Cautious growth target, with strong accent on job creation

Huang Yixuan
China is aiming for 6 percent growth this year, but concerns remain about the ability to bring employment roaring back.
Huang Yixuan

China recently announced a 6 percent goal for economic growth this year, lower than market expectations but a big improvement over the coronavirus-crippled economy last year. Growth in 2020 was 2.3 percent.

In setting the goal, the National People's Congress took into account the after-effects of the pandemic and a global recovery riddled with uncertainties.

Premier Li Keqiang, in an address to the congress, said, "This year, the country aims to create more than 11 million new urban jobs … and expand domestic demand … to put the economy firmly back to its pre-pandemic vibrancy."

Major financial institutions are even more optimistic. Many are predicting growth in gross domestic product this year will exceed 8 percent. Investment bank UBS is forecasting 8.2 percent, CCB International predicts 8.5 percent, and Nomura pegs growth at 8.8 percent, citing a global recovery, higher inflation and the low-base 2020 figure.

China made great strides in containing the spread of novel coronavirus and was the only large economy in the world last year to achieve some growth.

"There are risks associated with the use of such targets, which have historically contributed to excessive credit growth," said Andrew Fennell, senior director of sovereign ratings at Fitch Ratings. "However, these factors will be limited in 2021, and the post-pandemic recovery will make the goal easy to achieve."

He added, "We expect the government to gradually place less emphasis on growth targets in coming years as the focus shifts to job creation."

According to Wang Tao, chief economist at UBS, "compared with industrial production, which can recover at a faster rate, consumption needs more time to return to pre-pandemic levels.”

China's economy has gotten off to a robust start this year.

Industrial output in the first two months of the year rose 35.1 percent from a year earlier, while retail sales increased 33.8 percent.

Among other economic issues to emerge from the National People’s Congress, the general budget deficit is forecast at 3.2 percent of GDP; special local government bond issuance is projected to drop by 100 billion yuan (US$15.4 billion) from 2020; a debt-service moratorium and some tax cuts are extended for smaller businesses; and there were no explicit signals of new property-tightening measures.

The congress called for monetary policy to be "flexible" and "appropriate," balancing the need to support a recovery and the need to prevent economic risks.

"We believe a credit slowdown will be mainly driven by less liquidity and tighter prudential supervision on ‘shadow credit’ and Internet financing, and not by rate hikes," UBS's Wang said.

She forecasts a 5-point hike in the central bank's reverse repo rate and in medium-term lending facility rates later in the year, though effective lending costs may not rise.

Will there be a fiscal cliff in 2021?

Lu Ting, chief China economist at Nomura, sees that risk as "extremely low.”

"With a moderate stimulus last year, much tighter controls on property market financing, and some planned tapering this year, we think the economy is extremely unlikely to overheat," Lu said. "While we expect inflation to rise to a large extent, the inflationary pressures will be imported and not reflect a hot domestic economy.

"2021 marks the first year of the 14th Five-Year Plan (2021-2025), and China appears fully determined to start it off on the right foot," Lu said.

There is a risk, however, that the government may withdraw policy support too early when private demand is still weak and the growth recovery is still fragile, according to a report by Nomura.

It said China in the past two decades has been praised for its aggressive stimulus spending and subsequent cautious policy exits, but its excessive borrowing and blunt policy withdrawals also raised concerns.

Some analysts are uncertain about China's capability to reach employment goals.

The Australia & New Zealand Banking Group said "growth momentum not a worry, but the job market is."

The jobless rate in February rose to 5.5 percent from 5.2, which is inconsistent with the rebound in other activity data, according to Betty Wang, senior China economist at ANZ.

She said she believes changes in the jobless rate will influence China’s policies going forward.

Premier Li said, "In the raging times of COVID-19 last year, when bustling streets were deserted and shops were closed, our biggest concern was massive job losses. This year, we still face mounting pressure in employment."

The country is firmly committed to job creation.

"In generating jobs, we will continue to enable the market to play a principal role,” Li said. “In other words, we will continue to promote employment by supporting market entities. We will stabilize and expand employment, and open up new channels for job creation."

He pledged that employment will remain at the top of "six priorities" where stability is key and support is needed. Pro-job policies enacted last year will be kept in place and even beefed up.

Zhang Ming, an economist at the Chinese Academy of Social Sciences, said employment pressure in 2021 remains high, with college graduates, veterans and rural migrant workers being the three major groups.

"The economic growth target is closely linked with the need to address employment pressures,” he said. “Without moderate economic growth, it will be difficult to solve the employment problem."

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