1. Sluggish fiscal rebound for 2021
China’s economic growth is set to bounce back this year, but the outlook for government revenue isn’t so rosy.
Anticipated government revenue for 2021 is RMB 21.45 trillion – up only 1.8% from last year (Caixin).
Tax and non-tax revenues (like fees and fines) should see decent growth:
- These are expected to rise 8.1% for the central government and 11.0% for local governments.
But other sources of revenue will be down from last year.
- RMB 95 billion will be transferred from the Central Budget Stabilization Fund, down from RMB 530 billion in 2020.
- RMB 98.5 billion will be transferred from savings in centrally managed funds, down from RMB 358 billion.
- RMB 1.32 trillion will be reclaimed from funds left unspent by local governments at the end of the previous year, down from RMB 2.11 trillion in 2020.
Some context: The stabilization fund is a rainy-day fund used to offset the gap between revenue and expenditures when government income falls short. It got a lot of use in 2020.
Get smart: Policymakers in Beijing are inherently hawkish when it comes to deficits.
- That’s why we were surprised that, despite weak projected revenue growth, the Ministry of Finance announced a relatively aggressive projected budget deficit of 3.2% of GDP.
The bottom line: The fact that policymakers are planning to spend despite strong revenue growth is a sign that they are worried about the economy.
2. More but stable outbound investment
Here’s something juicy: The 14th FYP proposes drafting a new law on outbound investment (ODI).
Some context: Policymakers want domestic companies to be better integrated into key parts of global supply chains, especially those related to core technologies.
- One quick way to achieve this is to buy up companies abroad.
The existing regulatory framework for outbound investment is outdated.
- In 2019, the National Development and Reform Commission (NDRC) kicked off efforts to consolidate existing rules for outbound investments, but the progress has been slow.
Details about the proposed legislation are scarce, though the FYP says it will help companies:
- “Weather geopolitical, economic, and security risks associated with outbound investments”
Get smart: The 2015/2016 capital outflows crisis caused officials to clamp down on ODI.
Get smarter: The government is less wary of ODI now that financial inflows are so strong.
The bottom line: Chinese firms look poised to go on a global shopping spree – at least in strategic sectors.
3. SOEs to juggle conflicting priorities
The role of SOEs in the economy is a source of perennial debate.
- The 14th Five-Year Plan had plenty to say about that.
Here’s the deal: For years, Xi Jinping has been saying that he wants SOEs to be “bigger, better, and stronger.”
But what does that mean in practice?
For one, the14th FYP encourages SOEs to focus on their core business.
The plan also lays out six metrics by which SOEs will be evaluated (SASAC):
- Improving net profits
- Keeping the growth rate of total profits higher than that of the national economy
- Improving operating income and profit margins
- Increasing RD investment
- Improving total labor productivity
- Keeping the asset-liability ratio stable
In a nutshell: Beijing wants SOEs to be more profitable, innovative, and productive – without taking on a lot of debt.
SOEs will be given hard financial targets to hit (14th FYP):
- “We should strengthen the goal of capital gains and financial hard targets.”
And as part of the goal to increase profitability, more private players will be allowed in some sectors traditionally dominated by SOEs:
- Public utilities
So, SOEs are on the path to becoming more market-oriented companies, right?
The 14th FYP wants to make sure that SOEs also continue to serve broader policy objectives:
- “[We should] promote the state-owned economy to further focus on strategic security, industry leadership, the national economy and people’s livelihood, public services, etc.”
Spare a thought for SOE bosses: On one hand, they are asked to make their companies more profitable. On the other hand, they are asked to contribute to policy goals. It’s not easy to do both at once.
4. What’s the real goal here?
On Monday, we told you the 14th Five Year Plan (FYP) set a mandatory food security target for the first time ever (see March 8 Tip Sheet).
The goal: Grain production should exceed 650 million tons annually in 2025.
Some context: Food security has always been a top priority for China’s leaders, but it took on extra urgency in 2020 due to high grain prices and global uncertainty.
But that 650 million ton target isn’t exactly ambitious:
- Domestic grain production passed 650 million tons back in 2018.
- In 2020, yield exceeded 670 million tons despite natural disasters and COVID disruptions.
- And China still imported a record-setting volume of corn and wheat (see December 12 China Markets Dispatch)
Get smart: China will continue importing a critical portion of its agricultural commodity supply.
So…what are policymakers actually trying to do here?
For one thing, they’re moving food security up the agenda for innovators and businesspeople, by:
- Listing agricultural genetic research and farm machinery as “key science and technology frontiers”
- Prioritizing rural digitization and precision and automated farming
A section of the FYP on agriculture and rural development outlines a list of priorities aimed at making agriculture more efficient, including
- Expanding China’s stock of high-standard farmland by 275 million mu
- Raising the use of mechanized planting and harvesting to cover 75% of all farms
- Significantly expanding cold chain logistics for fresh agricultural products
Get smarter: Making the farming sector more competitive is the best way to protect it in the long run.
5. Xi’s dilemma is our dilemma
On Tuesday, Xi Jinping got all dressed up.
- Xi donned his Mao suit to go visit the PLA delegation to the National People’s Congress.
Xi’s visit came as no surprise. Xi has made sure to sit down with the PLA delegation at every Two Sessions since he took over the Party in 2012.
Xi’s message: Things are getting real (Xinhua):
- “The current security situation of our country [is characterized by] relatively large instabilities and uncertainties.”
Xi’s not alone in hyping China’s security challenges (SCMP):
- “Defence Minister General Wei Fenghe on Saturday… [said that] China’s national security had ‘entered a high-risk phase.’”
- “Wei also warned that US containment efforts would ‘last throughout the process of China’s national rejuvenation.’”
As a result, Xi wants the armed forces on alert (Xinhua):
- “[The armed forces must] be prepared to deal with all kinds of complicated and difficult situations at any time.”
Get smart: A growing sense of threat in China means that more resources will be focused on improving the country’s fighting capabilities.
Get smarter: We are entering classic security dilemma territory here. As China continues to upgrade its military, the US and others will do the same, making China feel even more under threat.
It’s a vicious cycle.
6. Risks rising for foreign business in China
With geopolitical tensions on the rise (see entry above), its an increasingly trick time for foreign companies in China.
On the one hand, there are some promising developments.
- The 14th Five-Year Plan (FYP) reiterated government promises to open the telecommunications, internet, education, culture, and healthcare sectors to more foreign investment.
Foreign companies doing research in China should be pumped.
- Foreign companies doing RD will be eligible for tax breaks.
- State-led science and technology programs will be opened up to foreign companies.
Our thought: With rising scrutiny abroad of anyone involved in Chinese government-led research, foreign companies will think twice before enrolling.
But the 14th FYP also contained some less encouraging signals for foreign companies.
- The plan struck a more conservative tone on financial sector opening – calling for it to proceed “steadily and prudently.”
And the plan called for improving four security related mechanisms:
- A national security review of foreign investment
- An anti-monopoly review
- A list of technologies concerning national security
- The unreliable entities list
The bottom line: Risks are rising for foreign firms in China.
7. An Alaskan thaw?
On Tuesday, the White House confirmed that US and Chinese officials were in talks to organize a meeting between top officials.
Some context: This will be the first high-level meeting between US and Chinese officials since the start of the Biden administration.
The unlikely likely location: Anchorage, Alaska.
- The interesting choice of venue is probably down to Alaska being a geographical midpoint between the two countries – a face-saving compromise.
Possible attendees include:
- Top Chinese diplomat Yang Jiechi
- Chinese Foreign Minister Wang Yi
- US Secretary of State Antony Blinken
- US National Security Advisor Jake Sullivan
Here’s White House Press Secretary Jen Psaki (SCMP):
- “We are directly engaged [with the Chinese side].”
- “We don’t hold back about our concerns, but we also look for opportunities to work together.”
Get smart: A one-off meeting between the two sides won’t be enough to heal the US-China rift.
- China has continued to lay the sole blame for bilateral tensions on the US, and Washington isn’t interested in making concessions.
Get smarter: A meeting will lay the groundwork for future consultations between the two sides, potentially paving the way for a more stable and manageable bilateral relationship.