China bucked the global recession in 2020, and in doing so narrowed the economic gap with the United States. Now it says it needs to pick up the pace this year.
Premier Li Keqiang on Friday announced that China would target growth of more than 6% in 2021.
While China emerged from the global downturn caused by the coronavirus pandemic on surer footing than any other major economy, it still only grew 2.3% in 2020.
The new target is more than what China needs to accomplish to get back on track with President Xi Jinping’s long-term goal for the economy. To reach Xi’s plans to double GDP by 2035, China would need to grow a bit less than 5% this year, with similar growth through the next decade or so.
But it’s also still lower than what some observers would have liked to have seen for the world’s second largest economy.
“China unexpectedly set a GDP growth target, but at a relatively low level,” wrote Iris Pang, chief economist for Greater China at ING. “I am worried that the low GDP target could signal a possibility that the government includes a scenario for the comeback of Covid.”
Li’s remarks came during China’s “Two Sessions” meeting, the country’s biggest political gathering of the year. Beforehand, there had been an intense debate in the country about whether to bring back a GDP target, which it abandoned last year for the first time in decades as the coronavirus took hold.
“In setting this target, we have taken into account the recovery of economic activity,” Li said on Friday, adding that the goal would “help sustain healthy economic growth.”
Some experts — including Yang Weimin, the former secretary-general of the National Development and Reform Commission — have encouraged such guidance, saying that China needs to set benchmarks to keep its growth on pace.
But others have been wary about bringing back GDP targets just yet. Ma Jun, a policymaker at the People’s Bank of China, said earlier this year that goals that are too ambitious could encourage local governments to borrow too much, heightening the risk of accumulating “hidden” debt.
A balanced recovery
China spent hundreds of billions of dollars last year on programs to stimulate economic activity, including major infrastructure projects and cash handouts for its citizens.
That amount of spending isn’t carrying over to 2021.
Li said Friday that China has set the budget deficit for the year at about 3.2%, slightly lower than that of last year, “in view of the effective containment of Covid-19 and gradual economic recovery.”
Li also lowered the amount of money local governments will be able to issue in special bonds this year by about 100 billion yuan ($15 billion) — though it still clocks in at some 3.65 trillion yuan ($564 billion). That money is primarily used to fund infrastructure projects, such as 5G networks, airports, railways, and charging stations.
He also said that the country would no longer issue special treasury bonds this year. The government issued about $155 billion worth of such bonds in 2020 to fund medical equipment and technology used to fight the virus.
Like other countries, China has to figure out how to balance a need for at least some additional stimulus as the recovery continues with a growing debt burden.
After all, the rate of growth last year was still China’s slowest in decades. And there are some points of weakness in the economy: Retail sales have lagged, for example, suggesting that people are still wary of spending money as the country struggles to stamp out Covid-19 outbreaks entirely.
An ambitious vaccine program is part of the equation, as China tries to inoculate the 1.4 billion people who live there. So far, it’s only vaccinated about 3.5% of the population, though plans to reach 40% by the end of June.
Li reiterated that the government will maintain “necessary support” for the economy and “avoid sharp turns” in policy as it tries to balance the recovery.
Analysts at Nomura said Friday that the new economic growth target could be interpreted as “too conservative.”
“In our view, Beijing is acutely aware that GDP growth could exceed 8% this year,” they wrote in a research note, adding that the government “may be reluctant” to set a bar that high “because of the disparate impacts among provinces and cities from the Covid-19 pandemic.”
There are other areas for Beijing to keep an eye on this year, too.
Earlier this week, Guo Shuqing, the Communist Party boss at the central bank, told reporters that the country’s property sector might be in a bubble and added that the speculative trend is “dangerous.” Regulators have already issued rules meant to limit lending to the sector, and Guo’s comments imply there could be a further tightening of credit.
Guo also warned that bad loans could continue to pose risks to the financial system, which could slow the pace of recovery.
A slew of major state-owned firms have declared bankruptcy or defaulted on loans in the past year — a concerning trend for a sector that Xi has wanted to bolster as a major driver of economic activity and innovation. Defaults by state firms surged to $15.5 billion in 2020, up 220% from the previous year, according to recent estimates by Jinan-based Zhongtai Securities.
China has other challenges, too.
On Friday, Li stressed the importance of job stability, adding that the country will “increase employment opportunities” where it is able. Unemployment remains a big concern for Beijing, and the country has pledged to create at least 11 million new jobs in urban areas this year.
While the country’s urban unemployment rate remains about 5.6%, some analysts suspect the full picture could be much higher.
“The risk to the Chinese economy [in 2021] is a consumption slowdown,” said Yao Yang, director of the China Center for Economic Research at China’s Peking University, in a video published on a Tencent-affiliated media website in December. He said that China’s overall unemployment rate could be near 20%, much higher than the government’s count of urban unemployment.
The country is also trying to boost its economy as it works toward other priorities, including a desire to shed its reliance on the United States for key technology — though some of its efforts have been hampered by US restrictions on Chinese companies, such as Semiconductor Manufacturing International Corporation.
On Friday, Li said the government will focus on innovation by spending more money on research and development.
The country is trying to reduce emissions, and intends to “strengthen comprehensive measures and joint efforts on air pollution prevention and control,” according to Li.
Becoming carbon neutral by 2060 is one of China’s big priorities — a lofty goal, considering China uses more coal than the rest of the world combined.
– Steven Jiang contributed to this report.