Junni Park, China Advisor, Asia House Research, provides an assessment of this year’s ‘Two Sessions’ – China’s most important annual political meetings that set the policy agenda for the year ahead.
- The Chinese government will raise infrastructure spending and cut business tax to meet aggressive 2022 growth target of 5.5 per cent
- China’s efforts to decarbonise its energy sector will be dialled back in the short-term as the priority shifts to jobs and economic stability
- China’s long-term development strategy for 2022 has been predicated on security-oriented issues amid global uncertainty
China’s 2022 growth ambitions
The Two Sessions showed that security and geopolitics is only gaining more weight in shaping economic policy – perhaps unsurprisingly given current developments in Ukraine, supply chain disruption and the economic scarring from the COVID-19 crisis.
China’s leadership used the Two Sessions1 , the nation’s most important annual political meetings, to project confidence and mobilise a push for growth and jobs amid external tensions and pressures on the domestic economy. This shift of priorities will also see an ease up of efforts to decarbonise China’s energy sector in 2022.
The leadership is focused on maintaining stability ahead of the quinquennial Party Congress this autumn when President Xi is expected to claim an unprecedented third term. This context likely shaped the consequential yet largely unexpected outcome of this year’s Two Sessions – the setting of an ambitious GDP growth target for 2022 of “around 5.5 per cent.”
This target is less than last year’s target (of six per cent) and 2021 actual growth (8.1 per cent) and is the lowest target in three decades. But 5.5 per cent is also above almost any forecast and a potentially high bar given that the Chinese economy entered the year running at about four per cent growth and faces headwinds from slowing exports, a property slump, sluggish consumption growth amid ongoing COVID-19 restrictions, and commodity price volatility.
Setting an ambitious growth goal to mobilise pro-growth economic policy is a notable departure from Xi’s tenure so far, which has seen a progressive move towards more emphasis on debt restructuring, risk control, and deleveraging. To achieve the newly unveiled ambitious growth target, a major stimulus programme is needed. The central government is set to spend CNY 2 trillion (US$320 billion) more than in 2021, which was itself a heavy year for fiscal expenditure. A more supportive monetary stance was adopted in the Government Work Report (GWR), suggesting further interest rate cuts this year.
High growth target and stimulus spending bodes well for markets
The shift to an ambitious pro-growth (and pro-jobs) stance is positive for China’s general business outlook.
- Infrastructure-related sectors will benefit from increased government spending, including CNY 3.65 trillion (US$580 billion) of local government special bond issuance.
- Digital infrastructure will receive a large proportion of spending, including 575 million 5G base stations to be built this year and a national integrated system of big data centres.
- Major spending on traditional infrastructure projects such as transport, logistics, energy, water conservancy, and renovation of old public facilities.
- Significant tax cuts totalling CNY 2.5 trillion (US$400 billion), as well as increased financing for manufacturing, high-tech, and MSMEs is of particular note.
It remains unclear if this package will be sufficient to realise the ambitious growth target and further stimulus measures may be announced later in the year. Given the current growth trajectory, there is a lot of ground to be made up in H2 to hit 5.5 per cent for the year. The fiscal expansion outlined at the Two Sessions is significant but not massive in historical terms and will be somewhat offset by falling local government off-budget revenues from land sales to struggling property developers.
Long-term restructuring downplayed for now
Last year, government actions impacted activity in multiple sectors, including a tightening of lending standards which caused a property slump and sudden regulatory tightening in the domestic technology and education sectors that led to significant layoffs.2 3
The Two Sessions gave a clear signal that, for 2022, growth and stability come before the long-term goals of tackling inequality or fostering China’s energy transition.4 This points to a more predictable policy environment with the following adjustments likely in the year ahead:
- Policy loosening and a limited revival of the property sector, which remains an important driver of demand for steel, cement, and household appliances. A targeted easing of rules on home purchases and mortgages is underway at the local level and likely to be expanded.
- A relative reprieve for China’s technology sector after last year’s regulatory tightening on data security, content, and overseas listings wiped billions off the value of China’s tech giants. However, they will remain under scrutiny and see profits suffer as they have to adapt to new policy frameworks that limit how they take advantage of their platform and market power.
- A temporary toning down of President Xi’s campaign for “Common Prosperity,” which was launched last year and spooked some entrepreneurs concerned that they would face direct pressure to help narrow China’s wealth gap. The slogan was conspicuous by its absence at the Two Sessions and comments on a forthcoming Common Prosperity action plan from the National Development Reform Commission (NDRC) suggest the current focus is more along existing policy directions to strengthen public services and the social safety net rather than to squeeze the private sector.5
One area where there will be no let-up is the zero-COVID policy, which apart from some “fine-tuning” is unlikely to change much in 2022. This will continue to limit in-person consumption, cross-border business, people-to-people exchange and tourism, and likely see continued periodic disruption to Chinese ports and factories, adding pressure to global supply chains.
Energy security trumps decarbonisation (for now)
Another policy shift at the stability-first Two Sessions was a temporary dial-back of decarbonisation in the energy sector. Last year, power rationing caused widespread disruption to industry as local officials took drastic steps to meet binding energy consumption targets.6
In 2022, growth targets will come before emission reduction targets. The GWR made climate-driven energy controls for local governments more lenient and called to speed up efforts to develop a more unified and market-based power sector. Clean coal will see considerable investments for some time to come as the government tries to balance energy security with gradual decarbonisation.
That said, China’s long-term climate goals remain intact. Priorities outlined in the GWR bode well for products and solutions related to renewables, hydrogen industry development, and carbon reduction retrofitting in fields such as metals, building materials, and petrochemicals.
The Two Sessions affirmed directives to move to a more institutionalised climate policy approach. The head of the NDRC said that local and sectoral plans aligned with the national climate roadmap will be released this year. This will provide valuable reference on how markets will evolve and help firms identify opportunities to sell low-carbon products and services and forge partnerships with local players, especially central SOEs that have been tasked with driving decarbonisation by building alliances and green supply chains. Green partnerships with state-owned enterprises (SOEs) can also help multinationals to embed themselves in low-carbon supply chains and access new customers, given SOEs’ role as orchestrators or “gatekeepers” for key sectors and projects.
Adapting to China’s long-term push for economic security
The GWR outlined plans to expand capacities such as crude oil refining and fast-track construction of national reserves for key inputs, adding five billion cubic metres of storage capacity for gas and bringing capacity of coal and emergency backup electricity to over 200 million tonnes and over 30 gigawatts, respectively. It also called to plug technological vulnerabilities by accelerating R&D and developing clusters of emerging industries such as biotechnology, new materials, aviation, marine equipment, and new energy. Tax deductions were raised from 75 to 100 per cent of R&D costs for small and medium science and technology enterprises.
Foreign investors need to assess how they align with China’s security-driven market reforms and development goals, which vary by sector:
- Auto and consumer goods remain promising sectors given favourable policy directions and the continued rise of China’s middle class. The trend is towards market opening, given that these sectors are considered non-sensitive and part of the long-term strategy to boost domestic consumption and reduce reliance on external markets. Foreign investment in passenger vehicle manufacturing has been fully liberalised as of this year and the GWR pledged new measures to support consumer spending on big ticket items such as cars and home appliances. Firms like Tesla are ramping up production and localising by building R&D centres in China. The Regional Comprehensive Economic Partnership (RCEP) raises the potential for China to develop into a base for regional auto exports.
- In sectors such as advanced manufacturing and chemicals, foreign investment that can help China internalise industrial chains will be encouraged and may benefit from further market opening or preferential policies. The GWR called to steer foreign investment towards manufacturing, high-tech, and central, western, and northeast China.
- Goals in the GWR will generate demand for solutions that help make China’s manufacturing sector smarter and greener, as well as enablers for low-carbon sectors such as green materials for buildings and new energy vehicles.
- President Xi warned that China cannot rely on international markets for food, calling to boost domestic output so that “the rice bowls of the Chinese people are filled with Chinese grain”. Firms that can help make China’s agriculture sector more productive and sustainable could benefit. Policy has recently shifted towards allowing domestic GM crops, long-delayed due to safety concerns.
- There was some progress in domestic capital market reform as the GWR called to implement China’s long-overdue registration-based IPO system nationwide. This will spur more Chinese companies to list domestically as US listings look increasingly challenging.
China will continue to pursue selective and slow liberalisation and integration with global markets. This year’s GWR shows the focus is making the most of regional trade agreements in Asia. Notably, unlike the previous three years, no mention was made of trade or investment deals with the US, EU, Japan and South Korea, perhaps reflecting the government’s intention to consolidate what is already confirmed, such as RCEP.
Investors should monitor the pro-growth agenda outlined during the Two Sessions and the implications of the government’s prioritising economic security as a continuation of its inward oriented policies. The ministries will be busy implementing directives from the Two Sessions as local governments seek investments to tap additional funding from the central government.
Looking ahead, the all-important 20th Party Congress takes place this autumn, which will confirm the new leadership and set Party priorities for the next five years, to be followed by the next Two Sessions in March next year, which will complete the leadership reshuffle by appointing new government posts including a new premier, vice premiers, and ministers.
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
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1. The Two Sessions refer to annual gatherings of the National People’s Congress, China’s top legislative body, and the Chinese People’s Political Consultative Conference, an advisory body. At the Two Sessions, the leadership sets policy directions for the year in the Government Work Report (GWR) and other key documents, delegates discuss policy proposals, and the legislature reviews key laws.
4. E.g. the ambitious growth target sends a signal to officials to rein in other actions that hurt growth; binding targets on energy consumption have been loosened; a de-emphasis of Common Prosperity.
6. As part of China’s decarbonization drive, the central government issues binding energy consumption targets to all provinces. In 2021, some local governments had to ration power to industrial and residential users in order to make these targets.
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