In a new research briefing, Zhouchen Mao, Head of Research and Advisory at Asia House, and Junni Ogborne, China Advisor, Asia House, provide an assessment of this year’s ‘Two Sessions’ – China’s most important annual political meetings that set the policy agenda for the year ahead.
- Given the reopening of China’s economy and early signs of recovery, the official growth target of “around 5 per cent” for 2023 should be attainable despite moderate fiscal stimulus this year.
- China is accelerating the drive to tech self-reliance as it is increasingly cut off from Western technologies and relations with the US deteriorate. This presents challenges for multinational corporations (MNCs) but also opportunities for foreign investment to shore up industrial chains and support innovation.
- Xi secured an unprecedented third term as president and is now in a stronger position to drive through this agenda. His allies, including new Premier Li Qiang, are now in control of the government. Most of ministerial-level technocrats were held in place, pointing to continuity in financial policy.
- The latest round of institutional reforms will solidify Party control of policymaking in priority areas such as technology policy. Financial regulation is expected to become more unified but tighter under a new upgraded regulator.
This year’s Two Sessions took on extra significance as the first since the 20th CPC Congress and China’s emergence from COVID-19 restrictions. The economy has begun to pick up after reopening but still faces major headwinds.
At home, three years of zero-COVID have left business and consumer confidence low and local governments severely indebted. The property sector remains on shaky ground and long-term demographic challenges loom. Externally, inflation is high and demand for exports is flagging. Geopolitical tensions remain high as the war in Ukraine continues, and China’s access to Western technologies is becoming constrained as relations with the US reach new lows.
Against this backdrop, the Two Sessions set a course to ensure economic recovery in the short term and make the economy more resilient to external uncertainties in the long term.
Government sets modest growth target for 2023
The official growth target of “around 5 per cent” for this year is lower than the most recent IMF forecasts of 5.2 per cent and should be achievable given the boost from reopening and early signs of recovery. It suggests that policymakers do not plan a huge economic stimulus this year, instead relying on growth from organic sources, and want to ensure the target is reached after last year’s growth of 3 per cent fell significantly short of the ambitious 5.5 per cent goal. More importantly, the modest growth target reflects the government’s intention to transition to a model of “high-quality growth” as indicated during the 20th Party Congress.
Fiscal policy adjustments point to a moderate increase in government spending as local governments remain cash-strapped. The fiscal deficit ratio was tweaked up to 3 per cent from 2.8 per cent last year. The special bond quota, used for local government spending on infrastructure and other projects, is CNY3.8tn (US$552bln) – up on last year’s quota (CNY3.65tn) but lower than the final allocation (CNY4.15 tn). It is expected that infrastructure investment growth will reflect the ambitions to become “high-quality” by gradually tilting towards tech- and ESG-oriented projects.
Rhetoric on US-China competition hardens
President Xi took the rare step of directly accusing the US of leading the West in “all-round containment and suppression of China.” This public escalation of rhetoric will be difficult to dial back and signals that the leadership expects a long-term deterioration of China-US ties, an assessment that will reverberate across the system. With bipartisan attitudes also hardening in Washington, especially after the Republican Party retook control of the House of Representatives, it is difficult to see how bilateral relations will improve any time soon. Official comments on the Taiwan issue, an ongoing source of tension with the US, did not indicate any change in Beijing’s position.
Security dominates policy agenda as drive for tech self-reliance revs up
Expectations that China will be cut off from Western technologies and markets have added yet more urgency to the government’s drive for self-reliance amid a very expansive interpretation of national security.
The most important part of this drive is achieving tech self-sufficiency, meaning more investments into secure industrial chains and reach breakthroughs in basic components, software, materials and processes, as well as aircraft, medical equipment, and other technologies. Xi’s call for deeper military-civil integration will further blur the lines between civilian and military sectors, placing more Chinese and foreign companies at risk of US sanctions amid growing restrictions on high-tech sectors.
Furthermore, moves to ensure food and energy security include diversifying imports and expanding the system for national commodity reserves and local stockpiles. The budget allocation to stockpile grain, edible oils, and other materials was raised by 13.6 percent.
Domestic consumption set to play a bigger role propelling economic growth
With external demand weakening and no planned surge in infrastructure investment, the government is relying on domestic consumption to drive the economy this year as record exports begin to wane. Three years of zero-COVID strategy have left pent-up demand and record excess savings of CNY5.6tn (US$827bln).
Consumer spending has rallied at the start of 2023, particularly over the Spring Festival holiday. However, consumer confidence remains low, and the recovery will likely be uneven. Efforts to boost consumption are centred around stabilising employment, increasing incomes, and renewing subsidies for some big-ticket items such as electric vehicles (EVs) and smart home appliances.
Government seeks to rebuild confidence of the private sector and foreign investors
Both President Xi and the new Premier Li Qiang took pains to voice support for the private sector, which has been rattled by three years of zero-COVID strategy and increased CPC activism in the economy. The government also outlined cuts to taxes and fees to help companies.
Despite the growing emphasis on self-reliance, Beijing still sees foreign investment as crucial to its long-term strategic goals. This year’s Government Work Report (GWR) had strong language on the need to attract foreign investment. There were also pledges to make open markets wider, especially in services, and to improve the business environment, with an emphasis on legal and regulatory reforms to promote fair competition and to better protect foreign investment.
As China reopens to the world, the government also called to set up a commercial green channel, as well as simplifying visa procedures, and a raft of other steps to attract foreign talent and facilitate cross-border travel.
Nonetheless, despite the government’s more investment-friendly rhetoric at the Two Sessions, implementation of these pledges will be crucial in the coming months to bolster investor confidence in the country.
Net-zero agenda takes a back seat to energy security
Energy security and growth will take priority over the net-zero agenda this year. Annual plans set a key role for coal and a less ambitious target to reduce energy intensity. While green development remains a critical long-term goal, the government’s current priority is economic recovery, with a particular emphasis on green actions that are also growth positive – such as investment in renewables and industry retrofits – rather than tougher environmental regulation and inspections.
ESG is an area to watch for 2023. Related standards are being developed for central SOEs and it has been reported that regulators are working on rules to make ESG disclosures compulsory for China-listed companies. The NDRC called for “major progress” on carbon statistics collection and accounting this year, paving the way for new tools to be introduced once net-zero becomes a top priority again.
Beijing steps up diplomacy as globalisation strategy evolves
Foreign Minister Qin Gang told the press that Beijing has hit the “acceleration button” for diplomacy as China opens and re-engages with the world.
Worsening relations with the US have increased the focus on developing a differentiated relationship with Europe, which is still seen as ‘in play.’ In contrast to his sharp words against Washington, Qin did not criticise the EU since European governments and firms are prime targets of China’s post-reopening diplomatic engagement.
The double-digit budget increase of 12.2 per cent for diplomacy reflects Beijing’s ambitions to play a bigger role around the world, especially in the Global South under its global initiatives for development and security. China’s recent role in brokering a restoration of Iran-Saudi ties suggests that Beijing will increasingly translate economic influence into political clout in regions such as the Middle East.
The Belt and Road Initiative (BRI), now in its 10th year, is being recalibrated as some projects face implementation challenges and tightening purse strings at home. The NDRC’s call to build “small but beautiful” projects along the Belt and Road indicates a continued shift away from mega projects in debt- and conflict-prone regions, towards a greater focus on quality and risk control as well as projects related to sustainability, digital, and health. This points to cooperation opportunities for third parties with solutions and expertise aligned with these areas, evidenced by the ‘third market’ deal signed between China Harbour and Al Ajlan Bros during President Xi’s visit to Saudi Arabia in December 2022.
Institutional reforms will further institutionalise Party’s control in key areas of policy-making
The latest round of State Council restructuring, which usually occurs every five years, will further strengthen CPC control over policy execution and focuses on finance, technology policy, and data governance. The actual impact of these reforms will become clearer once further details are released.
China’s existing banking and insurance regulator will be replaced by the new upgraded National Financial Regulatory Administration (NFRA), which will oversee all financial services except securities, which remain under the China Securities Regulatory Commission (CSRC). The CSRC will take over supervision of corporate bonds and is also upgraded. The creation of NFRA is likely to mean more unified but tighter regulation on financial services.
A new CPC central commission will guide China’s drive towards tech self-reliance. The Ministry of Science and Technology will be retooled to execute this strategy, while some of its other responsibilities are delegated to other ministries.
A new National Data Bureau (NDB) will be created under the NDRC to coordinate the development of the data infrastructure and use of data resources, which is currently spread across several agencies. However, the crucial issue of data security will remain under the Cyberspace Administration of China (CAC), meaning that the creation of NDB has neither undermined the power of CAC nor clarified compliance issues that MNCs are facing over cross-border data transfer.
A new government cabinet was appointed, including a new Premier, four new vice premiers, and new state councillors. This new team is notable for having close ties to Xi and backgrounds in engineering and strategic industries. Unusually, key members of the top team, including the premier and executive vice premier, have no previous experience in central government.
Contrary to expectations, only two of the State Council’s 26 ministries and commissions welcomed new heads. The decision to keep on trusted members of the economic team, including the Central Bank Governor and Ministers for Finance and Commerce, indicates continuity through the transition period and reassured markets.
Key new appointments
Li Qiang (Premier) Li is seen as well-attuned to the needs of private business and foreign investors, having spent his career in the business-friendly coastal areas of Zhejiang, Jiangsu, and Shanghai, where he helped Tesla set up its “gigafactory” and supported the use of foreign vaccines for COVID-19. As a long-time Xi ally, he is expected to enjoy more of the President’s ear than his predecessor Li Keqiang.
Ding Xuexiang (Executive Vice Premier) An engineer by training, Ding is one of Xi’s closest aides, previously serving as his de facto “chief of staff” and often travelling with the Chinese leader. As first-ranked Vice Premier, he will oversee a broad portfolio.
He Lifeng (Vice Premier) He was previously head of the NDRC, where he played a significant role in promoting the BRI. He is expected to take over the economics and finance portfolio from the influential Liu He. He is another close associate of Xi, having known the President for almost four decades.
Liu Guozhong (Vice Premier) Liu’s new portfolio as Vice Premier will include healthcare and COVID-19 policy. He is an electronics engineer by training and was previously the party secretary of Shaanxi. Liu is not seen as aligned with a particular faction.
Zhang Guoqing (Vice Premier) Previously Party Secretary of Liaoning, Zhang was trained in engineering and economics and spent much of his career as an executive at military contractor Norinco Group. As yet, his portfolio as Vice Premier remains unclear.
Zheng Shanjie (Head of NDRC) Zheng was Governor of Zhejiang and then Party Secretary of Anhui before being moved to his new role as the head of China’s economic planning ministry. Zheng has close ties to He Lifeng and is seen as a strong candidate for promotion to the Politburo in 2027.
The business implications
Reopening, policy tailwinds and opportunities for cooperation
China continues to present lucrative opportunities for foreign investors that can adapt and find niches aligned with Beijing’s long-term development strategy. It will continue to be a major growth market, along with Southeast Asia, for many MNCs, especially at a time when prospects are uncertain elsewhere.
In particular, consumer goods and hospitality stand to benefit from pent-up demand with the reopening of China’s economy. Advanced manufacturing remains a priority sector to encourage foreign investment, especially projects seen to help China shore up industrial chains and boost innovation. More MNCs are setting up R&D centres in China to tailor solutions for the local market, and the government is expanding incentives for such investment.
As frictions between China and the West continue, sustainability continues to stand out as a promising area for long-term cooperation. MNCs can establish themselves as green leaders by customizing ESG strategies for the China market, linking global commitments to the Party’s green goals through pilots and local partnerships related to areas such as renewable energy, supply chains, and technology upgrading.
“High-quality” growth and emphasis on ESG present additional opportunities
Although achieving energy security is likely to take precedent over the net-zero agenda this year, technology and ESG are essential to China’s long-term sustainable growth as indicated in the GWR. On ESG, green and low-carbon development will be key. By aligning with the Party’s goals of green development and energy security amid geopolitical tensions, the development of ESG presents additional opportunities for foreign investors to supply technological expertise and talents that would support its implementation and progress.
Assess how efforts to fortify the Chinese economy will impact your sector
Security concerns drive policy across an expanding array of issues and industries. This makes it more important than ever to understand what is on the Party’s security “risk radar,” its plans to mitigate these risks, and how these plans intersect with your business interests.
Investors may wish to develop a risk-opportunity matrix mapping out which of the will generate risk (i.e., “cybersecurity” for firms transferring data overseas) and which may create opportunities (i.e. “ecological security” for green tech firms).
- Efforts to reduce China’s dependence on imports and foreign technology will impact prospects for MNCs in certain sectors. . As more Chinese manufacturers aim to move towards 100% domestic sourcing, foreign firms may have to adopt different approaches to continue selling into their supply chains – from exports to local production or other means such as partnerships and tech licensing.
- China’s drive for security is not all downside for MNCs. It means that foreign investment that helps to shore up industrial chains or support innovation is especially valued, and will also generate opportunities for firms offering solutions deemed to make China more safe and secure. That said, MNCs engaging in security-related business are likely to also face greater scrutiny at home for their operations in China.
Managing risk and complexity
MNCs operating in China face a growing risk of being caught up in geopolitical crossfire. A hawkish US Congress is driving sanctions risks, while China continues to build its own legal and regulatory toolbox to deter and retaliate against such actions. February saw the first use of China’s Unreliable Entity List and other tools such as the Foreign Sovereign Immunity Law are in the pipeline.
MNCs may experience faster changes in China’s policy environment, and with less warning. Institutional reforms will further shift the focus of policymaking into the more opaque Party apparatus and allow the leadership to speed through new directives. Meanwhile, amendments to the Legislative Law create a fast-track channel for “emergency” laws to pass after one review, rather than the usual three, leaving organisations less time to comment or prepare.
To manage these potential challenges, organisations that have not already done so should consider undertaking systematic risk assessments and risk scenario planning. MNCs may need to devote more resources to having the right people and processes to keep up with China’s fast-changing political and regulatory environment.
2023 represents a window for stakeholder (re)engagement
The Chinese government is keen to show that China is open for business, offering extra visibility and access to early visiting executives. With visa issuance restored, flights increasing, and a new government now in place, this is a good window to update stakeholder maps, plan to engage and build relationships with key organisations, and prepare to explore new opportunities for business and cooperation.
Given the current geopolitical climate, foreign organisations should consider forging strategic partnerships with local firms, government agencies, associations, or research institutes. As well as enhancing cooperation and understanding, these partnerships can help to mitigate reputational risks and provide access to local networks, resources and knowledge. They can also help outsiders to better understand challenges created by the political climate and may prove useful in the event of a crisis.
Now the Two Sessions are over, expect a period when the workings of government may be affected as restructuring is carried out and new appointments settle into their posts.
Plans of the Party’s institutional reform is expected to be published in the coming weeks, providing a more complete picture of how the new system will take shape, including new CPC central commissions for science and technology and possibly financial work.
Sectors at a glance
- Consumer goods and hospitality are poised for robust growth this year after the end of the zero-COVID policy. In-person services such as tourism, dining and entertainment will benefit, and it is expected that luxury goods will soon return to growth. Auto sales will be affected by the phase-out of COVID-era subsidies, though some local EV incentives are being extended.
- Financial services are likely to see more unified and tighter regulation following overhaul of the regulatory system. International firms remain valued for their role in raising standards in the industry and continued market opening is expected. However, the sector is a current focus of campaigns on common prosperity and anti-corruption, putting scrutiny on pay structures and business practices.
- Healthcare will see more investment, particularly in smaller medical institutions, after the initial reopening wave exposed weaknesses in the system. New pilots and specialist treatment centres are providing channels for MNCs to bring innovative treatments to the Chinese market faster. However, the expansion of volume-based procurement to cover more medicines and medical devices will exert downward pressure on profit margins.
- Real estate remains on shaky ground and the government will implement measures to support the sector, including eased financing for developers and relaxed rules on housing transactions and lower mortgage rates to boost sales. However, these adjustments may take time to have an effect, given that buyer confidence has yet to recover.
- The commodities outlook is mixed. The Two Sessions did not signal an infrastructure surge and construction remains slack. The revival of economic activity should see oil demand from travel and logistics rebound, but the emphasis on domestic power sources such as coal and renewables may challenge LNG imports.
Asia House closely monitors economic and policy developments in China. If you would like to discuss these issues with one of our experts, please contact Jonathan Smith, Corporate Affairs Manager: email@example.com
FIND OUT MORE ABOUT ASIA HOUSE RESEARCH
 This brief presents key outcomes from the Two Sessions, including work reports by the premier, National Development and Reform Commission (NDRC), and Ministry of Finance, as well as comments by senior officials at the Two Sessions and other policies released in the run up to the meetings.
 JPMorgan Chase & Co January 2023 estimate
 At present, the 16 components of “comprehensive national security” are political, territorial, military, economic, cultural, societal, technological, cybersecurity, ecological, resource, nuclear, security of overseas interests, biosecurity, space, polar, and deep-sea.
Join our mailing list to receive Asia House research, analysis and event information direct to your inbox.