1. The most wonderful time of the year
The big day is upon us.
The annual session of the National People’s Congress got underway today with the delivery of the Government Work Report (GWR) by Premier Li Keqiang.
And the GWR is just the tip of the policy doc iceberg.
Also released today were:
- The National Development and Reform Commission’s (NDRC) plan for social and economic development for 2021
- The central government budget for 2021
Oh…and there was one other report of note released today:
- The 14th Five-Year Plan (2021-2025)
For the pedants: It’s actually called the 14th Five-Year Plan (2021-2025) for National Economic and Social Development and the Long-range Objectives Through the Year 2035 for the People’s Republic of China.
- 14FYPfNEaSDatLOttY2035ftPRoC for short.
Below you will find our hot takes on the annual work reports. We will dive deeper into the five-year plan on Monday.
2. Growing pains
They did it: The Government Work Report set a GDP growth target for 2021.
The number: “Over 6%.”
We weren’t sure this would happen.
- Recall that last year, for the first time, the government decided not to set a growth target due to the economic uncertainty surrounding the pandemic.
- In the run up to this year’s Two Sessions, there had been lots of debate about whether to permanently scrap the target – and perhaps replace it with metrics that better measured the “quality” of growth.
In the end, policymakers did what they so often do.
- They compromised.
Those who wanted a target got a target.
- “Above 6%” is fairly meaningless as a target.
- Given the low base year in 2020, something would have to go catastrophically wrong for the economy to not reach 6% growth.
Those who wanted to drop the target won’t be wholly disappointed.
- For the first time, the five-year plan does not include a growth target.
Get smart: An easily achievable 2021 GDP growth target and a lack of a growth target for the five-year plan are clear signs that policymakers are no longer predominantly focused on headline growth.
The upshot: Growth may disappoint to the downside this year – and in the years to come.
Our take: This is a good thing. With less pressure to boost growth, there will be less money funneled into unproductive projects. That’s a good thing for the long-term sustainability of the economy.
Want more insights into China’s macro picture? Then sign up for our premium China Markets Dispatch, our daily note on China’s economy and markets. In today’s note, we go deep into the government’s fiscal stance, monetary policy, efforts to boost consumption, trade, and more.
3. Business (environment) as usual
The Government Work Report didn’t devote a lot of space to improving the business environment.
Premier Li Keqiang did say that all businesses matter… to the greater cause, that is:
- “All types of market entities are builders of national modernization, [so they] should be treated equally.”
Some sectors will see improved market access:
- The government once again pledged to cut its negative list restricting foreign investment.
And foreign investment is extra-welcome in:
- Advanced manufacturing
- New and high technologies
- Energy conservation and environmental protection
But don’t get too excited:
- The NDRC said it will begin conducting national security reviews of foreign investments in 2021.
Li also isn’t done with his campaign to cut red tape:
- His report outlined further reductions in the time, documents, and hassle required for business-related bureaucratic approvals.
Policymakers also pledged to continue cutting business costs, by:
- Lowering the mandatory unemployment insurance contribution from employers.
- Continuing to push the state-dominated energy, transportation, and telecom sectors to lower charges.
Get smart: Broadly speaking, the business environment is improving. We hear this consistently in our conversations with clients.
Get smarter: Broad improvements don’t mean much to the companies hit with politicized market access disruptions – still one of the largest risks for foreign companies in China.
4. Democratizing innovation
Tech innovation received pride of place in this year’s Government Work Report.
That’s no surprise: October’s Fifth Plenum designated tech innovation as a core pillar of the national development strategy (see November 4 China Markets Dispatch).
In 2021, tech innovation is all about equalizing access to money, data, and opportunities.
More funds will be channeled to innovation projects:
- The central government will increase national RD spending.
- Banks will allocate more funds to scientific projects and reduce fees for small companies.
- Regulators will revise rules to encourage venture capital to support startups.
The report calls for the development of a digital ecosystem to facilitate the smooth flow of data by:
- Supporting the development of internet platforms while tightening antitrust regulations
- Digitizing government services and sharing more government data
- Transforming traditional industries with digital technologies
Upgrading China’s technological infrastructure is another key plank of the report, including:
- Investing RMB 3.65 trillion in traditional infrastructure and logistics systems
- Building new infrastructure, such as 5G networks and industrial internet systems
- Upgrading industrial supply chains
Get smart: The key theme is to democratize technology – ensuring small companies and remote areas are better able to compete with big companies and innovation hubs in highly-developed coastal cities.
5. Comrade Planet
Over the past six months, Xi Jinping has increasingly been touting the need for green development.
- So we have been pretty keen to see what the plan for 2021 is.
The good news: Environmental concerns were front and center in the Government Work Report.
The not-so-good news: There wasn’t really anything new on the policy front.
Instead we will see a doubling down on existing efforts, including:
- Continuing to reduce the discharge of major pollutants
- Expanding the catalog of corporate tax credits for environmental protection and resource conservation
- Providing financial support for green and low-carbon development
- Devising instruments for reducing carbon emissions
- Accelerating the development of national markets for trading energy use rights and carbon emissions rights
Get smart: We need specifics to know just how effective these initiatives will be.
Get smarter: Environmental protection has unquestionably shot up the government’s priority list of late. But so has energy security, and that has the potential to undermine aspects of the green drive (see next entry).
6. Negative energy
What’s the biggest issue facing humanity?
One plausible answer: China’s energy mix. Arguably, nothing will do more to shape the fate of the global climate.
Some context: China’s been stepping up of late, most notably with Xi Jinping’s pledge for China to peak carbon emission before 2030 – and be carbon neutral by 2060 (see October 29 China Market Dispatch).
To make progress toward those goals, in 2021, the Government Work Report promises:
- “A drop of around 3 percent in energy consumption per unit of GDP”
That’s a good start. Last year we did not have such a specific target.
But we were hoping for more. There has been a lot of talk recently about putting a cap on overall energy consumption. But policymakers clearly aren’t yet comfortable going that far.
And there is an important trend that will complicate the decarbonization drive:
- Energy security is an area of incresaing focus.
Why that matters: China is generally resource poor. But the one thing it does have a lot of is coal.
Get this: The National Development and Reform Commission (NDRC) work report seems downright pro-coal:
- “We will…systematically increase our ability to ensure the supply of coal.”
- “We will…make full use of the … basic role of coal-fired power.”
The bottom line: Coal will continue to be an integral part of China’s energy mix for the foreseeable future.
7. Rural development gets a boost
Rural development and agriculture are getting some love this year:
- The Government Work Report (GWR) devoted roughly twice the page space to this topic as it did last year.
Rural revitalization is the heir apparent to the recently concluded poverty alleviation campaign. The GWR committed to prevent backsliding:
- “We will align efforts to consolidate and expand…poverty alleviation with efforts to promote rural revitalization.”
- “A five-year transition period will apply…during which major assistance policies will remain unchanged.”
Raising rural incomes is also on the agenda, with the report calling for:
- “Promot[ing] faster development of rural industry and county economies…to enable rural… employment…and higher incomes.”
Enhancing food security is also a top policy priority. In addition to commitments to protect farmland and support the seed sector, the report pledges to:
- Continue subsidies for key crops like corn and soybeans
- Explore raising minimum purchase prices for rice and wheat
- Expand pilot crop insurance schemes
Get smart: Increasing incomes in rural areas is a necessary precondition for boosting domestic consumption. If done right, it could result in a massive growth boost.
Get smarter: Rising uncertainty about global trade relationships has given ag policymakers a case of the jitters.
- Just a few years back, they were looking to do away with minimum purchase prices altogether.
8. Financial services – liberalize it, don’t criticize it
The Government Work Report (GWR) had plenty to say about China’s financial system.
- But most of it is old news.
The big headline: Authorities will continue to liberalize China’s finance sector…while keeping a watchful, Sauron-esque eye on potentially risky behavior.
The GWR reiterates the government’s reform agenda. Over the next year they will:
- Expand the registration-based IPO system,
- Improve delisting mechanisms…
- Step up development of the bond market
- “Open up more financing channels for market entities”
Derisking is still very much a priority. The report pledged to:
- “[S]trengthen regulation over financial holding companies and financial technology to ensure that…innovations are made under prudent regulation.”
- “[I]mprove the mechanism for managing financial risks…and ensure that no systemic risks arise.”
Get smart: None of this is new. Optimizing the efficiency of the financial system – within carefully prescribed regulatory limits – remains the order of the day.
Get smarter: A robust, market-oriented financial system is a key plank of China’s broader effort to move its economy up the value chain.
9. The nail in the coffin
And so it happened.
On Friday, a draft decision on improving Hong Kong’s electoral system was submitted to the National People’s Congress (NPC) for review.
NPC Standing Committee vice-chairman Wang Chen explained the rationale for the new rules (Xinhua 2):
- “The electoral system of Hong Kong, including the method for selecting…the Legislative Council…should be in line with the principle of ‘one country, two systems’ and the actual situation of the region.”
- “It should ensure that ‘patriots govern Hong Kong.’”
To make sure that happens, Wang said the Election Committee will get a power boost (Xinhua 1):
- “The overall design of the system will be centered around the reformation and greater empowerment of the Election Committee of the HKSAR.”
Some context: The 1200-member strong Election Committee’s main function has been to choose the Chief Executive.
- Its members are largely mostly Beijing loyalists.
The most important change: It’s no longer just the Chief Executive that will be elected by the committee.
- “The Election Committee will be entrusted with the new function of electing a relatively large share of LegCo members and directly participating in the nomination of all candidates for the LegCo.”
Get smart: This effectively marks the end of an independent legislative opposition in Hong Kong.