A Letter from the Editor

China’s annual twin congressional sessions this year will usher in policies in significance and direction that arguably China has not seen since 1978.  2021 not only marks the beginning of the14th Five-Year Plan but the beginning of the Long Vision 2035 - a first 15-yearChinese development blueprint. 2021 fires off a 15-year era for China’s high-quality development. 

The Premier’s Government Work Report 2021 announced a series of measured economic targets:GDP growth above  6%, CPI below 3%, fiscal deficit at 3.2%, and money supply expansion in line with nominal GDP growth. Albeit the return of quantitative measurements, the Report engaged fewer numeric articulations than in the past years. 

This, in itself, signals China’s transition to a high-quality development phase, adopting a new development theory. 

A new stage of development calls for a new paradigm of economic thinking and corresponding political governance. 

The new development theory aims to unleash economic vitality partly through deepening reforms, most prominently seen this week, in the rural economy, of the household registration system, in the capital account, and of the education system. 

The new development theory also induces the rise of the technology-intensive economy. It places“digital development” and “personal development” at its center. 

This week, China also announced the world’s most ambitious overland transportation infrastructure development roadmap 2021-2035. The Plan consists of 6transportation arteries linking China’s 4 diamond-shaped economic poles, 7corridors, and 8 extensions, bringing the speed and scale in green transportation to a level the world has not seen. 

Just as one may think that China’s economic fall is long overdue, China continues to unleash economic dynamism from both traditional markets through further liberalization and new economic frontiers born of innovation. 

No one can precisely predict the future. What one can see is that the Chinese nation today is fueled by strong economic vitality. When a large number of people drive to thrive, optimism and hope become contagious to all who bear witness to it. 

Nation states were formed based on a collective myth since antiquity. When the myth thrives, the nation tends to thrive. Call this the Chinese myth. 


Nobel Laureate Michael Spence on Debt, Innovation, China & a Multi-Speed Global Future

Professor Andrew Michael Spence, Nobel Laureate in Economics and NYU professor, is a towering mind on the long and successful Chinese economy in transition over the past 40 years. In this rare opportunity, we hear his views on the global economy, the China Model and its future in the 21st century, innovation, digital governance, the fundamental roles of governments in the economy, and a multi-speed global development future. 



Government In Action

Government Work Report Outlines AnnualEconomic Targets and Central Government Priorities.

Key economic targets are confirmed during the Government Work Report on the first day of the National People’s Congress on March 5.

Key economic targets for 2021

  • GDP Growth target: 6%
  • Urban employment-growth target: 11 million
  • Urban surveyed unemployment rate: 5.5%
  • CPI: 3%
  • Energy intensity (energy required to produce one unit ofGDP): 3% reduction
  • Grain output: 650 billion kilograms.
  • Fiscal deficit for 2021: 3.2%
  • Monetary supply (M2) keeps pace with nominal GDP growth


Industrial Growth

  • Announce and execute a new Mid-Long Term Science andTechnology Development Plan (2021-2035).
  • Upgrade high-end manufacturing under Made in China 2025, including in the IC, software, new energy, NEV, and biotech industries.
  • The national fiscal budget earmarked for investment: RMB610 billion ( c. $100 Billion)
  • The state delivers top-down guidance to the direction of development.
  • Two key infrastructure projects, the Sichuan-TibetRailway and the Land-maritime Western Passage must be ensured for execution.
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We will be covering agricultural, consumption, trade, and social measures in subsequent newsletters.
Annual Congressional Sessions begin, Focusing on High-Quality Development.

The annual twin congressional sessions began today, kicked off with the opening session of the CPPCC in Beijing.

The main agenda of this year’s congressional sessions will focus on China’s transition into high-quality development. China’s new development theory goes beyond the scope of the 14th five-Year Plan. It will provide a consistent development path from the 14th through the 15th and the 16th Five-Year Plans. Therefore, this year’s policy conception will be of critical importance. The Congressional emphases will be on:

  • High-quality agricultural development to achieve comprehensive agricultural and rural modernization.
  • High-quality clean energy and green development to meet 2030 and 2060 climate change targets.
  • High-quality education reform, placing focus on investments in human capital, to achieve China’s technological ambitions.
  • Public health and healthcare reform to deliver Health China objectives outlined in the14th Five-Year Plan
China Details World’s Most Ambitious Land Transportation Network by 2035

By 2035, China will have built a green, high-quality and comprehensive multi-dimensional national transportation network, unveiled in the recently published transport network plan (《国家综合立体交通网规划纲要》).

1-2-3 Commuter and Logistics Transportation Plans by 2035
1-2-3 Hours threshold for national commuter travels. “全国123出行交通圈”

By 2035, all commuters’ travel time within an urban city should be within 1 hour. All commuters’ travel time within a metropolitan economic cluster should be within 2 hours. Travel time across all major cities in China should be within 3 hours.


1-2-3 Days threshold for global logistics for goods. “全球123快货物流圈”

By 2035, the transport network’s effects on cross-border logistics for trade will be equally dramatic. Transportation time for goods shipping will be reduced to within 1 day insideChina; Transportation time for goods will be within 2 days to neighboring countries, and it will be within 3 days to major global cities.


A 6-7-8 Green andEfficient National Transportation Artery System
The transportation artery system will encompass 6 axes, 7 corridors, and 8 extensions(a 6+7+8 grid network).

6 transportation arteries (6条主轴) (marked in red in graph) will interlink China’s four economic poles (四级)- the Beijing-Hebei-Tianjin economic area in the north, the Yangtze River Delta in the east, theGuangdong-Hong Kong-Macau Greater Bay Area in the south, and theChengdu-Chongqing Twin Economic Circle in the west.

7 transportation corridors (7条走廊)(marked in blue in graph): Beijing-Harbin, Beijing-Tibet, the Eurasian Landbridge, the Western Passage, Shanghai-Kunming, Chengdu-Chongqing-Kunming, Guangdong-Kunming.


8 Extensions (8条通道) ( markedin yellow in graph): 1) Suifenhe-Harbin-Manzhouli, 2) Beijing-Changchun-Huichun, 3) Land border railway(Heihe-Qiqihaer-Huhhot-Urumuqi-Kashgar-Lasha), 4) Fuzhou-Wuhan-Xi’an-Yinchuan,5) Erlianhot-Taiyuan-Luoyang-Yichang-Zhanjiang, 6) Chengdu-Tibet, 7) Changsha-Guilin-Nanning-Pingxiang. 8) Xiamen-Changsha-Chongqing-Chengdu.


Which regions stand to benefit?

Northeast China (Heilongjiang), Kunming (Yunnan), Chongqing+ Chengdu, Shan’Xi see concentrated mappings of incremental transportation networks in this ambitious nationalplan.

The regions within China’s current 4 economic poles will heavily benefit.


An unprecedented Scale

  • Comprehensive Transportation Network Will Reach 700,000Kilometers

By 2035, the total size ofChina’s comprehensive transportation network will reach around 700,000 km, excluding overseas sections of international land routes, air and sea routes, and postal routes. This includes about 200,000 km of railways, 460,000 km of highways, and 25,000 km of high-grade waterways. China will complete 27 major coastal ports, 36 major inland river ports, 400 civic logistics transportation airports, and 80 postal express hubs.


  • The Coverage and Service Capacity of the Postal andExpress Delivery Network Will Be Greatly Expanded

From 2021-2035, it is estimated that China’s freight volume will grow at around 2% per year, while postal and express delivery services will grow at around 6.3%.

By 2035, the express delivery network aims to greatly enhance collecting, processing, transportation, customs clearance, and delivery on a global scale. (read more in Chinese)


China Unveils Timetables for 5G andRenewables

China has recently emphasized its strategy around the development of 5G and carbon neutrality.


Last year China built more than 800,000 5G base stations. China plans to cover the entire east coast and major cities with5G.

China already boasts half of the world’s 5G users.

It took China 5 years to complete nationwide 4G coverage. According to Zhu Min, China plans to use a little over 3 years to complete nationwide 5G coverage, former central bank governor.

China is aiming to exploit 5G to leverage the potential advantages stemming from a well-integrated IoT network. This will help Chinese companies go digital, thus opening new capacities enabled by Industry 4.0.

More revelations of China’s Carbon Neutral roadmap

Chinese grid companies will be required to increase the amount of power purchased from renewable sources from 28.2% in 2020 to 40% by 2030, according to a draft policy from the National Energy Administration.

These targets also suggest that China will heavily rely on solar and wind energy to meet its renewable goals and move away from the construction of large-scale hydroelectric projects.

Indeed, President Xi Jinping announced that China would boost its installed capacity of wind and solar power to over 1,200 GW by 2030.

Source: Reuters

The scale of China’s renewable energy investment

It is estimated that between 2021 and 2060, the annual investment in renewable energies will exceed 1.5% of China’s GDP.

This means that in the next5 years, RMB1.5 trillion to RMB 2 trillion per year will be invested in the renewable energy infrastructure necessary to produce clean energy.

After 2030 the investments will increase to between RMB 4 trillion and RMB 6 trillion.  

·    China’s Capital Market and Capital Account Reforms

At the Global AssetManagement Forum (GAME), Bai Chong’en (白重恩), Chairman of GAME and Dean of the School of Economics and Management at Tsinghua University, warned against the repercussions of “hot money flows” to China when post-COVID policy normalization in developed countries will cause vast capital inflows in the future. 

This debate came at a sensitive time when China began to implement steps to liberalize further its capital markets and capital accounts over the 14th Five-Year Plan.

Bai said that with the twin capital system (双资本) reform, it is critical to coordinate the pace and sequence of capital account liberalization and capital market reform. This is because, despite China’s large economic size, its capital market is not as deep nor as wide.


The idea of the twin capital system reform, according to economist Huang Haizhou (黄海洲), refers to reforms of both the capital account and the capital markets. The capital account liberation will induce further reforms of the domestic capital market. And amore developed capital market will further push the liberation of the capital account. These twin capital system reforms will mutually reinforce the development of each other. (read more in Chinese).


Emerging Market Debt Worry

Meanwhile, Bai warned about the risks of emerging market debt. In this sense, the country bears a higher exposure to risks brought by debt from emerging markets as some of these countries show a slower recovery trend. Moreover, with the more developed countries set to withdraw their capital, the emerging markets may experience an increase in their debt obligations inside economies that have been already hit hard by the pandemic. All this stresses the importance for China to be cautious and prepared to deal with any potential crises similar to the 1997 Asian financial crisis.

History of China’s Capital Market Development

Over the past 10 years, the average net profit of A-share companies increased at CAGR 13.32%, outpacing China’s GDP growth over the same period.

In 2019, the total revenue of companies listed on the Shanghai and Shenzhen stock exchanges reached $7.79trillion (RMB50.47 trillion), accounting for more than 50% of China’s GDP for the first time.

As of October 2020, China’s capital market size topped $10 trillion, becoming the world's second-largest, behind the US at $38.3 trillion. (read more)

The international influence of China’s capital market has also grown. In 2020, a total of 124 Chinese companies (including Hong Kong, excluding Taiwan) were listed on the FortuneGlobal 500, surpassing the United States for the first time.

The new Qualified ForeignInstitutional Investors (“QFII”)/ RMB QFII (“RQFII”) rules (《合格境外机构投资者和人民币合格境外机构投资者境内证券期货投资管理办法》), effective from November 1st (2020) will make it easier for foreign investors to access the Chinese market. It is also expected that the new regulations will attract more medium- and long-term funds to the market and will increase the market’s sophistication. (read more)

Large growth potential for the A-share market

China’s A-share market capitalization to GDP ratio is still smaller than that of the developed countries, approximately 65%. (read more in Chinese) For reference, in 2018, the same ratio in developed countries reached 118.4%, according to the World Bank data.

The critical area forChina’s capital market growth lies not only in its size but in its depth. TheChinese capital market lacks the diversification of the market products, a strong options, and derivatives market, a global leading commodities exchange, and innovation in financial products.

China’s capital market liberation is still very much in its initial innings.


PMI Continues to Post above 50% in February.The Economy in the Risky Territory of Overheating.

February PMI above Threshold for 12 Consecutive Months, although it retraced from January due to seasonal adjustment.

China’sFebruary Manufacturing Purchasing Managers Index (PMI) was 50.6% in February, above the threshold for 12 consecutive months. Still, the index was down by 0.7% from January, indicating a sentiment decline partly due to theSpring Festival holiday effect.

The Good:

High-EndManufacturing activities are Accelerating.
  • In February, the equipment manufacturingPMI was 52.2%, and the production index and new order index were both above53.5%.
  • Business activity indices of industries such as telecommunications, broadcasting, television, and satellite transmission services scored high at 58.0%.

Under Made in China 2025, high-end manufacturing will continue to see vast industry-wide investments, globally competitive products, and pricing structure, and manufacturing efficiency supported by industry digitization and automation.

The Bad:

Commodity Inflation may force a liquidity tightening cycle in 2021

Due to the spiking raw materials prices, producer price pressure can be transferred to the consumer end. In 2021, if key raw materials prices continue to spike, theCentral Bank will need to respond with liquidity tightening earlier than expected.

In China, the liquidity cycle starts to see signs of tightening in 2021, although only with open market operations and within a stable range.

The Ugly:

Soft Economic Performance Indicators + Rising Price Indices = Sign of overheating and Risk of Stagflation

China’s economic cycle is shifting from recovery to overheating. China’s Banking andInsurance Regulatory Commission Chairman Guo Shuqing openly warned of the risks of real estate overheating yesterday. ( We cover this subject separately below.) The market is witnessing structured asset price bubbles, according to economist Ren Zeping. (read more in Chinese)


Liquidity will need to be tightened to curb asset overheating in 2021. Still, the task remains to ensure a strong pace of economic growth to avert the territory of stagflation.

Large Enterprises Continues to Outperform
  • Large enterprises continue to outperformSMEs. Large companies are accelerating recoveries despite the slowdown during the Spring Festival, confirming their role in supporting the economy.
Business Expectations Improved
  • The business activities expectation index rose to 59.2% in February, up 1.3% from January.
  • Surveys show heightened business confidence, as the production peak season begins in March and market demand is expected to warm up.
PMI for Services Industries Continues slow and lagging recovery.
  • In February, the services industry PMI was 50.8%, 0.3% lower than January but is still a good indicator that business is expanding.
  • Retail, catering, entertainment, and other industries related to household consumption are all in the expansion range. 

Larger Pension Deficit Expected; UrgentReform Needed

Some regions in China have been facing pension shortfalls, pushing the issue of pension reform back into the spotlight. Pension reform is a highly complex issue that requires good judgment and foresight for the future.

In the 1980s, Zhou Xiaochuan (周小川), who would later serve as Governor of the People’s Bank of China, stated that China’s pay-as-you-go (PAYG) system was unsustainable when factoring in the country’s aging population. In his view, the current pension system is unsustainable at a macro level, requiring reforms of pension management and State-owned Enterprises (SOEs) and the development of the capital market, among other things.

Due to the aging population, China will likely shift its focus from a PAYG-defined benefits scheme (one where the amount paid in retirement is based on working years and salaries) to a defined contribution scheme where the amount of contributions and choice of investments are subjective to the individual earner in a tax-advantaged fund that provides income during retirement. The current benefit system is unsustainable due to its dependence on younger generations to fund older generations’ pensions if the pension distributions outpace the return on investment. The actuarial is simply not feasible with rising life expectancy, booming aged population, and lower birth rates.

Under the current system, China meets the increasing demand for pension payments by increasing contribution rates, in turn pushing rates higher globally, which makes domestic companies less competitive.  Business contribution rates have reached as high as 20% in the past, dropping to 16% in 2019. However, this reduction only served to exacerbate pension imbalances.

In 2017,China formulated a new policy to cover pension shortfalls, with 10% of state-owned capital being transferred to a social security fund. Experts believe that it could reduce the contribution rates by 3-5% if this is completed successfully. The reason for the length of time it has taken to implement is based on the premise of intergenerational equity, emphasizing a smooth transition between pension systems.

Pensions remain a highly complex issue in China. Correct implementation of the reforms will be vital to diminish the increasing stress on China’s future pension system.



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