Economic Policy Likely Less Accommodative Than Expected in 2021 

A central theme of this year’s Central Economic Work Conference (CEWC) will likely focus on the implementation of the recently announced 14th Five–Year Plan (FYP) that starts in 2021. This means the policy direction will center on supply side structural reforms, such as innovation, improving the business environment, and addressing inequality. Meanwhile, de-risking and deleveraging is back on Beijing’s agenda, which implies that demand-side policies will be relatively restrictive as well.  

Combined, this policy direction should inject some caution into the latest bullish growth forecasts for 2021, since the signal is still deemphasizing growth. In fact, President Xi Jinping has already set expectations on growth by elaborating on why the 14th FYP doesn’t contain an explicit growth target as in the past. It appears that Xi believes downplaying the growth target will help Beijing focus on improving productivity and avoid constantly diverting resources to prop up growth.   

This apparent shift in emphasis from focusing on recovery to structural reforms takes place in a relatively deflationary environment. For example, November CPI is the weakest it has been in years. Meanwhile, fewer migrants have so far managed to find jobs, suggesting there is still sizeable slack in the labor market. In other words, the supply side still has a lot of potential for recovery.  

Yet unleashing that supply-side potential to support the recovery crucially depends on how accommodative policy will be, especially in the first half of 2021. This is why the direction of policy from the CEWC will matter—prioritizing supply side reforms will naturally mean less attention paid to supporting growth.  

At the same time, the demand side picture also does not look particularly rosy for growth, as de-risking climbs back to a top priority and as Beijing emphasizes economic security—including supply chain integrity, indigenous technology development, and financial stability—as an expansive and guiding principle. Just last month, Ding Xuexiang, Xi’s chief of staff, instructed officials to treat tail risks as if they are high probability events.  

Supply chains and technology decoupling have attracted much attention. But it is the renewed emphasis on financial risk that will have the largest near–term impact on growth because it will lead to an aggressive withdraw of fiscal stimulus. That’s because this year’s stimulus further increased local fiscal deficits, exacerbating existing fiscal vulnerabilities. Reports of debt-fueled financing of white elephant projects have once again alarmed Beijing.  

So Beijing has recently signaled that policy needs to revert back to proactive mitigation of risk rather than simply preventing it, putting local government debt front and center once again. But unlike the disruptive deleveraging campaign of 2017-2018, Beijing will likely employ a more targeted approach rather than one that was across the board. As a result, there will likely be more fiscal consolidation in 2021, which means that fiscal spending will become more conservative, putting a drag on growth.  

In general, the economic signals from CEWC will likely be broadly growth negative, even as the post-Covid recovery remains incomplete. My upcoming Macro Outlook will detail how this policy shift will affect the ongoing economic recovery. 

Houze Song is a research fellow at MacroPolo. You can find his work on the economy, local finance, and other topics here.