This year’s Two Sessions shows the Chinese Government sticking to its traditional approach of supply-side reforms and limited stimulus, but its targets remain ambitious given the current headwinds and geopolitical challenges. What does it mean for foreign-owned businesses in the country? asks Torsten Weller
This years’ annual plenary meetings of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) – also called the Two Sessions (or Lianghui in Chinese) – stood in sharp contrast to the general political atmosphere both in China and worldwide. While the country faces the worst Covid outbreak since the start of the pandemic and the world watches in horror at Russia’s invasion of Ukraine, China’s government is focusing – almost stoically – on its policy of fiscal consolidation and limited monetary support.
Jobs and innovation remain Beijing’s answer to nearly all policy problems, and while this is good news for businesses, the focus on ‘stability’ also harbours new risks. A lack of consensus over the direction of Xi Jinping’s policy of ‘Common Prosperity’ and the uncertainty over Li Keqiang’s successor will make ‘reactive’ policy adjustments more likely, thus increasing uncertainty for both foreign and domestic businesses in China.
First things first. China’s government wants its economy to grow by at least 5.5% this year. This is slightly lower than last year’s target of 6%. The figure itself came as scant surprise as Chinese provinces – which published their own targets ahead of the Two Sessions – had already zeroed in on the same objective.
Yet as Chinese Premier Li Keqiang pointed out in his traditional press conference at the end of the Two Sessions, China’s ever-increasing GDP – which reached £13.8 trillion last year – makes it more difficult to reach the stellar growth numbers seen a decade ago. In fact, even a 5.5% increase would add around £760 billion to the Chinese economy – more than the whole economy of the Netherlands.
Yet achieving this goal won’t be easy. Several analysts, including CBBC, therefore expected a significant monetary stimulus in the first quarter of the year. Yet the Chinese government has largely stuck to its supply-side oriented fiscal measures. As Li Keqiang explained at the press conference on 11th March, tax refunds and fee reductions are considered the fastest and most direct way to help businesses.
Nonetheless, China will transfer around RMB9.8 trillion to local governments and increase subsidies to cash-strapped localities by around 18% compared to last year. In total, government spending will rise by 12.8%.
Nominal GDP value change and official GDP growth (in %) (Source: National Bureau of Statistics, Xinhua)
But Li has also made clear that the extra money will focus on two things. First, social services, such as education, healthcare and better access of social services for migrant workers. Public spending on education should remain at around 4% of GDP, with a greater emphasis on reducing tuition fees for poorer kids. The government also wants to extend its basic healthcare coverage and raise coverage of treatment for the most common diseases to at least 70%. Finally, digitalisation of social services should make it easier for migrant workers to access social benefits.
Second, local governments are expected to do more to help Micro- and Small Enterprises (MSEs). Those companies – which account for over two-thirds of Chinese private businesses – were particularly hit by the pandemic, especially in the hospitality and tourism sector. A survey conducted by researchers at Peking University in collaboration with the Ant Group Research Institute found that only 30.6% of MSEs have returned to pre-pandemic turnover levels.
At the same time, MSEs have become the preferred solution to deal with unemployment. Rather than providing unemployment benefits – for which many local governments don’t have funds anyway – Chinese authorities have promoted self-employment as a way to keep people off the streets. Supporting these businesses via loans and tax cuts will therefore become an increasingly important task for Chinese policymakers.
Common Prosperity and jobs
Indeed, job creation – rather than welfare benefits – remains the principal concern for the Chinese government. According to Li Keqiang, China needs at least 11 million new jobs every year for its college graduates alone. This year 10.76 million young Chinese are expected to graduate from an institution for tertiary education, including vocational schools. However, this excludes around 45% of the cohort who are entering the labour market directly upon – or even without – gaining their high school degree. On top of that, 300 million migrant workers as well 200 million gig workers will need stable employment, too.
How does this tie in with China’s new policy of ‘Common Prosperity’ – the concept which emerged last year as a ‘guiding principle’ for the much-touted ‘New Era’. Concrete proposals for how this can be achieved were conspicuously absent from the week-long gathering. What’s more, ambitious reforms such as the planned ‘property tax’ have – once again – been shelved until further notice.
As noted in an earlier update on Common Prosperity, the Chinese government seems – at least for now – to be unwilling to significantly ramp up government benefits which could help create a modern ‘welfare state’ – as some Chinese economists have suggested. Instead, jobs, not benefits, remain the top priority.
New urban jobs added annually (Source: National Bureau of Statistics)
While lower taxes and fees are good news, Chinese regulatory risks will continue to occupy board room discussions in both China and the West. Ironically, Beijing’s focus on stability heightens this risk. Keeping a ship steady in stormy waters – i.e. Covid, real estate woes, and geopolitical tensions – is more difficult if there is no clear long-term development plan.
Even though more spending on R&D and ‘high-tech infrastructure’ is certainly helping some industries, Li’s remarks on job security underline the risk from weak consumer spending and a struggling real estate sector. Additionally, more ‘existential’ concerns, such as China’s collapsing birth rates – which drove last year’s bombshell decision to ban private tutoring businesses – add further uncertainty to China’s regulatory environment. As result, ad-hoc reversals and awkward policy implementation might well become more frequent.
The CBBC View
Despite its usual grandiosity, this year’s Two Sessions appeared to be more like a ‘farewell event’ for the current government under Premier Li Keqiang than a ‘rally’ for an ambitious reform push. Li himself admitted that this was his last Two Sessions as Premier and the unwillingness to leave unfinished business for his successor might indeed partly explain the stoic focus on financial stability and job security.
Apart from this observation, there are two main takeaways for foreign businesses. First, the Chinese government’s focus on innovation and entrepreneurship as an answer to slowing growth is a positive sign for businesses. In particular, high-tech industries will benefit from China’s continued upgrading of manufacturing capacity, supply chains and digital communication technologies. Individual entrepreneurship also provides new opportunities for professional and financial services as small companies or individual founders will require expert support to run their businesses.
The downside of Beijing’s emphasis on stability is that regulatory changes will become more ‘reactive’ and event-driven. Some of these events are ‘Grey Rhinos’ – to borrow Michele Wucker’s term for challenges which are obvious but neglected. This includes Covid and China’s struggling property sector.
Other risks are less obvious. For example, Beijing’s worries over the country’s demographic decline and the desperate push to ramp up birth figures are much harder to gauge. Embellished statistics and obscure political rhetoric might be a boon for Western ‘tea leaf readers’, but also make it fiendishly difficult for businesses to adopt to sudden changes.
While 2022 might therefore offer numerous new opportunities, it could also be less ‘stable’ than many are hoping for.