5 March 2021 | 12:45PM HKT

China: Two Sessions Comment 1: Government Work Report more

dovish than expected

The National People’s Congress started today. PM Li Keqiang delivered the Zhennan Li
+852-2978-6128 | zhennan.li@gs.com
Government Work Report which outlined key economic targets for this year. The key Goldman Sachs (Asia) L.L.C.

focus and divergence of views in the market had been on growth target and fiscal Hui Shan
+852-2978-6634 | hui.shan@gs.com
policy package. Overall, the message from the working report was more dovish than Goldman Sachs (Asia) L.L.C.

the market expected. Maggie Wei

+852-2978-0106 | maggie.wei@gs.com
Goldman Sachs (Asia) L.L.C.
On GDP growth target, it would be “ above 6%” this year, in line with our Helen Hu
expectations. Although this remains a relatively flexible target and is likely easy to +852-2978-6962 | helen.hu@gs.com
Goldman Sachs (Asia) L.L.C.
achieve given the low base (even assuming economic activity remaining flat at Q4 Andrew Tilton
+852-2978-1802 | andrew.tilton@gs.com
2020 levels, annual GDP growth would be around 6% year-over-year in 2021), this Goldman Sachs (Asia) L.L.C.
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).

Investors should consider this report as only a single factor in making their investment decision. For Reg AC
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Goldman Sachs China

With pre-allocation, in theory local governments do not have to wait that long to start to
issue new bonds.

On monetary policy, as expected, the tone in the report is same as that in last
December’s Central Economic Working Conference, and the report reiterated to keep
M2/TSF growth roughly in line with nominal GDP growth. From a quantitative
perspective, this means much smaller deviation in M2/TSF growth from nominal GDP
growth than last year which was unusually high due to the pandemic (last year the ratio
between TSF and nominal growth was up sharply to 5.2, much higher than around 1.2
on average between 2017 and 2019), and also a moderation in credit growth from last
year (we expect TSF stock growth to moderate to around 11.5% from 13.3% in 2021).
The government also requested continued support for SMEs, such as extending policy
of deferring principal repayment for inclusive SMEs lending and big banks to increase
inclusive SMEs lending by more than 30%. And the report also mentioned to push
lending rates to be lower. Although the room for decline in lending rates may be much
less than last year given the normalization of monetary policy, this also implies the
likelihood for policy rate hikes (and accordingly higher market rates) should be fairly low,
at least in the near term.

On employment/unemployment targets, the government set the new urban

employment target to be 11 million, and surveyed unemployment rate target to be 5.5%
(registered unemployment rate target to be 4.5%), back to levels seen before the
pandemic. These targets are in general not binding and have been pretty easy to
achieve—indeed, the most recent (late 2020) data show unemployment rates are
already below these levels at 5.2% for surveyed and 4.2% for registered employment.
Although in recent years, employment has seemed to be increasingly emphasized by
the government, it is still too early/unrealistic for the government to replace GDP with
employment indicators in their practical policy-making.

On CPI target, it was moved back down to 3% in 2021 from 3.5% in 2020 (after
keeping it at 3% between 2015 and 2019). Headline CPI inflation has been low (actually
slightly negative) recently, and we expect it to remain mild in 2021. So this should be
easy to achieve. In practice, the target has been more like a ceiling for the acceptable
range of CPI inflation.

The report also reiterated to support manufacturing, and to maintain a stable housing
market and increase housing supply in top tier cities.

On 14th Five-Year plan, the key priorities highlighted in the report were similar as that
in the proposals, such as a focus on high quality growth, innovation, expanding domestic
consumption, new urbanization and regional development strategy, and green
development. Detailed plan including targets for major indicators that the government
will try to achieve will be released next week after the “Two Sessions”. On growth
targets for the next five years, the report mentioned to propose growth target according
to situations each year. We may need to wait for more clarification on this in the detailed
plan. But this suggests growth remains very important for the Chinese government on
one hand, and on the other hand, the government will try to avoid having relatively
rigid/hard-to-achieve targets become an obligation, leading to excessive stimulus and

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Goldman Sachs China

renewed structural imbalances.

The Two Sessions will conclude on the 11th, shorter than typical around 10 days. This
was same as last year, reflecting the impacts of the pandemic. In the coming days,
members attending the Two Sessions will attend many press conferences and do
interviews. We will comment should there be any further significant announcements.

GDP growth target would be “above 6% in 2021

Percent change, yoy Percent change, yoy

8.5 8.5

China: annual real GDP growth target

8.0 8.0

7.5 7.5

7.0 7.0

6.5 6.5
2021:
"Above 6%"
6.0 6.0

5.5 5.5
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

Source: Wind, Government Working Report, Goldman Sachs Global Investment Research

5 March 2021 3