The annual session of China’s National People’s Congress (NPC) will start on March 5. As usual, the NPC will approve the government’s work report, which sets growth objectives and policy priorities for coming year. More importantly, as a special agenda for this year, legislators will discuss the 14th Five-year Plan (FYP) and Long-term Development Plan by 2035.

Given the uncertainties associated with the ongoing global pandemic, the NPC may opt to not set a specific GDP growth target for 2021. Instead, a qualitative goal such as “stable economic growth” might be adopted, which implies a GDP growth rate of around 6.0% year-over-year in 2021, although the realized growth rate might be higher on the low basis of 2020. This will allow more flexibility in policies to handle the volatile growth outlook.

On the other hand, a 6% target for surveyed urban unemployment and 3.5% target for Consumer Price Index inflation might be announced, reflecting the government’s attention to people’s welfare and social stability.

In terms of economic policies, policymakers may opt for gradual policy normalization. With macro-prudential measures, the People’s Bank of China could target M2 money supply growth in line with the nominal GDP growth, around 8% in 2021. Meanwhile, the central bank could keep a steady hand on policy rates, in order to provide low-cost funding to the real economy, particularly to small and medium-sized enterprises.

On fiscal policy, the government might exit its counter-cyclical stimulus and strengthen its fiscal discipline. The budget deficit target could be set at 3% of nominal GDP as in the pre-pandemic years. Meanwhile, special local government bond issuance could also be reduced to RMB 3trillion, versus RMB 4.5trillion in 2020.

Beyond those near-term goals, the 14th FYP and Long-term Development Plan will have more fundamental impacts to Chinese economic structure and investment landscape, particularly in the areas of consumption growth and innovation.

In order to boost domestic consumption, China could plan for reforms in the area of tax and income redistribution and narrow the regional income gap via development plans to support middle and western regions.

In the FYP, innovation and technology development will be promoted to core national priorities, particularly in the areas critical to achieving technological self-reliance. Investment plans and supportive policies will focus on areas such as integrated circuits, artificial intelligence, life and health science, renewable energy and aerospace.

Policy makers set plan to achieve better quality of growth in the next five years 
EXHIBIT 1: CHINA'S FIVE YEAR PLANS
NOMINAL GDP PER CAPITA, U.S. DOLLARS

Source: CEIC, IMF-World Economic Outlook, J.P. Morgan Asset Management.
*Nominal GDP per capita forecast from the IMF.
Data are as of December 31, 2020.

Investment implications

For the near term, as the global economic recovery stays on track, we also remain constructive about the growth prospect of China. This implies positive growth in corporate earnings in this year. This could be a more potent driver in market return instead of valuation expansion, especially given the policy normalization backdrop. As a result, investors need to be selective and focus on fundamentals when seeking opportunities in Chinese stock market. Moreover, when market volatility tends to increase, it is essential to have a more balanced allocation between equity and fixed income. 

Despite the short-term uncertainties, investors still have affluent opportunities in a variety of long-term investment themes, including consumption, self-sufficiency in technologies, carbon neutrality and renewable energy, and digital infrastructures. Sector leaders will continue to benefit from China’s economy of scale and additional supportive policies during the 14th FYP. The short-term correction in valuation might imply an attractive entry point for long-term investment in these sectors.  

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