signal caution on the part of Chinese policymakers – underscoring their concern about overheating the economy and reigniting financial volatility.
3. A negative fiscal impulse
On the short-term macro font, the most important policy setting to watch will be on the fiscal side.
Some context: Over the past two years, China’s macro policymakers have leaned heavily on the fiscal lever to support growth.
- This has marked a sea change in macroeconomic management – as the traditional playbook entailed pumping up monetary growth to fuel investment.
But after the fiscal blowout of 2020, the new mantra is all about achieving “policy normalization.”
The breakdown of key fiscal channels:
- The on-budget fiscal deficit is set to be reduced to 3% of GDP – from “3.6% or more” in 2020.
- The local government Special Purpose Bond (SPB) program will be significantly scaled back – from a RMB 3.75 trillion quota in 2020, to something more like RMB 3 to 3.5 trillion this year.
- The Special Treasury Bond program looks set to evaporate altogether – this rare facility provided RMB 1 trillion of central government financing last year, but will likely go unused in 2021.
Get smart: As we’ve written regularly in recent months, officials were disappointed with the efficacy of SPBs in 2020 – but are unsure what to replace them with.
Get smarter: The fiscal retrenchment will slow infrastructure spending, which was a key growth driver in 2020.
4. There’ll be no messing with monetary policy
If you’re looking for excitement from the Two Sessions – and frankly, who isn’t – you’re not going to find it in monetary policy.
Some context: China’s financial regulators have been selling a pretty consistent message on that front for months now, and they’re not going to tweak it just to generate headlines for the big event.
What is that message, I hear you ask? The Cliff Notes version goes something like this:
- Normalization of monetary policy is the priority, but it can’t come at the expense of the nascent economic recovery.
- That means gradually tightening liquidity conditions while offering targeted support to struggling sectors of the economy.
The People’s Bank of China is especially wary of having anyone mess with its messaginggiven how proud it is of the progress it’s made in improving communication with the market.
- Notably, it attributes its ability to tighten liquidity conditions prior to Chinese New Year to having sufficiently educated the market about its intentions.
The essence of its communication strategy seems to be constant reiteration of its position by central bank officials in public forums, with change coming gradually and incrementally.
- The Twp Sessions is not the forum to mix things up.
Get smart: Any change to the monetary policy mantra at the Two Sessions will be noteworthy. But don’t hold your breath.
5. Kicking up consumption
Another key macro-policy setting to watch in the Government Work Report will be any guidance that central authorities offer to support consumption.
Some context: Consumer spending continues to be the laggard in the post-pandemic economic recovery.
- While heavy industry and manufacturing have snapped back to normalcy – consumers have remained cautious.
More context: As we’ve covered regularly over the past few months, this situation is leading to a supply-demand mismatch, causing inventory build across the economy, and threatening the sustainability of the recovery.
- Authorities need to find a way to unleash consumption to pick up slack from industrial production and real estate investment – which have powered the recovery so far, but are starting to falter.
The problem: Central authorities have been MIA when it comes to consumption-boosting policies over the past 12 months – preferring to leave it to localities.
- One of the few policy moves we’ve seen was an incentive program to juice auto and small appliance purchases – primarily for rural households – offered by the National Development and Reform Commission in January this year.
What to watch: If central authorities were to signal more aggressive support for consumers (finally!) in the Government Work Report, it would make us much more bullish on the 2021 economic outlook.
6. A cornucopia of financial reform
With so many financial regulators, bank chairmen, and fintech executives present during the Two Sessions, there’s always plenty of talk about the financial sector.
We expect to hear:
- Tech executives telling journalists how much they support greater government oversight of fintech.
- Local officials saying that they welcome digital currency and blockchain experimentation in their localities.
- Bank executives promising to help small firms.
We’ll also look for:
- Specific policy measures that sometimes sneak into the finance section of the Government Work Report – making it a far more interesting space to watch than monetary policy.
But with regulators having already lined up a jammed-packed dance card for 2021, there’s not much space for new initiatives.
The regulators’ agenda already includes:
- Advancing the development of green finance
- Reining in fintech
- Pushing forward the digital currency
- Making capital markets more market oriented, risk sensitive, and open to foreign investment
- Bolstering Party influence in banks
- Recapitalizing banks
- Developing market-based interest rate benchmarks
- Getting more credit to small firms
Get smart: One thing to watch for are promises of greater opening to foreign investment in China’s capital markets – and maybe even (dare we hope?) some tangible measures.
Get smarter: The US financial sector remains Beijing’s most reliable ally in Washington. A bit more opening is an easy way to keep it onside.
7. I demand you supply me with demand
Global trade is another top-of-mind concern for policymakers heading into the Two Sessions.
Yesterday, we told you about a Ministry of Commerce (MofCom) presser where officials outlined key policy goals for 2021 (see yesterday’s China Markets Dispatch).
- These priorities are likely to reappear in the Government Work Report.
ICYMI: MofCom planned to boost trade by:
- Increasing policy support for exporters
- Optimizing supply chains for foreign trade
- Growing export markets
- Reducing barriers to foreign investment
- Promoting new business patterns and models of foreign trade
MofCom also envisions a bold new role for ecommerce in:
- Raising consumption
- Empowering small and medium enterprises
- Boosting rural incomes
- Expanding foreign trade
And China wants to boost its multilateral trading cred by:
- Considering joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
- Promoting reform of the World Trade Organization
- Expanding bilateral trade with Belt and Road countries
And – oh yeah – fixing strained trade relations with the US through increased dialogue.
Get smart: While trade skepticism is fluorishing in the West, Beijing remains very pro trade.
Get smarter: Beijing’s got the goods, but in the age of COVID, global demand may be in short supply.
8. Let’s get structural
Up till now, we’ve covered the short-term macroeconomic policy targets that Trivium readers should look for when the Two Sessions kick off next week.
But as we mentioned at the outset of this note, there will also be plenty of structural, long-term policy items set forth at the meetings.
The most important: The release of the 14th Five-Year Plan (FYP).
- The plan will outline key policy priorities and targets for the 2021-2025 period – along economic, social, government, and political lines.
- The plan will also lay out broad goals for the next 15 years.
In the entries below, we highlight some key themes that officials have indicated will imbue the FYP, including:
- Common prosperity
- Technological capability
- Environment and renewable energy
- Rural issues
Get smart: The 14th FYP will set the backdrop for all policy decisions over the next five years.
9. A path to common prosperity
Pay attention comrades!
Xi Jinping is looking to put the Communist back in the Communist Party of China.
What we’re talking about:
- In recent months, Xi Jinping has been talking a lot about the need to make progress on achieving “common prosperity.”
- Achieving common prosperity is a key component of Xi’s economic philosophy, the New Development Concept (see February 1 Tip Sheet).
This is pretty radical stuff: Xi is saying that the Deng mantra of “let some get rich first” is no longer applicable. Instead, the Party needs to pay more attention to how wealth is distributed in society.
In speeches about common prosperity, Xi has identified three issues that need to be dealt with:
- Regional disparities
- Urban-rural disparities
- Income inequality
The big question: What does this mean in practice?
That’s what we are hoping to get answers on at the Two Sessions.
What to watch: We guarantee that the common prosperity rhetoric will be florid. But what we want to see are concrete measures to achieve it; in particular, will there be hard targets related to reducing income disparities?
Get smart: The short-term impact of the common prosperity drive will be minimal. But over the medium-term, this is likely to have a large impact on China’s macro outlook.
10. Innovation: easier said than done
We think this goes without saying, but innovation will be highlighted prominently in both the Government Work Report and the 14th Five-Year Plan (FYP).
We know this because:
- Xi Jinping has repeatedly emphasized that China’s ability to innovate will determine its fate.
- The Party enshrined innovation as economic priority No.1 for the first time at the fifth plenum in October.
For the near term, the focus is on developing core technologies – aka bottleneck techs – to reduce the danger of foreign countries cutting off key supplies.
- These include 5G, semiconductors, AI, and biotech among others.
What to watch: Will other technologies be designated as “core?”
Question: How exactly do policymakers plan to boost innovation?
Answer: Probably by doing what they do best – throwing money at RD projects.
That’s harder than it sounds: China has missed its RD spending targets for the last four FYPs running.
We’ll probably see the use of other greatest policy hits such as:
- Production subsidies
- Consumption subsidies
- Cheap financing
- Tax breaks
Other things to watch in this space:
- Will policymakers look to refine the state-led venture capital funding model?
- Can policymakers find effective means for enticing the private sector to make breakthroughs in areas of national strategic importance?
11. Environmental protection drive keeps going
We expect just about zero big surprises on the environmental protection front.
Why’s that? Because Xi already did his big environmental protection reveal last fall.
ICYMI: In a speech to the UN General Assembly on September 23, Xi announced that China will:
- Peak carbon emissions by 2030
- Achieve carbon neutrality by 2060
And the plans for implementation have already been fleshed out.
By 2030, China will:
- Lower carbon dioxide emissions per unit of GDP by more than 65%, compared to the 2005 levels
- Increase the share of non-fossil fuels in its primary energy consumption to around 25% – up from a previous target of 20%
- Reach over 1,200 GW installed electricity production capacity from a combination of wind and solar power – almost tripling the capacity reached by Q3 2020
So what should we expect from the Two Sessions?
- The 14th FYP should offer more details on mandatory targets for measuring the progress of emission cuts and energy efficiencies.
Get smart: The 2030 goals for environmental protection will drive not only environmental policy in the coming years, but that of energy and industry as well.
Get smarter: Environmental impact used to be but an afterthought to economic policymaking. Now it’s front and center.
12. The next growth engine
We expect agriculture and rural development policy to feature higher than usual on the priority list at this year’s Two Sessions.
- Beijing spent the past eight years on an anti-poverty campaign, one of “three tough battles” (along with environmental protection and eliminating financial risks) at the top of the policy agenda.
- Now that Xi has declared “mission accomplished” on poverty alleviation, it’s time for the next big thing (see yesterday’s Tip Sheet).
Xi’s “rural revitalization strategy” looks to be next up.
- The most recent confirmation of this was State Council’s replacement of the leading small group focused on poverty alleviation with a new National Administration of Rural Revitalization (see the February 22 Tip Sheet).
Plus, rural development is critical to boosting consumption (see entry #5 above).
We expect to see:
- Plans to build on poverty alleviation work with longer-term rural job creation, social service provision, and infrastructure upgrades.
- Efforts to make the ag sector more productive and competitive.
- A reform agenda aimed at attracting more private capital to rural areas.
We’re also keeping an eye out for quantitative targets for rural development.
Get smart: If rural revitalization gets a quantitative target in the 14th Five-Year Plan, it will reshape local officials’ priorities and incentives in coming years – and with it, the rural economy.