China’s 2021 growth target signals the policy focus has shifted to structural reforms. The 2021 real GDP growth target is set at "above 6 percent", lower than the market consensus growth forecast of about 8.5 percent. This growth target means the government's policy focus is shifting away from short-term growth to longer-term structural reforms. Indeed, Premier Li said the growth target is "conducive to guiding all parties to concentrate on promoting reform and renovation and achieving high-quality growth". The government confirmed that it will continue to set annual growth targets in the next five years.
The fiscal stance will normalize gradually. The government's budget deficit target will be reduced to 3.2 percent of GDP this year from 3.6 percent last year, while local government special bond quotas will be reduced slightly. We estimate these targets imply about a 50 percent withdrawal of last year's stimulus measures. As a result, we forecast total fiscal spending will grow 8 percent in 2021, providing sufficient support to economy.
Monetary policy will keep loan rates low and strengthen support to small and medium-sized enterprises. The government announced it will guide "a further reduction in the effective loan rates". Policy support will be targeted at SMEs and businesses still affected by COVID-19. In fact, the government targets a 30 percent increase of SME loans by big commercial banks. The annual average CPI Inflation target is set at 3 percent this year, which is a reasonable target given the current low inflation rates.
The government is supporting innovation especially in the manufacturing sector. It envisages R&D spending will grow at least 7 percent per year in the next five years, and R&D share in GDP should increase further from 2.4 percent currently. The central government will increase its own spending on fundamental research by 10.6 percent in 2021. The government is encouraging R&D by continuing the 75 percent additional tax deduction on R&D spending, and will increase it to 100 percent for manufacturing companies.
Promoting green economy is a priority for the new five-year plan. The government will set five climate and environmental targets in the 14th Five-Year Plan. These targets will help accelerate China’s decarbonization and development of renewable energy. In 2021, the government will reduce energy intensity by 3 percent, and will build more parking lots and charging stations and accelerate electric vehicle battery recycling.
Opening-up will be accelerated in the services sector. The government confirmed that it will further reduce the negative list of market access to attract foreign investment. It will expand the pilot program for opening-up the services sector, and will introduce a negative list for cross-border services trade. These measures show China is determined to implement the EU-China Comprehensive Agreement on Investment, and convey a consistent welcoming stance toward foreign investors from all over the world.