China’s Two Sessions 2021: GDP Target, Tax Incentives, and 14th Five Year Plan

China’s Two Sessions 2021 will prioritize the roadmap for the country’s 14th Five Year Plan and flag areas of development to achieve sustainable growth and lead innovation.

Last week, more than 5,000 of China’s political, business, and social elite converged on Beijing for the country’s most important annual meeting – the Two Sessions. On Thursday, March 4, the Two Sessions officially kicked off.

The Two Sessions, or Lianghui, is the popular name for the back-to-back meetings of two of China’s major political bodies – the Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress (NPC).

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The CPPCC is a consultative body that includes over 2,000 members from various aspects of Chinese society, ranging from business entrepreneurs to movie stars. The NPC is China’s top legislative body.

The Two Sessions are always of interest to foreign investors, as it serves as a valuable window into China’s politics, reveals Beijing’s priorities for the coming year, and therefore the overall policy direction that the country will take.

This year, the Two Sessions take on added importance as 2021 is the first year covered by China’s new 14^th Five Year Plan for National Economic and Social Development (the 14^th Five Year Plan); it is also the 100th anniversary of the Communist Party of China.

This article lays out what to watch out for in the Two Sessions.

China’s Two Sessions 2021: What’s on the agenda?

This year’s Two Sessions commenced on March 4 and will conclude on March 11 – this is a much shorter period of 6.5 days as opposed to the usual 10 days. It follows last years’ experience and is in line with the national COVID-19 prevention and control requirements.

The decisions of the 15^th Meeting of the 13^th Standing Committee of the CPPCC has put out the below agenda for the latest CPPCC meeting:

• To hear and deliberate the work report of the Standing Committee of the CPPCC and the report on the work of making proposals since the third session of the 13th CPPCC.
• To attend the fourth session of the 13^th NPC of China, listen to, and discuss the Government Work Report, other relevant reports, and discuss the draft outline of the 14th Five Year Plan and the long-term goals for the year 2035.

The NPC meeting, that commenced on March 5, 2021, will follow the below agenda:

• Deliberate Government Work Report
• Examine the draft outline of the 14^th Five Year Plan and the long-range goals for 2035
• Review the implementation of the 2020 plan for national economic and social development and the draft plan for 2021
• Review the report on the implementation of the 2020 central and local budgets and the draft central and local budgets for 2021
• Deliberate on proposals submitted by the Standing Committee of the NPC for deliberation of the Organic Law of the NPC (Revised Draft)
• Examine the proposals submitted by the Standing Committee of the NPC for deliberation the Rules of Procedure of the NPC (Revised Draft)
• Deliberate on work report of the Standing Committee of the NPC
• Examine the work report of the Supreme People’s Court
• Examine the work report of the Supreme People’s Procuratorate

Unexpected but modest growth target set

The annual announcement of the GDP growth target has always been one of the most anticipated features of the Two Sessions. Because the government plays a significant role in the economy and faces political pressure to meet publicly stated goals, the GDP growth target in China is not just a predictor of growth output but also an input signal of forthcoming government credit and spending.

However, in last year’s Government Work Report, Premier Li Keqiang announced that China would not set a GDP growth target for 2020, marking the first time since records began in 1990. According to Li, the government opted against setting such a target due to the high level of uncertainty caused by COVID-19 and its effects on the global economy.

Prior to the Two Session 2021, there were speculations that China will follow the 2020 example and set no GDP growth target for this year. However, in the readout of the Government Work Report by Premier Li Keqiang on March 5, an economic growth target of “more than 6 percent” in 2021 was announced, which is relatively low but nevertheless now a public goal.

China – despite being the pandemic’s epicenter – was the first major economy to recover and enter 2021 with a relatively optimistic outlook. Beijing’s stable and time-sensitive policy responses, epidemic control strategy, and reprioritization of macroeconomic objectives ensured that it was the one of the two G20 economies that experienced positive growth in 2020 – the other being Turkey.

As compared to the estimated 3.5 percent contraction of global economy, China’s GDP grew by 2.3 percent in 2020, reaching RMB 10,159.86 trillion (US$1,571.73 trillion). In January 2021, the IMF forecast that China’s GDP would grow 8.1 percent in 2021.

Some experts are positive about bringing back the GDP target, holding the view that China needs to set benchmarks to keep its growth on pace. But other experts worry that setting a specific growth target creates incentives for inefficient government spending and short-term thinking while ignoring the deeper structural issues affecting the economy and people’s needs.

According to Li’s speech, the government has considered the recovery pace of economic activity when setting the modest goal, which is meant to help sustain healthy economic growth. Analysts believe that this lower-than-expected growth target is designed to tell the world that China will focus on higher quality growth. The target will give the government more room to push reforms when uncertainties remain, such as the COVID-19 and the US-China trade tensions.

Preferential tax incentives

Fiscal and tax policies are another area that holds key attention for China watchers as it is directly related to benefits businesses and foreign investors can enjoy in the following year.

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2020 was an extremely difficult year for small businesses; the tax and fee reduction policies  reduced the spending burden somewhat and made it easier to resume work production. In 2020, more than RMB 2.6 trillion (Approx. US$399.6 billion) taxes and fees were reduced, with RMB 1.7 trillion (Approx. US$261.3 billion) being attributed to social insurance premiums.

This year’s preferential policies are still largely focusing on helping this group to get through the on-going challenges. In the readout of the Government Work Report on Friday morning, the following incentives were unveiled:

• Extending the interim preferential tax policies for small-scale taxpayers, such as the preferential value-added tax (VAT) policy for small-scale taxpayers (that is, from March 1, 2020 to December 31, 2020, the VAT levy rates for small-scale taxpayers shall be reduced to one percent from three percent).
• Implementing new structural tax cut measures to offset the impact of some policy adjustment. Some of the previous tax and fee cuts may no longer be effective, but the government has taken that into account and will come out with new tax incentives to alleviate the impact.
• Increasing the monthly sales ceiling of small-scale taxpayers who are eligible for VAT exemption from RMB 100,000 (approx. US$15,370) to RMB 150,000 (approx. US$23,055). In China, individual VAT taxpayers and individual-owned business who do not register as general VAT taxpayers are treated as small-scale taxpayers. They should therefore also be eligible for this more beneficial VAT threshold.
• Halving the corporate income tax (CIT) liability of small and low-profit enterprises for the portion of taxable income not exceeding RMB 1 million based on the existing preferential policies. Currently, all small and low-profit enterprises can enjoy a 20 percent CIT rate on 25 percent of the taxable income amount for the proportion of taxable income not exceeding RMB 1 million. Here, small and low-profit enterprises refer to enterprises engaged in industries that are not prohibited or restricted by the government with an annual taxable income not exceeding RMB 3 million (approx. US$461,100), number of total employees not exceeding 300 persons, and total assets not exceeding RMB 50 million (approx. US$7.7 million).

In addition to the supports to small businesses, China is also using tax incentives to encourage innovations among enterprises and optimize the supply chains:

• Extending the 75 percent additional pre-tax reduction of R&D expenses and increasing the additional pre-tax deduction rate of manufacturing enterprises to 100 percent.
• Expanding the scope of preferential CIT catalogue for businesses engaging in environmental protection, energy and water conservation.
• Full refund of incremental VAT credits to advanced manufacturing enterprises on a monthly basis.

14th Five Year Plan

Deliberations on the 14^th Five Year Plan is the top agenda for the Two Sessions this year, as the plan is significant in securing China to become a strong power with high-quality and innovation-led growth. On Friday morning, Premier Li Keqiang detailed some of the concrete targets to be achieved during the 14^th Five Year Plan period in the 2021 Government Work Report.

Among others, the below aspects are particularly noteworthy:

• China will aim to keep the surveyed urban unemployment rate under 5.5 percent, despite not setting a concrete target for job creation over the next five years. (The surveyed urban unemployment rate is calculated through the aggregate data of urban employment and unemployment obtained from the sample survey of urban labor force.)
• China will aim to increase the permanent urban residents to 65 percent by 2025.
• China will strive for seven percent annual growth in R&D spending and forging a new development pattern.
• China will aim to reduce energy consumption per unit of GDP by 13.5 percent and cut carbon dioxide emission by 18 percent.
• China will provide strong support for public-interest pre-school education and kindergartens, including the private owned ones.
• China will support the development of private medical institutions and promote Internet Plus Healthcare initiatives.
• There is no concrete GDP growth target set for the period under the 14^th Five Year Plan, rather, it is said the GDP target will be set out according to circumstances and the economy growth “within a reasonable range”, unlike the 6.5 percent set for the period during the 13^th Five Year Plan.
• Annual growth in disposable income per capita over the next five years will be “in line with GDP growth”, in contrast with the 6.5 percent set in the 13^th Five Year Plan.
• On the trade front, China will continue to promote the high-quality development of the Belt and Road Initiative (BRI), ratify and implement the Regional Comprehensive Economic Partnership (RCEP) Agreement, sign and ratify the China-EU Comprehensive Agreement on Investment (CAI), accelerate China’s negotiations with Japan and the Republic of Korea on free trade, mull on joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and improve China-US business relations.

The 14^th Five Year Plan’s emphasis on boosting domestic demand, supply chain upgrading, technology self-sufficiency, and further opening the country’s domestic markets implies opportunities for foreign investors in multiple sectors, such as tech, clean energy, education, and healthcare. This will drive China’s growth in the next five years.

The 14^th Five Year Plan will be further deliberated by legislators and political advisors in the later sessions.

Along with the 14th Five-Year Plan, the long-range objectives through to the year 2035 will also be reviewed. This blueprint can be traced back to the Deng Xiaoping era when China started ‘Reform and Opening Up’. China aims to become a high-income country by the end of the 14th Five Year Plan in 2025, and to double the size of its economy and GDP per capita by 2035.

The year 2021 is thus crucial to China as it marks the start of the two set time frames. Investors keen on the Chinese market are suggested to maintain a close watch on the policy developments in upcoming Two Sessions.

For more insights into this year’s Two Sessions and the 2021 Government Work Report, Kyle Freeman, Partner at Dezan Shira & Associates and based in the Beijing office has written: Putting China’s 2021 Two Sessions and Government Work Report in Perspective.

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