After several turbulent years of economic reform and no GDP targets, China’s policy pendulum has swung back to growth. China’s 5.5% GDP target for 2022 demonstrates the government’s willingness to course correct.
Moreover, as Omicron infections skyrocket, the shift to a ‘dynamic clearance’ strategy reflects a softening in the country’s COVID containment strategy. While halting the virus’s spread is still a priority, so is protecting the economy. China is once more dedicated to securing growth, just not at any cost. At a recent IMA China CEO Forum meeting, a well-known economic consultant remarked,
‘In 2022, the pendulum has swung back to growth. We will not see the same rate of aggressive policy measures as we did last year. However, once a stable growth trajectory returns, expect a return to policies that bring short-term pain for long-term gain.’
Growth slows but opportunities remain
China closed out 2021 with 4% growth in the fourth quarter, one of the lowest rates on record (besides the first quarter of the pandemic). Exports and domestic consumer spending dropped. In early 2022, Omicron reared its head, and China’s travel restrictions and Covid policies have begun to cut more deeply.
‘There is a realisation that if China doesn’t open, it will hurt the 20% of the economy that never got back on its feet, such as travel and tourism. Meanwhile, since the rest of the world is back in business, China’s exports are not as necessary to the world economy.’
Size matters
Whether China can achieve its 5.5% growth targets against numerous headwinds or not, companies should not underestimate the opportunities in China. With its large base, the Chinese economy continues to generate hundreds of billions in new sales annually.
‘A decade ago, China was a $5 trillion economy growing at 10% or more per year and adding about $500 billion to the economy annually. In 2022, China is a $17 trillion economy that is slowing down to around 3% growth. At this rate of growth, it is still adding $500 billion to $1 trillion a year to the economy. In relative terms, more GDP is being added to the economy this year than in the roaring early aughts.’
Growth trends to watch
During the China CEO Forum meetings, our commentator and members made the following predictions for 2022 and beyond.
The housing sector will stabilise
‘I see good signs that housing is stabilising after the government stepped in. We will not see property take-off again; however, if we don’t see good growth in housing, expect more easing up on lending.’
Consumer spending will shift towards services
‘China will continue to reallocate growth away from residential construction, steel, cement, and white goods and into consumer, non-durable and services areas. Those are the growth areas in China.’
Premium products will experience the highest sales growth
‘China’s consumers continue to be savvy and demand better products. Companies that can provide innovative, high-quality goods will continue to thrive.’
Online and offline sales will converge
‘Our business is looking at how we do offline to online convergence. Consumers are no longer shopping only during normal daytime hours.’
Electric vehicles will dominate auto sales
‘We see the shift to electric vehicles away from the combustion engine as an opportunity to drive our growth this year. We are experiencing 50% to 70% growth year-on-year.’
MNCs will invest in local firms to secure their supply chain
‘Chinese OEMs often do not have a brand but can take a product and improve it. Buying these companies gives our supply chain some insurance.’
Short-term lockdowns will not disrupt production
‘Our factory was shut down for five weeks and we lost sales. But only with a market the size of China can a company recover completely and still achieve the desired growth as budgeted.’
Government officials will prioritise tax collection
‘Tax officials at all levels of government will push hard for tax compliance to raise revenues. China will need to put itself on solid fiscal ground due to the demands of its aging population.’
Inflation in China will be lower than in the West
‘Inflation in the US and Europe is skyrocketing, due to the stimulus money pumped into the economy. But last year, China was taking money out of the economy and consumer spending was flat. This is why it has been tough to pass on price increases in China.’
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