China’s Economy: What to Expect

This year, the annual sessions of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) National Committee, known as the Two Sessions, lifted hope to new levels by designing a blueprint for sustainable development following socialism with Chinese characteristics as envisaged by the 20th National Congress of the Communist Party of China (CPC).

The annual meetings discussed the main economic agenda for 2023. A total of 2,977 deputies make up the 14th NPC, China’s top legislative body. The CPPCC National Committee is China’s top political advisory body comprised of more than 2,000 members from various segments of Chinese society.

The annual government work report presented during the Two Sessions reviewed the achievements and challenges of 2022 and planned the country’s socioeconomic development agenda for 2023.

China’s goal is to basically realize socialist modernization by 2035. This is also part of the country’s second centenary goal.

 Rebound in Economic Activity

The lifting of COVID-19 restrictions in late 2022 has clearly boosted economic growth.

China’s factory activity in February 2023 bounced further into expansion territory, according to data released by the National Bureau of Statistics on March 1. The official manufacturing Purchasing Manager’s Index (PMI) reached its highest level in nearly 11 years in February, 52.6, showing China’s factory activity expanding at its fastest pace in more than a decade. The last time such a figure was reached was April 2012. The world’s second-largest economy staged what economists are calling a very rapid rebound. In January, the PMI stayed at 50.1, a sharp increase from 47 in December. A reading below 50 indicates contraction, while anything above shows expansion.

The PMI for large enterprises rose by 1.4 points to 53.7, while the figure for small enterprises increased by 4 points to 51.2. The PMI for small businesses reached expansion territory for the first time since May 2021. The non-manufacturing PMI in February also rose to 56.3 from January’s 54.4, when it was already enjoying a sharp improvement backed by a recovery in services and construction activity. It reached the best level of the last two years. The rapid expansion came amid accelerated resumption of factory output after the Chinese New Year holidays.

Broad improvements in both manufacturing and non-manufacturing PMIs evidence solid momentum for post-pandemic recovery. While stimulus policies are expected, the People’s Bank of China will likely be mindful of inflation risk and may tilt to a natural policy once the economy is back on track.

Buoyed by the Two Sessions’ outcomes, consumption is expected to improve later this year.

But many challenges remain, 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 crucially important for business leaders and foreign investors involved in China. They serve as a valuable window into China’s politics and reveal the country’s priorities and policy directions for the future.

 GDP to Grow

China set its annual GDP growth target at around 5 percent for 2023, according to the government work report. Moody’s announced earlier that it expects China’s economy to grow by 5 percent in 2023, an upgrade from its previous prediction of 4 percent. Analysts expect pent-up demand for non-traded services to support a consumption rebound starting this spring.

Julian Evans-Pritchard, head of China economics at Capital Economics, wrote in a research note that the numbers “underscore just how quickly activity has bounced back,” adding that his firm’s 5.5-percent growth forecast for China may be too conservative.

The growth target set by the Two Sessions is certainly realistic. In 2022, the GDP growth target was set at “around 5.5 percent.” However, China missed the target and grew by only 3 percent mainly due to outbreaks of COVID-19. But China’s GDP still exceeded 100 trillion yuan (US$14.55 trillion) for the third consecutive year in 2022 despite complex external challenges. It is expected to exceed 130 trillion yuan (US$18.84 trillion) in 2023, an increase of about 10 trillion yuan from the previous year.

Riding the buoyant sentiment in China, provincial-level governments announced ambitious local GDP growth targets for 2023. At the high end, Hainan, Jiangxi, Tibet, and Xinjiang set targets between 7 percent and 9.5 percent. At the lower end, Beijing, Tianjin, Shanghai, and Guangdong set targets ranging from 4 percent to 5.5 percent. The average of all the regional growth targets is around 5.9 percent.

 FDI to Increase

China’s Central Economic Work Conference last December highlighted the need to increase foreign trade and investment cooperation to stimulate growth and proposed expanding market access.

Foreign direct investment (FDI) in the Chinese mainland, in actual use, expanded 6.3 percent year-on-year to 1.23 trillion yuan in 2022 according to data from China’s Ministry of Commerce. In U.S. dollar terms, FDI inflow rose 8 percent year-on-year to US$189.13 billion. 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. The actual use of foreign capital in manufacturing reached 323.7 billion yuan (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, which is a proportional increase of 7.8 percentage points from 2021. Countries with a relatively high increase in investment in China included the Republic of Korea, Germany, and Britain, with investments increasing by 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 in 2021. Investment from Belt and Road countries grew by 17.2 percent, and investment from the nine ASEAN countries grew by 8.2 percent.

The Chinese government is likely to introduce new incentives and beneficial policies for foreign investors in 2023. These could potentially target key development zones and emerging and high-tech industries.

Total investment recently announced by 18 provincial-level regions in China for domestic projects reached nearly 10 trillion yuan (US$1.44 trillion). The Ministry of Finance will further expand issuance of local-government special bonds to support construction of major domestic projects.

Policy Adjustment

With economic growth and recovery high on the 2023 agenda, the focus of the policies discussed at the Two Sessions was on areas such as advancing industry development, production, and consumption. Policies aimed at propping up strategic industries ranging from healthcare, semiconductors, and green technology to modern agriculture will get priority.

China released a guideline document on promoting standardized, healthy, and sustainable development of the platform economy last year. China has reassured tech companies that the government would support them in going public on domestic and overseas stock exchanges.

Last year, China unveiled its Anti-Foreign Sanctions Law to respond to reckless sanctions imposed by certain foreign countries. This law is a basic law in the field of foreign affairs, and it is necessary to make provisions on countermeasures and restrictive measures in principle. For acts that undermine China’s sovereignty, the law contains relevant responses to firmly counter such acts.

The overall outcome of the Two Sessions is pro-growth. The result will be support for industry, possibly through further tax incentives, more market access, and measures to boost consumption in a robust environment of multilateralism.

 The author is a business writer at tech media KrASIA and former chief editor of the Indian daily Janmabhumi.