China tilts to growth and stability amidst uncertainties at home and abroad

China’s leadership used the opening weekend of this year’s Two Sessions to project confidence and a more pro-growth stance amidst external tensions and pressures on the domestic economy.

The Two Sessions are annual meetings of the National People’s Congress (China’s legislature) and the Chinese People’s Political Consultative Conference (a political advisory body) that set key targets and the economic agenda for the coming year. This year’s Two Sessions come as the leadership is focused on ensuring a smooth run-up to the 20^th Party Congress this fall, which is expected to see a major leadership shakeup as President Xi claims an unprecedented third term.

1. Growth and jobs take precedent over long-term goals and restructuring

In Premier Li Keqiang’s Government Work Report (GWR) delivered on March 5, the official GDP target for 2022 was set at 5.5%. While lower than last year’s target (6%) and actual growth (8.1%), this is a high bar given current economic headwinds. These include slowing exports, a property slump, sluggish consumption amidst ongoing Covid restrictions, as well as commodity shortages and price volatility, now compounded by global uncertainty over Ukraine. In December, the IMF forecast growth of 4.8% for China in 2022.

This target and the tone of the meetings so far signals that policy emphasis has shifted towards growth and jobs for this year. Long-term efforts to shift the economy to a more sustainable and equitable model - which saw heavy-handed government actions hit tech, education, real estate, and the power sector last year - look set to take a more backseat role for now. “Common prosperity,” a push to make society more equal which has elicited some concern from the private sector, received little coverage in the GWR, suggesting that short-term stability is a higher priority for now.

2. Government investment and tax cuts to achieve the growth target

The ambitious growth goal for 2022 calls for expansionary fiscal policies. The budget deficit to GDP ratio target was set at 2.8%, down from 3.2% in 2021. The central government set a budget of RMB 640 billion (USD 101 billion) and will issue local government special bonds worth RMB 3.65 trillion (USD 578 billion), the same amount as last year. On top of this, the central government will divert close to RMB 9.8 trillion ($1.6 trillion) to local governments, an 18% increase from 2021 and the largest increase in recent years.

Government spending and lending will go to key construction projects, including “New Infrastructure,” energy bases and other facilities, and upgrading residential communities. There will also be more spending on healthcare and social welfare.

The GWR also outlined major tax cuts for businesses, potentially amounting to RMB 2.5 trillion (USD 396 billion) and VAT credit refunds accounting for RMB 1.5 trillion (USD 237 billion).

3. Making China’s economy more innovative and resilient

The GWR outlined steps to make China’s economy more innovative and less dependent on external technology, markets, and resources. Policymakers likely see this mission as even more important given global volatility and the use of economic warfare amidst the Ukraine crisis.

Stabilizing foreign investment is part of these efforts. MNCs will be encouraged to expand investment in advanced manufacturing and R&D, particularly to remedy weak links in China’s industrial chains, with a special focus on central, western, and northeastern regions.

As part of efforts to boost innovation, tax deductions for R&D costs will be raised from 75% to 100% for small and medium sci-tech enterprises. The government sees these smaller firms as playing a key role in enhancing China’s technological strength and has launched programs to nurture “little giants” in strategic sectors.

4. Safeguarding energy supplies while institutionalizing the net-zero agenda

Energy security remains a priority after power rationing measures caused major disruption to industry last year. As part of this recalibration, the GWR called to make "dual control" binding limits on energy consumption more flexible and oriented to carbon reduction.

This year will see China’s drive to peak carbon before 2030 become more institutionalized as it is fleshed out in a more detailed and systematic policy roadmap. At the Two Sessions, National Development and Reform Commission Director He Lifeng noted that 17 provinces have already linked their local plans with the central roadmap for decarbonization. MNCs should watch for the release and implementation of local and sectoral carbon peaking plans in the coming year.

Key takeaways

• Overall, the GWR signals a broad continuity of current policy directions. The shift to a more pro-growth stance will entail major government spending and is generally positive for short-term prospects in the China market, though at the cost of long-term efforts to restructure the economy and move away from a model highly dependent on debt-fueled construction.

• The GWR and investment plans point to promising growth opportunities in sectors such as new infrastructure (i.e. data centers, 5G stations), decarbonization (i.e. low carbon technology, renewable energy), new urbanization (i.e. retrofitting residential projects), advanced manufacturing, and healthcare.

• In the long-term, steps to increase China’s population, such as the three-child policy, are likely to impact MNCs by affecting the growth of the labor market.

• The GWR shows continued strides to improve the business environment for local players and MNCs. Amidst efforts to make the Chinese economy more resilient, the government will continue to seek foreign investment to shore up industrial chains.