What to Expect in China's Economy
China's Two Sessions or lianghui of the NPC and CPCC in 2023 have lifted hope to new levels by designing a blueprint for sustainable development, with the true essence of socialism with Chinese characteristics, as envisaged by the 20th National Congress of CPC.
The Two Sessions refer to the annual meetings of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), which preside over the main economic agenda for 2023, as well as significant governmental restructuring. The CPPCC is a consultative body that includes over 2172 members from various segments of Chinese society. The NPC with 2977 deputies is China’s top legislative body. The Two Sessions are the only fixed annual meetings of these two political bodies.
The annual Government Work Report (GWR) presented at the session contained both the achievements and challenges of 2022 and the country’s socioeconomic development agenda for the year.
The goal for China is to realize socialist modernization by 2035; This rejuvenation is also part of achieving the Party's second centenary goals.
China Rebounds
In the first year of re-opening after the pandemic, China is emerging from its bruises; The lifting of COVID-19 restrictions in late 2022 has already boosted economic sectors.
China’s factory activity for February 2023 bounced further into expansion territory, according to data from the National Bureau of Statistics, released on March 1. The official manufacturing Purchasing Manager's Index (PMI) reached the highest level in nearly 11 years in February – 52.6, proving China’s factory activity has expanded at the fastest pace in more than a decade. The world’s second-largest economy staged what economists are calling a very rapid rebound after reopening from zero-Covid. It is the highest level since April 2012. In January, the reading was 50.1, a sharp increase from 47 in December, as the pandemic restrictions were starting to fade. A reading below 50 indicates contraction, while anything above that shows expansion.
The PMI for large enterprises rose by 1.4 points to 53.7, while the reading for small enterprises increased by 4 points to 51.2. The PMI for small businesses was back in expansion territory for the first time since May 2021.
Non-manufacturing PMI in February also grew further to 56.3 from January’s 54.4, when it saw a sharp improvement backed by a recovery in services and construction activity. It recorded its best level in two years. The Caixin/Markit manufacturing PMI, a private gauge of the country’s factory activity, jumped to 51.6 in February from 49.2 in January. It was the first expansion in seven months.
The official PMIs mainly cover larger businesses and state-owned companies, while the Caixin readings are more focused on smaller businesses and private companies.
The rapid expansion came amid the accelerated resumption of factory output after the Chinese New Year holidays.
The broad-based improvements for both Manufacturing and non-Manufacturing PMIs reflect the solid momentum of post-reopening recovery. While stimulus policies are expected, the People’s Bank of China would be mindful of inflation risks and may tilt to a natural policy once the economy is back on track.
Buoyed by the Two Session's outcome, there will be further improvement in consumption later this year. To further expand domestic demand in 2023, Two Sessions has proposed that 3.8 trillion yuan ($550 billion) be allocated for special-purpose bonds for local governments, compared to 3.65 trillion yuan in 2022.
But there remains a range of challenges, including sluggish domestic demand, persistent problems in the housing market, and unequal development across the country. The economic and legislative decisions made at the Two Sessions are of high importance to business leaders and foreign investors in China; they serve as a valuable window into China’s politics and reveal Beijing’s priorities and policy direction for the future.
GDP to Grow
Shortly after China’s factory activity data was released, Moody’s announced that it expects China’s economy to grow by 5% in 2023, an upgrade from its previous outlook of 4%. They expect pent-up demand for non-traded services to support a consumption rebound starting this spring.
After the data became public, Julian Evans-Pritchard, head of China economics at Capital Economics, wrote in a research note, "They underscore just how quickly activity has bounced back following the reopening wave of infections," adding that his firm's 5.5% growth forecast for China this year may be too conservative. The IMF recently forecast GDP growth of 5.2 percent for China this year and 2.9 percent for global growth.
Hence, the Two Sessions has set a realistic annual GDP growth target of 5 percent. In 2022, the GDP growth target was set at “around 5.5 percent”. However, China missed the target, growing 3 percent year-on-year, due mainly to the large outbreaks of COVID-19. But, China's GDP exceeded 100 trillion yuan ($14.55 trillion) for the third consecutive year in 2022 despite complex external challenges. It is expected to exceed 130 trillion yuan ($18.84 trillion) in 2023, an increase of about 10 trillion yuan from the previous year.
In reflection of the buoyant sentiment in China, provincial and municipal governments have announced ambitious local GDP growth targets for 2023: At the higher end, the provinces of Hainan, Tibet, Xinjiang, and Jiangxi have set targets of between 7 and 9.5 percent. At the lowest end, Beijing, Tianjin, Shanghai, and Guangdong have set targets of between 4 and 5.5 percent. The average of all the regional growth targets is around 5.9 percent.
An ambitious growth target means more effort into short-term growth, which could come in the form of more infrastructure investment, incentive policies, and consumption vouchers. A lower target allows the formulation of longer-term development plans to address systemic issues.
Two Sessions has set the deficit-to-GDP ratio at 3 percent for 2023, which is 0.2 percent higher than last year. It is a reliable indicator of a country paying its debts. Generally, a low debt-to-GDP ratio measures a healthy economy that doesn’t accumulate future debts.
FDI to Increase
China's Central Economic Working Conference (CEWC), held in December, has highlighted the need to increase foreign trade and investment cooperation to stimulate growth and proposed expanding market access.
Foreign direct investment into China grew by 14.5 percent from a year earlier to CNY 127.69 billion in January 2023. In dollar terms, FDI increased 10 percent to USD 19.02 billion in January. Manufacturing and high-tech industries continued to attract high levels of foreign investment despite the economic slowdown, and some regions, such as the EU, increased investment in China significantly.
Certain industries saw above-average rates of investment growth in 2022. Actual use of foreign capital in manufacturing reached RMB 323.7 billion (approx. US$47.8 billion), a year-on-year increase of 46.1 percent. This accounted for 26.3 percent of all foreign capital used in the country in 2022, a proportional increase of 7.8 percentage points from 2021.
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The countries that saw a relatively high increase in investment in China included South Korea, Germany, and the UK, with investments increasing 64.2 percent, 52.9 percent, and 40.7 percent year-on-year, respectively. Investment from the EU also saw rapid growth, with investment from the bloc increasing by 92.2 percent year-on-year, a significant reversal from the 10.4 percent year-on-year decrease seen in 2021.
Investment from Belt and Road countries grew 17.2 percent, and from the nine ASEAN countries grew 8.2 percent.
It is likely that the government will introduce new incentives and beneficial policies for foreign investors in 2023. These could potentially target key development zones and emerging and high-tech industries.
The total amount of investment that has been made public by 18 provinces and regions for domestic projects reached nearly 10 trillion yuan recently. The Ministry of Finance will further expand the issuance of local government special-purpose bonds to support the construction of major domestic projects. New issues exceeding 4 trillion yuan in 2022 supported more than 30,000 projects.
In February, the New Export Orders Index was up 6.3 points to 52.4, ending 21 months of contraction and supporting domestic demand and the recovery of small firms.
Structural Changes
The approval of small structural changes to the government is a regular occurrence in China. They have a significant impact on how policy is formulated and implemented over the next five years. The structural changes made in 2018, when the 13th NPC convened for the first time, were wider and saw the creation of new ministries and branches of government, including the National Supervisory Commission, an anti-corruption agency.
This time, there was a focus on restructuring the Ministry of Science and Technology (MST) and establishing a National Financial Regulatory Administration. Directly under the State Council, China's cabinet, the new administration will replace the China Banking and Insurance Regulatory Commission (CBIRC) and be in charge of supervising the financial industry except for the securities sector. The new administration will also transfer certain functions of China's central bank and the securities watchdog China Securities Regulatory Commission (CSRC).
The new set-up is on the lines of the Central Financial Work Commission (CFWC), a financial supervisory body set up in 1998 in the wake of the Asian Financial Crisis, which was dissolved in 2003.
China will also establish a national data bureau, to boost the digital economy. It will be administered by the National Development and Reform Commission (NDRC).
Policy Changes
Since economic growth and recovery are at the forefront of the 2023 agenda, the legislative changes and policies mooted by the Two Sessions focused on areas such as advancing industry development, production, and consumption. Policies aimed at propping up strategic industries - healthcare, semiconductors, green technology, and agriculture to improve food security and self-sufficiency, will get priority.
In January 2022, China released the Opinions on Promoting Standardized, Healthy, and Sustainable Development of Platform Economy, which endorsed the international expansion of tech companies. China has reassured tech companies that the government would support them in going public on domestic and overseas stock exchanges.
Considering the Western sanctions on Chinese tech companies, one major change is the passing of revision to China’s Legislation Law. A major part of the latest revision involves giving the NPC exclusive legislative authority over the "establishment, organization, functions, and powers" of supervision commissions.
It clarifies that the National Commission of Supervision can formulate supervisory laws and regulations in line with the Constitution, law and the decision of the NPC Standing Committee.
Last year, China unveiled its Anti-Foreign Sanctions Law to respond to reckless sanctions imposed by certain foreign countries. It is a basic foreign policy law, to make provisions for countermeasures. For acts that undermine China’s sovereignty, the law contains relevant provisions to firmly counter such acts.
China has already taken a series of moves to counter foreign sanctions. In 2021, the NPC passed an anti-sanctions law, providing legal backing for sweeping retaliation against any individuals, their families and organisations responsible for imposing sanctions against the country. Those steps include denying visas and freezing an individual’s assets.
The amended Law will further devolve certain legislative powers to provincial and municipal governments, to draft regulations on matters such as urban and rural construction and management, environmental protection, and historical and cultural protection.
Thus, the outcome of the Two Sessions is pro-growth. It means more support for industry, possibly through further tax incentives, more market access, and measures to boost consumption, in a robust environment of multilateralism.
China has already taken a series of moves to counter foreign sanctions. In 2021, the NPC passed an anti-sanctions law, providing legal backing for sweeping retaliation against any individuals, their families and organisations responsible for imposing sanctions against the country. Those steps include denying visas and freezing an individual’s assets.
The amended Law will further devolve certain legislative powers to provincial and municipal governments, to draft regulations on matters such as urban and rural construction and management, environmental protection, and historical and cultural protection.
Thus, the outcome of the Two Sessions is pro-growth. It means more support for industry, possibly through further tax incentives, more market access, and measures to boost consumption, in a robust environment of multilateralism.
Article in China-India Dialogue: http://chinaindiadialogue.com/chinas-economy-what-to-expect
In China Pictorial: http://china-pictorial.com.cn/chinas-economy-what-to-expect
