Here’s What Economists Are Saying About China’s Growth Target

Economists are parsing through China’s latest economic targets and seeing a greater determination to achieve higher-quality growth while withdrawing pandemic stimulus slowly.

China released the annual goals, including a conservative growth target, in a government work report published Friday morning, as the country’s rubber-stamp parliament, the National People’s Congress, kicked off.

Here’s a look at what economists are saying about the targets:

Modest goal

The government set the target for gross domestic product expansion this year at above 6%, much lower than the 8.4% average forecast of economists surveyed by Bloomberg.

Here’s What Economists Are Saying About China’s Growth Target

“The government has set a more flexible economic growth target to leave room for structural reform and pandemic uncertainties,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong.

It’s almost certain that China will achieve that growth rate this year, which reflects authorities are shifting their focus to the quality of growth instead of speed, Pang added.

“There is no doubt China will achieve it, likely by a large margin,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

This allows the government to free up its hands to deal with problems such as the increase in macro leverage, the over-expansion of the real-estate industry, the monopolies of big-tech companies, and the “disorderly expansion of capital,” he said.

Instead of giving an average growth target for the next five years, the government plans to propose targets each year in accordance with the situation then.

This approach “suggests growth remains very important for the Chinese government on one hand, and on the other hand, the government will try to avoid having relatively rigid/hard-to-achieve targets become an obligation, leading to excessive stimulus and renewed structural imbalances,” Goldman Sachs analysts including Zhennan Li wrote in a note.

Balancing act

Beijing set the budget deficit target at about 3.2%, down from an all-time high of over 3.6% last year, but higher than the 3% expected by analysts. The special local government bond quota was set at 3.65 trillion yuan, also more than the 3.5 trillion yuan expected, but below last year’s 3.75 trillion yuan.

“We think Beijing intends to guide local governments to use special bond issuance to further reduce off-balance sheet financing and alleviate some hidden debt risks,” HSBC analysts including Qu Hongbin wrote in a note. “This strategy has been described as ‘opening the front door wider and blocking the back door’.”

Here’s What Economists Are Saying About China’s Growth Target

The contrast between the higher-than-expected budget deficit and the cautious growth rate target shows Beijing is trying ensure growth while preventing financial risks, Michael Hirson, head of China and Northeast Asia at Eurasia Group, told Bloomberg TV.

“I think it shows that Beijing is really looking to have that balance between starting to cast attention to long-term financial risks, and that’s the emphasis on sustainability, but a recognition that this recovery risks losing some momentum, and thus needing to support growth over the course of the year,” he said.

The approach also indicates authorities are only withdrawing virus stimulus slowly without any sharp turn, economists said.

“The figures are larger than our and market expectations, highlighting the government’s stance to normalize policy only gradually,” said Michelle Lam, Greater China economist at Societe Generale SA in Hong Kong, in a note. “There is a focus on equalizing social welfare and supporting medium and small enterprises in the spirit of improving income allocation.”

“The gradual exit of fiscal support is a clear sign of no U-turn of macro policy,” Tommy Xie, head of Greater China research at OCBC Bank wrote in a note. “However, China’s intention to keep its macro leverage ratio stable may be the cause for more market volatility going forwards,” he said, adding that it’s a sign that room for further easing is limited.

Consumption and innovation

Another major focus of the government report is boosting domestic consumption and enhancing innovation to achieve more sustainable growth, Hanfeng Wang, chief strategist at CICC, told Bloomberg TV.

“The message of this report is they are trying to boost demand, especially consumption, I think it’s very important in the 14th five-year plan period,” said Wang, referring to China’s blueprint for economic development from 2021 to 2025.

Here’s What Economists Are Saying About China’s Growth Target

The report didn’t mention that per capita disposable income will grow in step with GDP this year, a “concerning signal” about consumption, Yue Su, principal economist at the Economist Intelligence Unit, wrote in a note. “Household debt may also worsen as a result of a recent wave of property speculation,” she said.

The report said per capita disposable income will grow in step with GDP growth, a “concerning signal” about consumption that wasn’t mentioned in previous years, Yue Su, principal economist at the Economist Intelligence Unit, wrote in a note. “Household debt may also worsen as a result of a recent wave of property speculation,” she said.

China will increase its basic research expenditure by 10.6% this year, while research and development spending will grow at an annual rate of more than 7% over the next five years.

“Technology self-sufficiency will underpin China’s development, according to the work report,” said Pang of China Renaissance. “Consumption and innovation are expected to be two growth engines” for China’s growth in 2021 and 2022, he added.

The report’s goal to achieve higher growth in labor productivity than that of GDP “implies more input into technologies as well as further market-oriented reforms,” Chaoping Zhu, global market strategist at JP Morgan Asset Management, wrote in a note.

Carbon goals

China also vowed to cut energy consumption per unit of GDP by 3% in the report, while continuing to reduce the emission of major pollutants.

“CO2 emission is a hard target. This is Xi’s promise to the world and is a major foreign policy” and will offer one of the few things of common interest between the U.S. and China, said Raymond Yeung, chief economist for Greater China at Australia and New Zealand Banking Group in Hong Kong. “It is also a warning to resource intensive industry.”

©2021 Bloomberg L.P.

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