Linking the past and the future – China's New Development Stage
Interpretation of the Chinese Government Work Report 2021
In introducing the Chinese Government Work Report at the 4th Session of the 13th National People's Congress earlier this month, Li Keqiang, Premier of the Chinese State Council, summarized the government's work over the past year, stressed again the major directions of development during the 14th Five-year Plan period, and set out annual targets for economic growth, employment, CPI and emissions reduction.
Li's speech demonstrates the importance China's government attaches to the sustainable and healthy development of the national economy, and future macro policies can be expected to set out precise actions and targets for quality and efficiency enhancement. This article considers China's future policy priorities and development opportunities for domestic enterprises from a macro and industry perspective, based on our long-term observations of the Chinese economy.
Chinese Government work priorities for 2021
Actual 2020 figure
Reduction in energy consumption per unit of GDP
New urban employment
More than 9 million people
11.86 million people
More than 11 million people
Surveyed urban unemployment rate
More flexible and moderate
Flexible, precise, reasonable and moderate
Evidently higher than that the previous year
Basically matching the nominal economic growth rate
Macro leverage ratio
More proactive and well-functioning
Quality and efficiency enhancements; more sustainable
Tax and fee cuts
More than RMB2.5 trillion
Source: Government Work Report 2021, Wind
Overview of priorities in the Chinese Government Work Report
2020 was an extraordinary year for China. Having achieved a major strategic success in response to COVID-19, it was not only the world's only major economy to achieve growth, but also realized its 1st Centenary Goal on time and attained victory in the fight against poverty.
2021 is of particular importance to China as it pursues its modernization drive. It will act on the general principle of pursuing progress while ensuring stability that was stressed at the Central Economic Work Conference at the end of last year, ground these efforts in a new development stage, apply a new development philosophy, and create a new pattern of development. These efforts will enable China to get off to a good start in the 14th Five-Year Plan period and commemorate the centenary of the CPC with outstanding development achievements.
- As Covid-19 prevention and control becomes the norm and the economy recovers with decent momentum, macroeconomic regulation and control policy will gradually return to normal, although the support necessary for economic recovery will be kept in place. China has set a deficit-to-GDP ratio target for the year of about 3.2 percent, slightly lower than the 2020 target, but higher than 2019's.
- Stabilizing employment and improving living standards remain the top priorities. The Government Work Report continues an established employment-first policy, addressing hot topics involving people's wellbeing, such as education, healthcare, housing, basic living requirements, intellectual and cultural needs, and social governance.
- The domestic market is the cornerstone of China's new development pattern. In 2021, it will continuously expand domestic demand as a strategic imperative, increase personal incomes through multiple channels, fully tap the potential of the domestic consumption market, and promote better alignment of consumption and investment.
- The dual-circulation development pattern calls for sound, smooth international and domestic circulation. The negative list for foreign investment will be further reduced, and a similar list for cross-border trade in services will be formulated.
- Advancing reforms in key areas: China will further energize market entities based on deepening overall reforms. At the government level, it will transform various functions. At the enterprise level, it will work to reduce production and operating costs. At the market level, China will promote the common development of enterprises under diverse forms of ownership and deepen reform of its fiscal, tax and financial systems.
The State Council, in accordance with recommendations from the CPC, produced the draft Outline for the 14th Five-Year Plan for Economic and Social Development and Long-Range Objectives through the Year 2035. The 14th Five-year Plan period will lay the foundations for development in the coming 15 years. The key points are:
- China will foster a new development pattern in the domestic market. In the 14th Five-year Plan period, it will pursue a strategy of expanding domestic demand and intensifying supply-side structural reform, and generate new demand with innovation-driven development and high-quality supply.
- Scientific and technological innovation are crucial to the new development pattern. Innovation is at the heart of China’s modernization drive. China will strengthen science and technology to provide strategic support for development. Meanwhile, it will give greater prominence to the guiding role of enterprises' scientific and technological innovation, safeguard the achievements of researchers, promote industrial innovation through multiple means, realize manageable development of industries, and accelerate digitalization to create new strengths in the digital economy.
- China will also promote the realization of green development goals. The Government Work Report includes specific targets for green development and requires solid steps in 2021 towards achieving peak carbon emissions and carbon neutrality. China will also draw up an action plan for carbon emissions to peak by 2030.
- China will strive for common prosperity and promote coordinated development. In the 14th Five-year Plan period, it will focus more on coordinated development, promote connectivity between rural revitalization and poverty alleviation, improve its new urbanization strategy, and promote coordinated regional development, all of which are effective means to tackle imbalanced urban-rural and inter-regional development. China will ensure public services are inclusive, meet essential needs, and ensure basic living standards for the disadvantaged to ensure its people share more fully and fairly in development gains.
- China will advance overall reform and opening up and bolster the momentum and vitality of development. It will develop a high-standard, socialist market economy; build a high-quality market system; implement reforms to promote the market-based allocation of production factors; modernize its fiscal, tax, and financial systems; deepen reforms to streamline administration and delegate powers; improve regulation, upgrade services, and develop new systems for a more open economy.
Consumer goods and retail
The Government Work Report proposes that China will strategically expand domestic demand and fully tap the potential of the domestic market, sending the following signals to the consumption sector:
- On the consumption side, China will encourage improvements in people’s consumption capacity by increasing personal incomes and improving the environment for consumption. The Report mentions that personal incomes will be steadily increased to improve people’s consumption capacity, and China will improve the environment for consumption to ensure people are able and willing to spend;
- On the supply side, China will encourage supply for the consumption of big-ticket items, environmental protection and new goods and services. The Report notes that China will encourage steady increases in spending on automobiles, home appliances, and other high value items, and abolish excessive restrictions on sales of second-hand vehicles. More car parks and electric vehicle battery charging and swapping facilities will be built, and the system for recycling power batteries will be developed at a faster pace. The Report also proposes that enterprises be encouraged to develop new products and services, and that better market access will be provided for new products. China will ensure products sold domestically are produced on the same production lines, meet the same standards, and are of the same quality as exported products. The Report adds that consumption of services such as healthcare, culture, tourism, and sports will be promoted;
- To address circulation, China will encourage efforts to make consumption links more digital, inclusive, convenient and equitable. Addressing digitalization, the Report says China will use the Internet+ model to promote integrated development of online and offline businesses in more fields and create new forms and models of business, providing more convenient and satisfying services for consumers. To promote inclusiveness, networks for the flow of goods and services in urban and rural areas will be improved, and rural e-commerce and express delivery services will be expanded to spur greater consumption at the county and township levels. To improve convenience, China will ensure convenience stores, shops, and other neighbourhood services are well-run, and to promote equity, will encourage platform companies to reduce their service fees as appropriate.
The guidance of the Two Sessions for the logistics sector has four main aspects: reducing expense and increasing efficiency; improving networks for the flow of goods and services in urban and rural areas; developing cross-border e-commerce; and promoting supply chain development. '
- Reducing expense and increasing efficiency by lowering transportation and logistics costs, including by introducing differentiated pricing for expressway tolls, abolishing port development fees and cutting airlines’ contributions to the civil aviation development fund.
- Improving networks for the flow of goods and services in urban and rural areas. In a major development trend, the logistics industry is continuing to promote urbanization in rural areas, with enterprises accelerating their deployments in rural areas and improving infrastructure.
- Encouraging the development of cross-border e-commerce to diversify markets. Import tariff policies will be adjusted, and customs clearance procedures at ports will be optimized to facilitate cross-border shopping.
- Accelerating the digitalization of logistics supply chains. China will advance the digitalization of traditional infrastructure and apply emerging technologies such as big data and blockchain to promote the digital transformation of logistics supply chain systems.
The Government Work Report expresses plans for manufacturing sector development as "three increases and one reduction": accelerating innovation, improving supply chain stability, promoting corporate collaboration; and reducing the production, operation and financing costs of manufacturing enterprises.
- China will encourage enterprises to increase R&D spending with preferential tax treatment, and raise the allowable tax deduction on enterprises’ R&D costs to 100% for manufacturers.
- It will raise the proportion of loans to the manufacturing sector and increase investment in equipment upgrades and technology transformation by manufacturing enterprises to make industrial and supply chains more self-sufficient and better control risks.
- China will give full play to large enterprises’ capacity to provide leadership and support, and to the collaborative and supporting role of small- and medium-sized enterprises to strengthen its industrial foundations.
- It emphasizes the reduction of charges in sectors such as energy, transportation and telecommunications; will allow all manufacturing enterprises to engage in market-based electricity transactions; and maintain a range of guiding opinions, including a policy of allowing micro and small enterprises to defer principal and interest repayments on inclusive-finance loans, with the aim of reducing manufacturers' production, operation and financing costs.
Energy and resources
Energy and resources will develop on three themes: reform, greenness and openness.
- The general objectives are energy sector reform, reduced charges, strengthening, expanding, and increasing returns on state capital, and enhancing the strength, quality and size of SOEs.
- A range of green development initiatives are proposed, including drawing up an action plan for carbon emissions to peak by 2030, improving the energy mix, pushing the development of new energy sources, and accelerating the development of national markets for energy use rights and carbon emissions rights trading around peak carbon emissions and carbon neutrality.
- China emphasizes high-quality opening up, including achievements in promoting high-quality Belt and Road cooperation, advancing cooperation on major projects and lifting the quality of foreign investment.
Life sciences and healthcare
The Government Work Report signals several policies on medicine and healthcare, with a focus on ensuring basic medical care for people while achieving innovative development.
- China will strengthen its public health system, improve the system for disease prevention and control and accelerate the development of the healthcare industry.
- It will continue to systematically promote centralized purchasing and include more medicines for chronic and common illnesses and high-priced medical consumables into bulk government purchases to lighten patients' burden.
- China will increase government subsidies for basic medical insurance for residents by an average of RMB30 per person, and subsidies for basic public health services by RMB5 per person; promote unified provincial-level management of basic medical insurance funds and realize immediate inter-provincial settlement of outpatient bills through individual accounts for basic medical insurance; improve the system for a range of medical insurance benefits; and improve the dynamic adjustment mechanism of the list of drugs covered by medical insurance.
- It will improve the capacity of medical services at the county level, expand trials of national and regional medical centers, and strengthen the ranks of general practitioners and rural doctors.
- China will support traditional Chinese medicine and Western medicine and accelerate the introduction of a range of policies and measures concerning innovative development of medical education and the development of traditional Chinese medicine.
- It will promote well-regulated growth of “Internet+ Healthcare” initiatives, optimize measures such as medical appointment procedures, and promote online and offline coordination to provide medical services and products that are more convenient and accessible.
Based on the above trends, we suggest enterprises in the sector pay more attention to improving R&D capabilities to differentiate themselves. Enterprises should also transform to adapt to digital applications and the introduction of policies. "Inclusiveness" and "innovation" are the key words of the future.
According to the Two Sessions, China's scientific and technological development will focus on the foundations and quality of innovation to promote innovation-driven development and further improvements in China's scientific and technological strength.
- China will strengthen the development of its foundations for innovation across a range of dimensions.
- It will accelerate construction of major science and technology infrastructure and platforms, such as national laboratories, industrial innovation centers, engineering research centers, manufacturing innovation centers, enterprise technology centers and innovation platforms.
- Key areas of science and technology development will cover strategic emerging sectors such as new generation AI, quantum communication and computing, advanced information technology, biological medicine, and new energy.
- In terms of regional development, science and technology innovation centers and industrial innovation hubs will be formed, and national independent innovation demonstration zones and high-tech industrial development zones will be built in Beijing, Shanghai, and the Guangdong-Hong Kong-Macao Greater Bay.
- China will strengthen strategic scientific and technological capabilities, and tackle difficulties in key fields, relying on national mechanisms and innovation ecology, including in technologies currently facing bottlenecks, such as integrated circuit semiconductors and chips. Accelerating scientific and technological self-reliance is critical.
- China will continuously deepen and improve digitalization in every sector, including through the digital transformation of traditional industries; cultivation of new forms of digital economy; digital empowerment of small- and medium-sized enterprises; upgrading the industrial sector with digital and smart technologies; building national pilot zones for digital economy innovation and development; and poverty alleviation through e-commerce.
- It will also steadily build new digital infrastructure such as 5G networks, data centers and the industrial internet.
Improving the foundations and quality of innovation depends on capital and industry ecosystems. For this reason:
- National R&D expenditure intensity is set at 2.4%, which would lift the contribution rate of scientific and technological progress to 60%.
- China will boost the principal role of enterprises in innovation, encourage enterprises to intensify R&D spending, and support enterprises in technological research and development in cooperation with research institutes and upstream and downstream peers.
China will continue to focus on deepening financial supply-side structural reform, and harness reform and innovation as the key source of momentum. Monetary policies will make ensuring stability a top priority. The needs of promoting economic recovery and preventing financial risks will be balanced.
- Prudent monetary policies will be reasonable and appropriate. Increases in money supply M2 and aggregate financing will be generally in step with nominal GDP growth, and the macro leverage ratio will be kept stable.
- Micro and small businesses will have easier access to financing, and their overall financing costs will drop steadily. Further steps will be taken to address the financing difficulties of micro and small businesses, such as postponement of principal and interest repayments, and increasing support via re-lending and rediscounting; continuous improvement of systems for assessment and exemption from liability for due diligence of financial institutions; and innovation of supply chain financial models. Inclusive loans to micro and small businesses by large commercial banks will increase by more than 30% in 2021.
- China will continue advancing financial reforms in key areas: Replenish capital of small and medium banks through multiple channels (such as hybrid capital bonds and local government special-purpose bonds); strengthen corporate governance, management of shareholders’ information under the penetration principle and transparent regulation; strengthen the role of insurance in protecting against risks and providing services; conduct multi-level capital market construction and open up more financing channels for the market (promoting registration-based reform and strengthening bond market development); and strengthen the regulation of financial holding companies and financial technology to ensure financial innovations are made under prudent regulation.
- China will implement special polices on providing financial support for green and low-carbon development, and devise instruments for supporting the reduction of carbon emissions.
- Upholding the principle that housing is for living in, not for speculation, China will focus on addressing housing issues in large cities. It will ensure well-regulated development of the long-term housing rental market, and cut taxes and fees on rental housing. China will focus on addressing the housing difficulties faced by new urban residents and young people.
- China will accelerate the development of the 3rd pillar of pension insurance system. As an aging society (it’s estimated that the proportion of people above 65 years old will reach 14%), full coverage of pension insurance will be basically realized during the 14th Five-Year Plan period. China will accelerate the development of the 3rd pillar along with reform and innovation to make it an emerging form of business for the provision of commercial pension insurance. Commercial pensions will also promote the sound development of the capital market as long-term guarantee funds.
Summary and recommendations
- With epidemic prevention and control and economic recovery on the right track, macro policies and economic trends will not see major changes.
- Policy-oriented equitable development will bring new opportunities for economic growth, reflected in the government’s further efforts to constrain "monopolies" at the enterprise level, and inclusive measures in education, medicine, elderly care and other fields to support people’s livelihoods.
- Scientific and technological innovation is a major support for national strategies, and scientific and technological capability is enterprises' core competitive advantage.
- Supply chain adjustment, decarbonization, capital market reform and domestic consumption will determine the future pattern of industrial development.