China’s ‘two sessions’: how Beijing is moving past GDP targets and towards social balance

While Premier Li Keqiang may still mention hard economic targets in his annual work report, the market needs to see that policy dynamics are shifting
To pursue its ‘dual circulation’ strategy in the coming years, China needs a bigger consumer base as it looks to reduce income inequality

Hao Zhou

Published: 6:45am, 3 Mar 2021

Why you can trust SCMP

At a grand event last week in the Great Hall of the People in Beijing, ahead of the annual National People’s Congress this week, Chinese President Xi Jinping declared a “complete victory” over absolute poverty. The state media reported that close to 100 million Chinese living in rural areas had been lifted out of absolute poverty since Xi came to power in late 2012.

When market investors watch the NPC, their focus is usually on the economic targets set by Beijing. From these so-called hard indicators, the investors would elaborate and draw some policy and market implications. From Chinese policymakers’ perspective, these economic targets act as a form of forward guidance and help to anchor market expectations.

However, both investors and policymakers have gradually realised that while the rigid economic targets provide clear guidance, many other issues may be overlooked, which could then be harmful to all of society.

For instance, economic growth has not benefited all segments of the population equally or at the same pace, resulting in a significant increase in income inequality. This is especially of concern as high levels of inequality affect the pace and sustainability of growth, particularly in the long term.

The Gini coefficient is widely used to gauge income equality. For China, data suggests that the Gini coefficient started rising as far back as the early 1980s, reflecting an increase in income disparity.

04:59

Xi Jinping declares ‘complete victory’ in China’s anti-poverty campaign, but some still left behind

In recent years, although China’s Gini coefficient has shown signs of levelling off – it stood at 0.465 in 2019, down from a peak of 0.491 in 2008 – the National Bureau of Statistics is still concerned that a number in the range of 0.4 to 0.5 reflects an income gap that is too large.

As the economy continues to be affected by the Covid-19 pandemic, low-income groups will only be more vulnerable. In particular, food prices have risen in China since the virus outbreak. Moreover, property prices have surged again in the mega cities, which will put fresh graduates under more pressure.

‘Two sessions’ 2021: five things you need to know about China’s biggest political gatherings

For Chinese policymakers, all these warning signals suggest that they not only need to chase decent economic growth, but also have to redress the balance between the rich and poor. Hence, Xi’s emphasis on poverty reduction ahead of the NPC meetings.

A healthy and more balanced growth path is also important for China to pursue the “dual circulation” strategy over the coming years or even decades.

With the new strategy, China will rely significantly on the domestic market to develop and expand its economy, which is crucial for positioning itself against deglobalisation and elevated geopolitical tensions. From this perspective, a bigger consumer base will have to be cultivated to lay the foundations for the strategy.

This probably explains Beijing’s efforts to contain asset bubbles in the economy, as wealthy families would have been benefiting more from rapidly rising asset prices. The fact is that poor households have much less money to make investments with high thresholds.

Beijing has already tightened the screws on the property market, and further tightening looks inevitable in the coming year. Notably, the Chinese central bank said the growth of property-related loans was slower than the overall loan growth in 2020, for the first time in eight years.

China saw number of ultra-wealthy individuals rise the fastest globally in 2020

Concerns about policy tightening have already weighed on stock market sentiment. China’s onshore stock market experienced volatile sessions in February, with the benchmark CSI index falling almost 10 per cent within the month. In the meantime, onshore bond yields have been on the rise, suggesting that the market expects the People’s Bank of China to become increasingly hawkish in the foreseeable future.

On the contrary, the PBOC will probably be more generous with targeted monetary policy instruments. In the past year, the Chinese central bank has created a few direct instruments to help increase the credit supply to small and private firms, while lowering the costs of funding such loans.

Therefore, if we carefully calibrate what Chinese policymakers have been doing, there seems to be a clear bias towards rebalancing China’s economic structure. With all the effort, Beijing is also looking to reduce income inequality to achieve more sustainable growth in the long term.

On the one hand, China is seeking to support the manufacturing sector to help low-income groups; on the other, Beijing is limiting the credit access of wealthy families and asking commercial banks to expand balance sheets and lend to small and private companies.

All told, while Premier Li Keqiang may still mention some hard economic targets in his annual work report this week, the market might need to read between the lines to understand that policy dynamics are shifting in Beijing. Just keep in mind that it means a lot for China to have a broader base of consumers and a stronger manufacturing sector.

Hao Zhou is senior emerging markets economist at Commerzbank