China focuses on growth today and on tech for the future

Putnam Fixed Income team, 04/30/21

  • The ambitious five-year plan calls for self-sufficiency in technology and quality domestic growth.
  • China's economic activity has picked up since the Lunar New Year holidays.
  • The monetary and fiscal policies will not be as supportive as in 2020.

China's economic activity has picked up since the Lunar New Year holidays. The world's second-biggest economy expanded 2.3% last year, the only major global economy to post gains. In early March, the government unveiled its plan for the next five years, pledging to ramp up technology development and lower dependence on foreign markets.

Beijing's shifting five-year blueprint

The government released new targets for the economy during the annual meeting of the National People's Congress — China's legislature — in March. The 14th five-year plan reiterated China's goal of reaching the level of a middle-developed nation by 2035. The plan also focuses on technology development and upgrading the domestic economy.

Technology self-sufficiency seems to be at the top of the policy agenda, as the plan is full of initiatives such as state laboratories and tax incentives. Specific areas of focus include digitalization, telecommunication, artificial intelligence, and quantum computing.

Technology self-sufficiency seems to be at the top of the policy agenda.

While there are various strategies to promote domestic consumption, upgrading the manufacturing sector seems to be the only doable one, in our view. Policy makers are aware they need to reduce the negative impact of aging on consumption. As such, they plan to phase in an increase in the statutory retirement age and raise the fertility rates.

China also pledged to go carbon neutral, with green development, and pushed for financial reforms and improvements in the business environment. But structural challenges, including reforming its state-owned enterprises (SOEs), were not a part of the five-year plan. This indicates to us that the state will continue to play a key role in the economy.

Breaking with convention on growth targets

In their five-year plan, Chinese leaders did not include any average annual growth targets. Hu Zucai, vice director of the National Development and Reform Commission, said this decision will allow the government to focus on improving the quality of growth and coping with risks in a more flexible manner.

Still, policy makers pledged to keep growth in a reasonable range over the five-year period and set an annual growth target of above 6% for 2021. This year's target is partly a surprise, since they scrapped the annual GDP target in 2020. The projection appears realistic, as many analysts and international lending agencies forecast growth at or above 8% this year.

Inflation chart

China also aims to keep its jobless rate within 5.5% in 2021 to 2025. But the current official jobless rate is 5.5%. The question is whether policy makers will tighten their belts as the jobless rate declines. We believe monetary and fiscal policies will not be as supportive over the next few years compared with 2020.

Recovery in manufacturing and exports

The five-year plan comes amid continued momentum in economic activity during the first few months of 2021. While seasonal factors may have artificially inflated the numbers, the quick containment of a mini Covid-19 wave led to speedy reopenings and better economic indicators. The "staying put" policy during the holidays might have contributed to the pickup.

Industrial production, property investment, manufacturing, and trade have all improved. The recovery in the services industry has been slower due to the lingering effects of the virus. Exports surged 60.6% in U.S. dollar terms in the January to February period from a year earlier. And imports jumped 22.2% in the first two months of the year. The gain in exports reflects last year's low base and favorable global demand for Chinese goods, including health care and vaccines.

Credit growth and monetary aggregates rebounded a bit and surprised to the upside in February. Although the policy stance can stay accommodative for now, Chinese policy makers might be more willing to reduce domestic policy support as growth picks up among advanced economies.