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What to watch as China rolls out an economic plan to overtake the US

Laying out plans that could propel the economy into the world’s biggest this decade.
Image: Bloomberg

China kicks off its biggest political meeting of the year Friday, laying out plans that could propel the economy into the world’s biggest this decade.

The annual gathering of the National People’s Congress carries an added significance this year with the Communist Party’s unveiling of its new five-year plan — a blueprint to boost the domestic market and reduce technological dependence on the outside world. Approval of the policies are predetermined, but the NPC meeting is an important mechanism through which the ruling party communicates its plans to the world.

China powered its way out of the pandemic last year after the virus was quickly brought under control, becoming the only major economy to expand in 2020. Now, with risks of asset bubbles growing, policy makers must engineer an exit from the monetary and fiscal stimulus that fuelled that recovery — and do so without destabilising growth and spooking investors already wary of corporate defaults.

Here are some of the key issues to watch when Premier Li Keqiang outlines the ruling party’s plans Friday:

Growth target

The government didn’t set a target for gross domestic product growth last year, and with the coronavirus pandemic still looming, it could refrain from doing so again. The Communist Party has emphasised the need for quality growth and dropping a numeric target for a second year would signal it considers that more important than the pace of expansion, said Haibin Zhu, chief China economist at JPMorgan Chase & Co.

But it’s still an open debate. A researcher at an influential government think tank said last week a target was necessary to ensure quality growth. And three-quarters of provincial governments have already set annual GDP growth targets of 6%-8% for this year — conservative in comparison with economists’ median estimates of an 8.4% expansion.

Aside from this year’s growth, the new five-year plan will also lay out an average growth goal for 2021-2025, which Zhu estimates would be about 5.5% a year, compared with a target of more than 6.5% in the previous plan. “That is achievable because there is high growth in 2021 to start with,” partly due to base effects from last year’s pandemic-induced slump, he said.

In the absence of a GDP target, local officials guide policy with reference to an urban job creation target, which is likely to be 11 million this year, according to forecasts from Goldman Sachs Group.

Stimulus withdrawal

The government runs a budget deficit each year as part of what it calls “proactive” fiscal policy, disclosing an annual target for the gap between spending and revenue. This year, the target will return to pre-pandemic levels of 3% of GDP from more than 3.6% in 2020, according to Peiqian Liu, chief China economist at NatWest Markets in Singapore.

“We expect the stimulus withdrawal to be mild and focus on reducing excessive debt growth,” she said.

Morgan Stanley economists estimate that the “augmented” deficit, which includes wider forms of off-balance-sheet borrowing by local governments, will fall to 12% of GDP in 2021 from 15% in 2020. That is still high relative to pre-pandemic levels closer to 10%. The quota for local government bond issuance, an important driver of infrastructure investment, will fall to 3 trillion yuan ($465 billion) this year from 3.75 trillion yuan, the economists wrote in a note.

What Bloomberg Economics Says…

The direction set for economic policy is likely to be toward normalisation — but gradually. Pockets of weaknesses and downside risks — evident in the soft patch at the start of the year — mean that fiscal and monetary support will likely be tapered, but not withdrawn. — Chang Shu, chief Asia economist

Five-year plan and tech focus

Alongside its work report for this year, the government will also release economic goals for 2021-2025. The five-year plan is a hangover from the planned-economy era, when specific targets for output of steel and other products were set. Since then the document has become mainly a list of general aspirations, but it sets the tone of policy and includes some numerical targets.

At the centre of the new plan will be Beijing’s push to develop new technologies and cut the nation’s reliance on geopolitical rivals such as the US for components like microchips.

That should mean allocating more resources to science and technology, with spending on research and development targeted at around 3.5% of GDP over the period, according to Cao Cong, an expert on Chinese science policy at the University of Nottingham in Ningbo.

Births and retirement

The five-year plan will also attempt to soften the impact of a rapidly declining birth rate and ageing population on economic growth, with a possible further relaxation of limits on family size and a raising of the retirement age. The plan is also likely to include a target for moving rural residents into cities, and measures on equalising social services between regions, in order to reduce inequality and promote consumer spending.

“The government needs to come up with ways to lift fragile household confidence and get more money into the pockets of consumers,” said Shaun Roache, chief Asia-Pacific economist at S&P Global Ratings.

Energy goals

Investors are watching out for more specifics on how the government will reach its goal of peaking greenhouse gas emissions by 2030 and achieving carbon-neutrality by 2060. It’s been widely flagged that renewables will take an ever larger slice of power generation at the expense of the dirtiest fossil fuel, coal. But policy changes are likely to reach far beyond just energy markets, from reining in output of highly polluting metals like steel to the rejuvenation of vast agricultural hinterlands.

Running parallel to — and perhaps occasionally competing with — the massive effort to cleanse the atmosphere will be policies that speak to historical anxieties around ensuring the supply of food, energy and minerals. Given the country’s stature as the world’s biggest buyer of everything from crude to iron ore and corn, investors will be on the look-out in particular for any hints that strategic stockpiles will be expanded, or import dependencies curtailed.

Financial reforms

The five-year plan will likely include aims to further open up the financial system to foreign investors, and reduce the limits on Chinese investors moving cash overseas. Capital market reforms over the next several years may also help to direct financing to businesses: officials are considering making relaxed listing rules more widespread and also studying the feasibility of a same-day trading mechanism on Shanghai’s Star Market.

At the same time, authorities are tightening their grip on technology giants like Ant Group and Tencent Holdings’s WeChat Pay to curb their growth in financial services. The central bank earlier this year proposed anti-monopoly rules in the online payment market.

Hong Kong

Any announcements on Hong Kong could stoke tensions with the US, which sanctioned senior Chinese officials after the NPC imposed a national security law on the city last year. Chinese officials have been urging electoral changes to ensure “patriots” run the former British colony, further restricting its already-limited democracy. China will also release a target for defence spending as part of its budget. Military expenditures rose by 6.6% last year, the slowest pace since 1991.

© 2021 Bloomberg

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Herein lies the resources super cycle. Lots of value ahead in some smaller JSE listed resource entities…

China, Africas new Colonialists

They’re running through Africa and settling in without firing a shot

Beware EFF, ANC and BFLF..Your woes do not lie within the minorities..In fact if anything they could have been your ally

As it stands, do yourself a favour and drive through the townships and rural towns and see for yourself who owns the businesses and who Is in their emply!

And guess what? It’s too late to change the fliw of the tide..They’ve entrenched themselves firmly in our country

Whilst you were politicizing against the minorities, the giant slithered amongst you and infiltrated our land

My suggestions is that you start learning to speak Mandarin..Your new masters will insist on it

Your kids and the generations thereafter will be somewhat different to a liberation movement as they’re going to be “liberated” for the wrong reasons

Good luck Africa, the Dragon has already entered

If we distance ourselves from the immediate and everyday policy issues, to get some broader perspective, it becomes clear that China and South Africa are moving in opposite directions.

The Chinese economy has been expanding at between 8% to 12% over the past 20 years while the South African economy has been largely stagnant over this period.

The pace at which the Chinese are constructing infrastructure amounts to building the entire Eskom every 4 months, while we are destroying what we had.

The Chinese economy creates jobs at an unprecedented rate to lift the population out of poverty. We are destroying jobs at a record rate. The fact that we have the highest unemployment figure in the word describes how the local policies dump people in poverty.

The Tripartite Alliance is socialist/communist/collectivist. China is a one-party state ruled by the Communist Party. If both countries are communist, why are their economies moving in opposite directions?

Both are not communist though. China is communist in name only. They are moving away from a history of shared resources and unaccountability towards property rights, accountability and the rule of law.

We are moving away from a system of property rights and rule of law, towards collectivism, shared resources, unaccountability, and the rule of man. We are on opposing trajectories. That is why the results are different.

@mojo

I will take the bait!

All other things being equal, comparative size of population may be a proxy for a nation’s power and success.

But…

In the case of China vs the USA, the devil is in the detail of the CHANGING demographics.

Quantity does NOT equal Quality!

I point to India as a useful comparison to China. India is a national disaster, and have ONLY themselves to blame for their chaotic predicament (and future demise).

Your notion that the human population should just keep on multiplying (because that “must be good for the GDP) is dangerous and wrong. This planet ALREADY has too many humans! This over-population is digging our own grave!

My thesis is that a Nation’s Success (however you may want to define that) ultimately depends on the average intelligence of the nation.

A nation of clever people will defeat a nation of stupid people. A company run by clever people will out compete a company run by less-clever managers. Just common sense.

In China’s case, this has been PROFOUNDLY affected by the consequences of the one-child policy.

For example, the child is born into a family with BOTH parents present. Illegitimate births are virtually unknown.

The consequence of this is that these “only-child’s” (the policy has now been relaxed, but not abandoned) are very much treasured, stimulated, and doted upon by the parents.

This good parental behaviour has PROFOUND future consequences for the individual child. And then – and to my point – ultimately for the MATERIAL benefit of the nation.

It is a proven fact that children from a happy, loving, nuclear family generally are much brighter, more conscientious, and more eduacable than their peers from dysfunctional single-parent upbringing.

Which adverse trend is the rising demographic problem in the USA.

The future consequences of China’s one-child policy is not all roses and sunshine.

There is an imbalance of girls to boys, and there is going to be a huge social challenge dealing with the aged later.

But the Chinese are aware, and regard this as a necessary and only temporary hiccup (they really do think long-term).

On balance, the Chinese are developing into a nation of very resourceful, hard-working, and clever people driven by a strong vision for the future.

I wish I could say the same for the USA.

There is no longer any comparison!

Having reread your commentary there are some points I deeply agree upon and others where I feel your ideas are fed by archaic notions.
We need people. Yes, we are near a global all time peak of population. Sadly, from 2050 on, it is all down hill as humanity will succumb to her growing infertility and decline into oblivion, like the elephants and finally go extinct.
The Chinese rulers have done themselves an enormous disservice by applying their one child policy. An evil abomination on humanity in itself but leading to rampant filiacide (the cause of the male/female imbalance).
With the demographic cycle in mind, China gave herself a a knock out blow. Her population is going to half. America’s is going to expand. w.r.t. your insinuations about the brown people of this world, I believe you are mistaken in underestimating them.
What is enraging is that in this day an age, there are still whole populations (however large) who believe they have an inherent right to the lion’s share of the world’s resources because they are more ‘intelligent’?
The Chinese are masters at the copy, whether as calliographists or as technologists. Their art is gentle and sophisticated, their culture beautiful. I don’t think they will ever match the innovative prowess of the Caucasian mind, which, in another way is inspired almost supernaturally in its finest creation.
They have taken autonomous technology and classification technology (note: I avoid the use of AI or machine learning, because I think both are fallacies) to great heights. But like the technological innovation of the 19th Century, the bicycle, people will grow bored with it and the bubble will exhaust.
In the “long term” what can be more time tested than perseverance towards Liberty.
The ancient Chinese state fully understood the play of power in the world. and the fundamental role of geopolitics. They were on top of the demographic pile. They had an abundant agrarian economy. But that was then.
Now they are in a group of contenders for geopolitical dominance.
They have shown themselves to have savvy in warfare. But the factors that cause this dominance, like demographics and climate are pointing away, despite their ignoble attempts to cheat (through the OCP and climatic interventions, like large scale cloud seeding.)
They have upped the development of their population, but at what long term cost? They have probably lost their chance to ever again dominate the world through power. And hopefully so.

The population size per se does not say very much. The economic policy and the GDP is the overriding factor. When the economic policies are disastrous like in Zimbabwe, Venezuela and South Africa, the GDP per Capita is stagnant or in decline. The GDP feeds people. Below a certain level, the GDP/capita cannot sustain the population size. People will starve and the population size will shrink when any nation moves away from property rights towards collectivism. This is the Malthusian Trap. The economy keeps people alive, not the other way around.

The GDP/Capita in South Africa is $6000, in India $2000, Zimbabwe $1400, China $10 000 and $65 000 for the USA.

Biden’s in their pocket. That should accelerate things.

Maybe we will see the Americans work for the Chinese, make them work 18 hour days for all the hardships they created all over the world for the past fifty years.

I really do not care what happens to America as much as they do not care about anyone else.

America only cares about Dollars.

They will do it before 2027, guaranteed.
The western ideology of private citizenship getting watered down to that of public citizenship. Everything you say and do will be held against you and you will be accountable to a Ruling Class.

Time to start dust up on your Cantonese.

Watch how African States sell peoples souls to the highest bidder, oh wait they have been doing it already for the last 20 years.

Albert Einstein believed in the idea of socialism and many a large activist for it. Unfortunately it shows his complete lack of understanding regarding Spontaneous Order which not only gives rise to individualism in opportunity but also product development through competitiveness. If it was not for Spontaneous Order, not even the mighty china would have any to manufacture as nothing would have been developed in the first place.

His rather short cited narrative mainly applied to the inefficiency of resource usage and thus based his total view that all resources need to be centrally controlled.

https://en.wikipedia.org/wiki/Political_views_of_Albert_Einstein#Socialism

Just because a socialist can quote something from someone famous and smart, does not make what they saying makes any sense. You cannot go against the Nature Law of Order, your very existence will stagnate and regress.

Sorry I have been reading THE FATAL CONCEIT The Errors of Socialism by F.A. Hayek

while the west is held to randoms by profit motive the communists out do the capitalists

@Casi_negro:

It is only after China switched to a profit driven market economy that they grew from a Third World backwater to the second biggest economy.

Where SA’s government can learn from China is in China’s super strong emphasis on economic growth.

China growing at 10% a year for 3 decades and SA growing not even at 2%.

“It is only after China switched to a profit driven market economy that they grew from a Third World backwater to the second biggest economy.”

Nope – not quite true!

If it were simply – and ONLY – due to “adopting a market economy” then they still be trailing every Capitalist nation around.

The driving factors for China’s massive success is due to coming-together of long-term factors that have been present for many decades.

1. A disciplined social culture of literally THOUSANDS of years.
2. A political system devoid of constant electioneering and bickering amongst ego-driven opponents. Compare that to the electoral system of the Western poster-child of the USA, where Trump is actually NOT some wild, isolated aberration, but actually the ultimate NATURAL consequence of an INHERENTLY dysfunctional electoral system.
3. A VERY strong sense of a National Identity, and a pride in that. And a VERY strong patriotic commitment to the sense of “working all-the-time, and in every way, for the greater good of CHINA”. One can argue that the USA also has this feature, BUT in the USA the reality is that this is diminishing and a shadow of its former exuberance.
4. The decision to attack – head-on – the wildly ballooning population growth decades ago. In my considered opinion, this is the SINGLE MOST IMPORTANT factor in China’s turnaround and consequent rise to world-dominance. Contrast this outcome with every other nation that has ignored this!
5. The practice of committing to long-term plans and decisions. And to eschew short-term political expediency. China really does play “The Long Game”. They commit to 100 year (and even 200 year planning). Obviously, long-term plans get amended when circumstances change, but do not think that there is no commitment to the long term vision. Quick example – Taiwan is regarded as an integral part of China, and the vision is to make that happen. China is currently preparing a full-on military invasion, and will make that move when they are confidant they can successfully deter/destroy US intervention.
6. The appointment of competent and trustworthy officials at every level of governance, and a bureaucracy that aggressively ensures this. The overly corrupt are ruthlessly executed.
7. A social surveillance and disciplinary system that rewards “good citizen” behaviour. And “notices” bad social and punishes it with the withdrawal of ordinary privileges. For example, people with criminal backgrounds or other infractions are not allowed to travel on the High_Speed Train Network, but may only use the inferior lesser train routes.
8. Much of this social surveillance is of a really terrible Orwellian nature, with really terrible personal outcomes for the “victims” (which will be entire families).

Western culture finds these practices abhorrent and terrifying. And rightly so. The problem for the West is that this seems to be the winning formula for China – while the incompetent West is literally socially disintegrating chasing its own self-important tail.

W.r.t your 4th point – I believe you are completely wrong – China actually shot herself in the foot. The Chinese population, headed towards 2050, would, without the one-child-policy (OCP) have been 1.4 billion people. Instead they are going to reach 700 million at that time i.e. they are going into population decline. America, where lots of people in the world want to live, and which has a lot of immigration will see its population rise to just over 500 million by 2050. Geo politically they will be about evenly balanced. People drive GDP growth (partially). You’ll see Chinese GDP decline. And America’s rise. The Silk Road initiative is their effort to rope in all the brown races as their labour in their quest to reassert themselves as the master race. Ask yourself what sort of world would you like to be in: A vassal to an extremely powerful totalitarian state? or subject to the wealth vaccuum (through black dollar QE) of a gluttonous defender of the FREE world.

@mojo

See my response to you under Sensei’s comment. Incorrectly posted there by me. My bad!

China has over 4 times the population of the U.S. and even if China overtakes the U.S. it really does not have great significance given the population differential.

The trade system is going through changes that will soon hurt those that stand alone. I reckon the country with the most to lose is likely the US.. while China pushes ahead to open the door on how to set things up eg digital yuan integrating directly to Swift.. longer term US has a serious debt issue with lesser trade purchasers ie dollar usage is waning at a time when they need to force the defacto reserve nature.

Wrt China overtaking the US.. meh.. they will come close but fail to overtake due to population dynamics. If you look at what they doing it’s all about automation and changing from diy to helping neighbours diy in their backyards. Question is whether they can right size for the smaller economy and still be prosperous. Tough one.. as they basically have to switch from everyone’s factory to everyone’s automation manufacturer which takes time(avg education level) but they are getting there.

End of comments.

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