Summary

William Hess views the NPC target of 6% real GDP growth as conservative and a 3% inflation target is suggestive of a lower tolerance for upstream reflation than was the case in 2020. The fiscal deficit target came in as expected and overall these growth and spending targets demonstrate that the political leadership thinks the economy has returned to potential growth. Longer-term objectives will be dominated by national security with an emphasis on food, tech and energy independence at the same time as reducing external reliance and vulnerabilities for example; proposes cuts to steel output in 2021 will reduce imports of ore and coal while allowing for new investment in electronic ARC furnaces to digest domestic and imported scrap.

William commented on the latest credit data which indicates strong cyclical restocking demand as well as a rebound in corporate capex. Pressure remains on shadow banks but so far funding conditions for developers look ok. Restocking, rates and inflation cycles should all peak out by the end of Q3, and this will contribute to currency weakness; until then, look at FX to moderate domestic price impacts of commodity prices.

Song Gao expanded on the outlook for credit. Based on the GDP target he is looking for M2 at 8%-8.5% and 10%-11% TSF growth; macro leverage (credit/GDP) growth should be capped below nominal GDP at 5 percentage points. He expects rates to continue to rise as a function of cyclical credit/liquidity demand amid leverage caps; market rates/yields may rise more than benchmarks (CGBs/repo) as regulators contain bank and government funding costs; PBOC should raise MLF rates after market rates have risen, but this will not represent incremental tightening; market rates will do that; credit market jitters may return as maturities accelerate and local fiscal conditions remain tight.

Carbon neutrality is a first order effort to address national security concerns with environmental considerations secondary. This involves reducing reliance on external energy and natural resources, with the expectation that changes to industrial processes and the energy mix will also reduce carbon emissions; State Grid has identified the “electrification” of the economy as a key means to the strategic end of strengthening China’s national economic security.    

The property sector will see another attempt at a shift towards public policy housing, with less emphasis on new commercial supply; special purpose bonds and policy banks will support affordable and rental housing capacity, as well as urban renovations; property completions should also remain strong, which is supportive of correlated demand for durable goods demand; land sales should remain strong to prevent a fiscal cliff, but new starts growth will face headwinds.

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