China’s economy beat the world in 2020. Next up: Meeting its own expectations

China’s economy grew 2.3% in 2020, the National Bureau of Statistics said Monday, making China likely the only major economy to report annual growth under the constraints of the COVID-19 pandemic.

But China’s performance—buoyed by debt-backed infrastructure projects and by exports of electronics and medical equipment—was far short of where the nation’s leaders had hoped to be in 2020.

Before the severity of the novel coronavirus outbreak became apparent in February last year, Beijing had a target of achieving 6% growth in 2020. The goal, obtainable under normal circumstances, would have helped China achieve another target it set in 2015—to double the size of its GDP over 2010 levels by 2020.

But after a historic 6.8% contraction in the first quarter, Chinese Premier Li Keqiang advocated for abandoning a 2020 growth, and China resigned itself to doing the best it could.

“This is because our country will face some factors that are difficult to predict in its development due to the great uncertainty regarding the COVID-19 pandemic and the world economic and trade environment,” Li said in an address to China’s parliament in May.

Li was more optimistic in November, after China’s GDP showed growth for two consecutive quarters. In a meeting with analysts at the World Bank and the International Monetary Fund, the Premier said GDP growth for 2021 could return to a “reasonable range.”

The World Bank predicts that “reasonable range” will be around 8% growth in 2021 for China’s economy, as the country returns to normal. China has averaged 6% GDP growth in more recent years, but growth in 2021 will be measured against the weaker baseline of 2020.

But to make its recovery sustainable, China will need to shift from stimulus-led growth that saw it through 2020 and encourage the return of domestic consumption.

“China is now more mindful about excessive stimulus causing a rapid build-up of leverage and financial risks,” says Bruce Pang, head of macro and strategy research at China Renaissance Securities, adding that China will walk back some of its 2020 fiscal policies—such as issuing special bonds for infrastructure investment—in the year ahead.

China’s debt issuance and default sizes both surged last year. According to government think tank National Institution for Finance and Development, state-owned enterprises defaulted on a total $11 billion of debt—over half of all debt defaults in China in 2020 and the highest default total for SOEs since China began allowing defaults in 2014.

In his November meeting with the IMF, Li said that Beijing would ease off on state investment and allow consumption to play a more “guiding role” in the economy. That rhetoric pays homage to President Xi Jinping’s nebulous “dual circulation” economic policy, which the central government began promoting in May last year. The policy essentially calls for China to increase domestic consumption of locally-made goods in order to limit exposure to the policy whims of international trade partners, such as the U.S., which issued numerous blocks on trade with Chinese firms during the Trump Administration.

Recovery in consumer spending, however, has lagged behind China’s other economic indicators, with retail sales returning to growth for the first time last year in the third quarter. Retail sales ended the year down 3.9% compared to 2019.

Bo Zhuang, lead economist at T.S. Lombard, says that dual circulation is not supposed to be a complete shift to self-sufficiency but rather a rebalancing against “the backdrop of deglobalization.” Nevertheless, the policy shift will likely prove significant this year, as China enters its 14th Five Year plan.

“The country is at a pivotal stage of transforming its growth model, improving its economic structure and fostering new growth drivers,” Pang says. “Consumption, as well as industrial investment and innovation, look set to benefit from government policies, in our view, and become the new engines of China’s growth.”