For months now I have argued that China is tightening stimulus and we can expect it to slow through the second half of 2021. That has been clear in PBOC tightening at the margin plus some fiscal. Now, following last week’s National People’s Congress it is offical. Goldman has the details:
On GDP growth target, it would be “ above 6%” this year, in line with our expectations. Although this remains a relatively flexible target and is likely easy to achieve given the low base (even assuming economic activity remaining flat at Q4 2020 levels, annual GDP growth would be around 6% year-over-year in 2021), this could still be viewed positive—many market participants had expected no growth target, like last year, which arguably would have left more room for a hawkish policy shift. Setting a growth target that is more like a lower bound at national level is also consistent with those targets set at provincial levels, with the majority of provinces using “above” in their targets and 6% as the minimum lower bound. Overall, we think this shows GDP growth per se (i.e., maintaining GDP growth within a reasonable range) remains very important, although the flexibility in the target reflects that the binding effects from a GDP growth target on policy may decrease.
On fiscal deficit and local government bond quota, the government set the official on-budget fiscal deficit target in 2021 at 3.2% of GDP, lower than a historical high level of 3.6% in 2020 but slightly higher than the 3.0% we and the market expected. Local government special bond full year quota is Rmb 3.65 tr, slightly lower than Rmb 3.75 tr in 2020, but again higher than our expected Rmb 3.5tr and also likely towards the high end of market expectation. Of course, a more relevant indicator for measuring on-budget fiscal stance is the effective deficit, but detailed information to calculate this would be included in the budget report, which will be released around two days later. The government may reduce its drawdown of fiscal deposits in 2021 relative to 2020, which could mean the decline in effective deficit could be larger than that in official deficit. It was reported that part of the local government bond quota was already pre-allocated to provincial governments (as in the past two years, though it was later this year). From budget procedure perspective, to issue new government bonds requires NPC approvals during the“Two Sessions” and then allocation by the State Council/MOF to provincial governments. These would be followed by the adjustment of provincial budgets incorporating information on bonds and approval of local NPC. This could take at least a month (historically most provinces started to issue bond in May or even June). With pre-allocation, in theory local governments do not have to wait that long to start to issue new bonds.
