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Economic Research: China Finally Retires Its "Growth Above All" Policy

China's sober and flexible 2021 GDP target is a gamechanger. It confirms, in hard numbers, that the government no longer prioritizes short-term growth over other objectives. The result should be more breathing room for the government to achieve its other priorities.

Last year, facing the uncertainty of the pandemic, the government refrained from setting a growth target for the first time since at least 1990. This year Premier Li Keqiang, in his remarks at the "Two Sessions" government meetings that began last week, set a below-consensus guideline for 2021 and omitted a target from the five-year plan.

Securing new priorities--including social welfare, deleveraging, the green transition, and technology independence--will mean adjustment costs and sacrificing some growth in the coming years. S&P Global Ratings thinks the latest growth target recognizes this trade-off, as well as the uncertainty of a post-pandemic world and China's inescapable long-term slowdown. The market may be surprised at how much tolerance the government has for slower growth if it reflects firm progress in these other priorities.

China's 2021 Growth Target Strikes A New Tone

China's growth target for 2021 of "above 6%" is striking for two reasons. First, it is quite low and well below the consensus range of GDP forecasts that sit at between 8% and 9% (our current forecast is 7%). Second, it provides more flexibility than a fixed number or a range with a cap and a floor.

We should view 6% as the new "bottom line," the lowest level of growth that is politically acceptable. If growth were to threaten 6%, we would expect to see quick and substantial policy easing. Still, it is important to remember that China's GDP, like the rest of the world's, is coming off a very low base. Unless China is hit with a large new and unexpected shock, it will not be difficult to beat 6%, with room to spare.

China's leaders have been de-emphasizing growth over other priorities for some time (in fact well before the 19th Party Congress in 2017). But this is the first time the shift has been crystallized in a more sober and much more flexible growth target.

The GDP growth target guides macroeconomic policies, such as interest rates and influences how much banks should lend. At the local level, the target sways officials when they are deciding how to spend their resources (and in the past how much they should borrow off the books).

It is also a measure of political success. The target is rarely missed and, when it is, it is usually because growth comes in higher. In the past, there has been little incentive to undershoot the target. When the economy has been unexpectedly weak, a gap has opened between granular activity indicators and official GDP. The message, in the past, was that economists' GDP forecasts should never be too far away from the target..

2021 Jobs Targets Easily Achievable

Growth targets grab headlines, but the government's economic priority has always been jobs. Premier Li noted that the government's target for the surveyed unemployment rate is 5.5% for 2021, compared with the 6% target for 2020. Note, though, that this measure of unemployment is already below this year's target and ended last year at 5.2%.

Again, this gives policymakers breathing space if growth and hiring is slower than expected. We should also remember that this measure of unemployment, while an improvement on previous versions, is incomplete and misses many migrant workers who left the cities last year and may still be out of work. If these jobseekers return, unemployment may rise for a while.

A second key target is for new urban jobs, which has been raised to over 11 million in 2021 from 9 million in 2020. This is a gross number and does not include people who lose or retire from their jobs. The target is focused on new graduates, many of whom will look for work in China's larger cities. The Ministry of Education expects 9 million students to graduate from university in 2021, an increase of over 350,000 from 2020.

Again, the 11 million jobs threshold for 2021 is well within reach--last year, over 11.8 million new urban jobs were added, despite much slower growth. One note of caution, however, is that some of these jobs may have been "created" by state-owned enterprises and private firms looking to perform national service. As the recovery matures, new jobs will need to be economically sustainable.

A Healthier View Of The Growth-Jobs Tradeoff

This mix of growth and jobs targets shows that the government now recognizes that the economy has become more labor-intensive. As the economy shifts towards providing services rather than goods, more jobs are created per unit of real GDP. Consider the steelworker whose output can be ramped up significantly by upgrading or adding to the machines she works with to the food delivery driver. In contrast, an e-commerce delivery driver may receive the latest smartphone and an electric bike in place of her old gas guzzler, but she may still struggle to deliver to many more apartments in a day.

This means China can achieve its jobs targets with slower and safer economic growth. Local governments and firms do not need to borrow and invest at a breakneck pace, adding to the debt burden and starting potentially unprofitable projects, for the economy to create jobs. The flipside to this, of course, is lower labor productivity growth and a gradual decline in GDP growth over time, something we return to below.

2021 Inflation Target Of 3% Assumes Improving Consumer Demand

The inflation target for 2021 is 3%, down from 3.5% in 2020. Last year, consumer prices were, on average, 2.5% higher than in 2019 but this masks large swings. The unbalanced nature of China's recovery, including soft demand for many consumer goods and services, together with the fading effects of the supply shock on pork prices, has seen the economy dip into mild deflation. In January, inflation fell to -0.3% while inflation in the service sector fell to -0.7%.

China's inflation target is different from the notion we are familiar with in G7 economies. It is not a formal target for the central bank, the People's Bank of China (PBOC). The PBOC cares about inflation but it is just one of many objectives it worries equally (if not more at times) about, including jobs, debt, and financial stability. Still, by penciling in 3% for this year, the government is clearly anticipating that current policy settings and growth of above 6% will be enough to rebalance the economy, boost household spending, and lift consumer prices later in 2021.

China's Energy Intensity To Start Falling After Stalling Post-COVID

S&P Global predicted last year that the decline in China's energy intensity (the amount of energy consumed per unit of real GDP) would stall post-COVID (see "China's Energy Transition Stalls Post-COVID," Sept. 22, 2020). The latest official data confirm our prediction and underscore the extent to which energy-intensive activities, including infrastructure and property investment, have driven the recovery so far. The government now targets a reduction of 3% in energy intensity in 2021. This is slightly slower than the average 3.6% decline recorded in the decade before 2020.

Chart 1


This is not yet the sharp inflexion point in energy use some may have wanted to see following China's commitment to become carbon neutral by 2060, but it reflects the reality of an economy still heavily dependent on investment and manufacturing.

No Sharp Turns In Policies

The broad message on policies is "no sharp turns." There is a tightening bias but, overall, no sense that 2021 will bring in substantial changes. Our view has been that policies had already begun tightening in the second half of 2020, as shown in a pronounced turn in financial conditions, including weaker credit flows and higher real interest rates.

The government expects its own interpretation of the fiscal deficit (there are other interpretations), to narrow from just over 3.6% to 3.2% of GDP. This was less of a tightening than many expected, but not enough to alter the general impact on the economy. As always, the language on monetary policy was vague.

The reality is that monetary policy, reflected in real de-facto policy interest rates, is already somewhat tight. Given the growth target, we do not anticipate a further tightening this year. The government said it expects credit to grow in line with nominal GDP growth and total debt-to-GDP to stabilize. More effort may be needed to constrain the debt-to-GDP ratio over the medium term.

Why New Priorities Dampen The Outlook For Near-Term Growth

A common refrain is that there need not be any trade-off between China's growth and its new priorities: social welfare, green transition, stabilizing leverage, and tech independence. A case can indeed be made that success in each of these objectives could help boost productivity and lift growth. The issue is one of time horizon.

Over coming years, pursuing these goals will incur transition costs, including disruptions to current activity. Building clinics for elderly citizens will improve the quality of life for many Chinese citizens and help the economy rebalance. Still, in purely GDP accounting terms, it may have a lower immediate payoff than connecting a town to the high-speed rail network. In the energy and resources sector, the green transition will mean the write-off of legacy assets and disruptions in communities dependent on certain activities, such as mining.

Efforts to restrain the rise in debt will mean tighter lending conditions and, all else equal, lower rates of investment, capital accumulation and output. Trying to do without some foreign technology, in a bid to increase self-reliance, will ripple through supply chains, hit production, and could affect demand for some Chinese product.

Our sense is that the government understands these trade-offs and, subject to the bottom line of 6%, is happy to trade growth today for growth, stability, and supply chain security in the future.

Looking Further Ahead—No Growth Targets In The Five-Year Plan

The absence of a target in the 5YP adds to the sense that we have reached an inflexion point. Plans stretching back to the 1980s have included hard growth targets which then provide the anchor for the reform agenda. In the 13th 5YP, for 2016-2020, the government set a target of "above 6.5%". For the next five-year period, 2021-2025, the government has said only that growth must be in a "reasonable" range. What, though, is reasonable?

Setting Targets Amid An Inescapable Long-Term Slowdown

We think China faces an inescapable long-term slowdown (see chart 2). In earlier research, we estimated that China's real growth rate will average about 5% during through 2025 and just less than 4% through 2035 (see " China Credit Spotlight: The Great Game And An Inescapable Slowdown," Aug. 29, 2019 ).

One reason is that China's labor force will almost surely shrink, with the United Nations projecting a decline of 0.5% per year, on average, through 2035. The government has floated changes in the retirement age, but a likely gradual phase-in may not be enough to offset the aging effect. We also expect investment to cool, which means a slower pace at which the economy adds capital. Finally, productivity's contribution to annual growth should be about 3 percentage points as China gets richer and rebalances more towards the services sector, where productivity gains are typically more muted.

Chart 2


China's Productivity Predicament

In the run-up to the 5YP, Chinese researchers and think tanks with close links to the government proposed a wide range of possible growth targets for the 2021-2025 period, from less than 5% to over 8%. This range reflects different views on productivity trends, with optimists suggesting artificial intelligence (AI), machine learning, and smart manufacturing can reverse China's decade-long productivity decline. Pessimists focused instead on state-owned enterprises, whose economic footprint has begun to grow again and whose productivity record is poor.

Our own projections assume that while China can arrest its productivity growth decline, it will be hard to reverse. The closer China gets to the frontier in some technologies, the harder it is to catch up quickly. China will have to start dreaming up new technology itself, especially if it seeks to achieve tech independence, and this takes time. With the state taking a keener interest in technology, the historical record suggests this may also dampen productivity growth.

At the same time, private consumption and services should account for a larger share of the economy in the future, something recently emphasized by policymakers. Remember that private consumption accounts for less than 40% of spending, compared with 55% and over for other large economies, whether developed or emerging markets. Data across decades and across countries, including China, are compelling indications that productivity growth in services is almost always lower than in manufacturing.

Welcome, World, To China's New Development Model

The government's latest work report and 5YP feel like an inflexion point. We knew something like this was coming but the new targets and priorities add more weight to the view that priorities have changed, for good. "Growth above all" as a goal has been replaced by a more complicated, but in the longer term more sustainable, set of objectives.

As China rebalances and resets, the rest of the world will have to adjust. The country is too big for that not to happen. As China moves along a path to a consumption-driven economy, net zero carbon emissions, and technology independence, its trading partners will confront new challenges and opportunities. The journey is just beginning.

Related Research

This report does not constitute a rating action.

Asia-Pacific Chief Economist:Shaun Roache, Singapore (65) 6597-6137;

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