CHINA: National People’s Congress will signal ambition to surpass US economy

China's annual parliament session convenes on 5 March to set economic targets for 2021 and to approve the 14th Five-Year Plan (2021-25) and the Long-Range Objectives Through 2035. The 2035 targets reflect China's ambition to surpass the US as the world's largest economy, escape the middle-income trap, and avoid Japan-style stagnation. But achieving the ambitious 2035 targets will likely require tolerating slower growth from 2021-2025, while enacting structural reforms that put the economy on a better long-term footing. China's annual parliament session, the National People's Congress, will open on 5 March with Premier Li Keqiang's presentation of the annual government work report. The traditional highlights of this report are the annual GDP growth target and the fiscal deficit target, but these elements have declined in importance in recent years. More significant are the five-year plan and long-range objectives, which reflect the Communist Party's goals of achieving high-income status and technological self-sufficiency. Short-term modesty Last year's work report declined to state a GDP target for the first time in decades. While the pandemic was the most significant factor in that decision, policymakers had already been shifting away from rigid growth targets in favor of an emphasis on growth quality. This year's work report is also likely to omit a precise GDP target, though Li may still announce a conservative baseline, such as growth of "above 6%." With most independent analysts forecasting GDP growth of 8-9% this year, this growth floor would be easily met. China's trend growth rate is now probably only around 4-6%, but the low base in 2020 – when the pandemic dragged growth down to 2.3% – means that 2021 growth will be higher than trend. The conservative growth target will send a clear signal to local government officials that priorities like environmental protection, technological upgrading, and income re-distribution should take priority over the single-minded pursuit of GDP growth. Many provincial governments have already set GDP targets of around 6% for this year, reflecting local officials' newfound willingness to settle for growth rates below the national average. On fiscal policy, the annual fiscal deficit target may be trimmed to 3% of GDP from 3.5% in 2020, reflecting strong growth momentum and policymakers' concern about a sharp rise in debt in 2020 due to pandemic-related stimulus. Local government debt is a particular concern. The official deficit target covers only on-budget fiscal debt, while excluding quasi-fiscal borrowing by local governments' arms-length financing vehicles. Still, the lower on-budget target will also signal regulators' intention to curb off-budget borrowing. Since the work report will express the deficit target as both a percentage of GDP and in renminbi terms, the target will also contain an implied GDP target. Long-term ambition More important than the economic targets for 2021 will be two longer-term plans: the 14th Five-Year Plan covering 2021-2025 and the Long-Range Objectives Through 2035. Short summaries of both plans were previously published at the Communist Party's Fifth Plenum in October. In his official summary of the Long-Range Objectives, President Xi Jinping said that China "has hope and potential" to double GDP and per-capita income by 2035, apparently from a 2020 baseline, which implies an economy worth around USD 30tn in 2035 (in 2020 dollars). Achieving this goal would almost certainly make China the world's largest economy at market exchange rates, assuming US growth averages around 2% annually over the same period. These plans also aim to propel China out of the middle-income trap that has stymied other countries that achieved China's current level of per-capita income. Japan, though it achieved high-income status, is another precedent that Chinese leaders hope to avoid. As a share of US GDP, Japan's economy peaked at 70% in 1995, while China reached 70% of US GDP in 2020. Chinese policymakers are aware of other similarities to Japan in the late 1980s: high savings, high debt, a bubbly property market, demographic aging, and heavy reliance on exports. The five-year plan should be understood as an effort to lay the groundwork for achieving the 2035 goals, which are highly ambitious and cannot be taken for granted. Paradoxically, however, this groundwork will likely involve tolerating slower growth from 2021-2025 to put the economy on a healthier long-term trajectory. This will require difficult reforms designed to enhance long-term productivity, such as opening some state-dominated sectors to greater competition and promoting consolidation in manufacturing sectors suffering from excess capacity. A key signal, therefore, will be whether the five-year plan sets a GDP growth target for the period. Even more than the lack of a growth target for 2021 alone, omitting a target for the entire five-year period would signal that short-term GDP growth is no longer a top priority. This signal would discourage the kind of wasteful investments in infrastructure and low-end manufacturing that have pushed China's productivity growth sharply lower in recent years, causing some economists to doubt that China's GDP will ever surpass the US.

March 2, 2021

Asia

CHINA: National People’s Congress will signal ambition to surpass US economy

BY Gabriel Wildau

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