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China is unlikely to set a growth target for next year, as the low base comparison with 2020 due to Covid disruption will drive a significant rebound in headline gross domestic product data, and as authorities steer a cautious path between maintaining economic expansion and avoiding excessive growth in indebtedness, policy advisors told MNI.
The Chinese Academy of Social Sciences sees growth next year at 7.8%, and Wang Hongju, a senior fellow at CASS, said setting a target at such a high level could create misleading expectations about China's future trajectory. The rate of GDP expansion will decline from 2022 as 2020's base effects fall away, he noted, adding that the government could still set numeric targets in areas such as employment. Other policy advisors see 2021 growth at 7-9%.
The government is expected to announce economic targets during the annual National People's Congress which usually happens in March. This year also saw no growth objective, due to the Covid-19 pandemic. The annual Central Economic Work Conference, likely to be convened this week, will lay out areas of policy focus.
The economy continues to face headwinds, noted Wang, pointing to continuing political tensions in the U.S., and to Brexit, as well as uncertainty over the pace at which major countries will be able to distribute Covid vaccines.
The authorities must also position policy to take control of debt levels which have ballooned as a result of Covid stimulus, a task which could occupy them for the next five years, he said. Total social finance, a gauge of credit expansion, could slow to about 10% from last month's 13.6%, he said. While the People's Bank of China should continue to provide ample liquidity to prevent any rise in bond defaults, the M2 measure of broad money should grow by 8%-9%, in line with nominal GDP growth, down from over 10% this year, he added.
But leverage control cannot be too tight lest it causes the economy to slow down sharply, advisors said, with one, who asked to remain anonymous, saying that a repeat of the deleveraging campaign of several years ago could be dangerous. Debt holidays on principle and interest, granted to help small businesses survive the impact of the pandemic and due to run until March, should be withdrawn only with care if failures are to be avoided, the advisor said.
Lenders had deferred payments on CNY4.7 trillion in loans as of the end of September, PBOC data shows.
The government is also likely to rein in its fiscal deficit from this year's unprecedented 3.6% of GDP, advisors said.
The new level could be around the previous limit of 3%, according to Zhao Quanhou, director of the Financial Research Centre at the Chinese Academy of Fiscal Sciences. This would still be enough to flag a "proactive" fiscal stance, but it would cut spending by about CNY1 trillion, he said, agreeing that China should avoid setting economic growth targets in future.
In this scenario, issuance of special central government bonds (SCGB) would perhaps halve to CNY500 billion, while quotas for special-purpose local government bonds (SLGB) may edge down to CNY3.55 trillion from this year's CNY3.76 trillion, he said. Some market investors expect sales of SCGB, issued to fund anti-pandemic measures, to dry up completely, but Zhao noted that the fight against Covid-19 is far from ending. SLGBs, whose payments are tied to revenues from projects they fund and which do not appear in headline deficit calculations, are also still needed, to support growth and employment, together with new high-tech infrastructure.
But the anonymous advisor said a 0.6 percentage point cut in the deficit ratio may jeopardise investment and hurt indebted local governments. It would be better to opt for a deficit closer to 3.4% of GDP, he argued.
Maintaining growth next year will be especially important, the advisor noted, as 2021 will see the 100th anniversary of the foundation of the Chinese Communist Party on July 1, when the government plans to announce that it has achieved its goal of eliminating poverty. It also marks the start of the 14th five-year plan.
While headline data may appear robust, underlying growth may still be sluggish, the advisor said, pointing to exports, the strongest driver of 2020's growth. Many exporters are barely profitable or even losing money due to yuan appreciation, he said.