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China: Outlook for 2022

China’s timely and efficient response to the COVID-19 pandemic enabled it to not only largely contain the spread of the novel coronavirus at home but also resume economic activities and become the only major economy to achieve positive growth in 2020 as well as secure a strong economic rebound in the first half of 2021.

China’s GDP grew 9.6 percent in the first three quarters of 2021, which means its average growth rate in the past two years was 5.2 percent, making it a major driver of global economic growth. And this trend, which started more than a decade ago, is likely to continue in 2022 and beyond.

Yet the downward pressure on China’s economy increased from the third quarter of last year, with year-on-year GDP growth slowing to 4.9 percent in the third quarter from 7.9 percent in the second.

Although China’s exports remained resilient, domestic consumption and investment growth was below expectations due to cluster infections in different parts of the country, policy tightening and industrial regulation. As such, some economists have described the present state of the economy as strong in external demand but relatively weak in domestic demand.

As the feeble growth of domestic consumption and investment since the third quarter of 2021 cannot accord strong support to the economy, China’s growth may fall to about 5 percent this year, a rate that may not be enough to help the country meet its annual socioeconomic development target.

First, China’s growth for the whole of 2021 is expected to be 8 percent. And if its GDP growth is only 5 percent in 2022, it would mean a major fluctuation in the growth rate, which is not conducive to the smooth operation of the macroeconomy and meeting the expectations of the market.

Second, China will face great pressure on the employment and people’s livelihood fronts this year, so it needs to realize its target growth rate.

Third, the global economy, especially advanced economies, may recover further this year. And in order to stay ahead in the global competition with developed economies, especially the United States, China needs to maintain a medium-to-high growth rate.

To achieve these strategic goals, China needs to maintain a growth rate of 5.5 percent or higher this year. For that, it has to strengthen its macroeconomic policies and find some nodal industries and fields that can help boost overall growth by closing the output gap.

Given the limited potential of external demand and the uncertainty over the growth of domestic consumption due to the sporadic yet frequent infection outbreaks, increasing investment in nodal sectors is the best way to ease the downward pressure on the economy. So stabilizing economic growth should be the authorities’ core policy goal in the short term.

To achieve higher-quality development in the long run, China needs to minutely analyze the factors behind its economic growth, set new macroeconomic policy targets, and increase investment in nodal industries that can help sharpen the competitiveness of Chinese enterprises and products.

Actually, huge investments in nodal industries and fields and injecting new vitality into micro-subjects in industries are important reasons for China’s rapid economic growth since the launch of reform and opening-up more than 40 years ago.

The basic reason for the downward pressure on the economy is that China has almost completed its industrialization process. In fact, China surpassed the US manufacturing output value way back in 2010 to become the world’s largest manufacturing country. Today, China’s manufacturing industry accounts for almost 30 percent of the world’s total in terms of added value, compared with 16 percent of the US, which ranks second in the world.

Due to the near completion of industrialization, China’s total factor productivity (TFP) growth has dropped to 2 percent per year. And since capital and labor inputs are encountering hurdles and TFP growth has declined, China’s economy is bound to transition from high-speed to medium-high-speed growth.

Hence, to achieve higher-quality development, China must build a new investment and financing system and increase investments in nodal industries. Maintaining a high investment rate is critical to improving TFP growth, as studies show that increasing investment by 10 percentage points can lead to a 1.18 percentage point increase in TFP growth.

If China wants its TFP level to be 65 percent of the US’ by 2035, it needs to ensure an annual TFP growth rate of 1.95 percentage points higher than the US’, which means its annual TFP growth rate should be 2.5-3 percent. Therefore, to achieve higher-quality development while maintaining healthy growth, China has to rebuild its investment and financing system and significantly increase investments in basic and core sectors.

In the longer term, China’s production network will undergo huge internal changes, and new nodal industries will emerge, and by adopting more proactive fiscal policy and sound monetary policy, China can channel the funds in a more targeted manner to key sectors which have the potential to become new drivers of the economy.

Furthermore, the growth space and added value created by the investments will help improve China’s core competitiveness, with the importance of such kind of growth becoming clear in the medium to long term.

Fruitful diplomacy trend to continue in 2022

The year 2021 was special for China in many ways. It celebrated the 100th anniversary of the founding of the Communist Party of China, implemented the 14th Five-Year Plan (2021-25), largely succeeded in containing the COVID-19 pandemic at home, and continued to contribute to world economic growth and global recovery.

The year also saw China helping improve global governance, overcoming difficulties, and elevating diplomacy to greater heights, pointing to the greater role the country is set to play in 2022.

Contributions to combat pandemic, climate change

With the pandemic continuing to rage in different parts of the world in 2021, China launched emergency global humanitarian campaigns. Up to now China has provided more than 2 billion doses of COVID-19 vaccines for more than 120 countries and international organizations.

China’s vaccine supplies and donations have helped many developing countries and international organizations to fight the pandemic, which demonstrates China’s strong opposition to the “vaccine nationalism” being practiced by some advanced economies and its resolve to boost global cooperation.

The past year also saw China intensifying its climate actions. For example, it took various measures to ensure its carbon emissions peak before 2030 and it realizes carbon neutrality before 2060. While the number of wind farms and production of solar photovoltaic panels increased in China, the cost of renewable energy reduced due to handsome investments in the sector-the highest in the world for several years-a trend which is likely to gain strength in 2022.

China has also provided proposals and made strenuous efforts to improve global climate governance, while setting new carbon emissions reduction goals in 2021. And at the UN Climate Change Conference in Glasgow, Scotland, in December, China announced measures for peaking carbon emissions and transitioning to green development.

Among China’s major diplomatic work last year was helping Africa fight against the pandemic and overcome the pandemic’s economic and social impacts, which have exacerbated Africa’s problems of extreme poverty, food crisis and regional conflicts.

In this regard, the Eighth Ministerial Conference of the Forum on China-Africa Cooperation in Dakar, Senegal, in November yielded agreements and projects including deepening cooperation in the fight against the pandemic, sending emergency supplies and medical teams to Africa, and helping run nearly 400 aid projects to support the continent’s economic recovery.

In fact, the China-Africa strategic and cooperative partnership has become an example for South-South cooperation.

Multilateral cooperation improves global governance

The pandemic has coincided with major global changes. But the existing global governance mechanism is not strong enough to cope with the intensifying global frictions and diverse issues, and effectively contain the pandemic and ensure steady global economic recovery.

As for the United States’ role in global governance, while previous president Donald Trump pursued unilateralism and withdrew the US from international organizations and pacts such as the World Health Organization and the Paris Agreement, causing irreversible damage to the global governance system, incumbent President Joe Biden, despite partly repairing the damage caused by Trump, is still focused on geopolitics and competition for power.

By contrast, China has been safeguarding multilateralism, participating in global governance and taking measures to address global challenges with the ultimate goal of building a community with a shared future for mankind. As a responsible global power, China wants global governance to be fair and equitable.

China is also working to develop major-country relations, and enhance mutual understanding with other countries while striving to maintain Sino-US relations by balancing competition with cooperation. On the other hand, China and Russia have deepened their comprehensive strategic cooperation in all areas and at all levels with the aim of promoting global peace and strategic stability.

When it comes to China-European Union ties, the two sides have enhanced strategic mutual trust, are upholding multilateralism and free trade, and combating climate change. Indeed, China-EU cooperation has strengthened in the digital, green development and other emerging areas.

Moreover, the Regional Comprehensive Economic Partnership agreement, which came into effect on Jan 1, will boost regional cooperation and trade.

This year marks the 50th anniversary of the normalization of China-Japan diplomatic ties, and maintaining sound and stable relations with Japan (and the US) will be critical to China’s peaceful rise.

But by passing the Innovation and Competition Act of 2021, which disregards facts, hypes the “China threat” theory, even lobbies for decoupling between China and the US, the US Congress has chosen to intensify strategic competition with the aim of checking China’s rise.

China can still balance ties with the US and Japan

And since Japan, as an ally of the US, is under pressure to take sides, it would be immature to predict a drastic improvement in Sino-Japanese ties this year. However, there is room for China to maneuver its relations with the US and Japan. The pandemic and rising inflation have had a serious impact on the US with no let-up in sight even at the beginning of this year. The US can, to a large extent, offset the impact by cooperating with China, especially because the two countries have a lot of common issues to tackle including the pandemic, climate change and global economic slowdown.

As for the RCEP, as the world’s largest free trade agreement, it is expected to increase trade and investment between China and Japan, and help improve their overall relations. More important, China will continue to make efforts this year to develop a new model of major-country relations and improve relations with other countries, including the US.

Creating more opportunities for foreign firms

China has removed ratio restrictions on foreign ownership in the domestic passenger car-making sector, according to the 2021 negative list for foreign investment access which came into effect on Jan 1, 2022. This means China has further opened up the manufacturing industry to foreign capital following the securities, insurance and other financial services sectors.

According to a report on China’s business environment released by the American Chamber of Commerce in Shanghai, 59.5 percent of the surveyed US companies significantly increased their investments in China in 2021. In real terms, US companies’ investments in 2021 increased 30.9 percent year-on-year to reach the level of 2018, that is, before the China-US trade dispute started.

That US companies are continuing to invest in the Chinese market shows the irreversibility of economic globalization and the failure of the “decoupling” campaign launched by Washington.

Also, China has been further integrating with other economies in the Asia-Pacific region and beyond, thereby strengthening global economic cooperation. In fact, it is the deepening cooperation among the region’s economies that enabled the Regional Comprehensive Economic Partnership agreement to come into force on Jan 1.

The RCEP will not only facilitate trade and investment among the 15 member states through tariff concessions, but also improve the division of labor in the region and thus strengthen the regional supply chains-by implementing the rules of origin-and enhance its strategic value and position in the global supply chains.

While the impact of the COVID-19 pandemic on the global supply chains will prompt multinational companies to make their supply chains more resilient and flexible, the consolidation of China’s status as a huge and key consumer market will help expedite the regionalization of the supply chains. And the strengthening of multinational companies’ supply chains in China’s market will create new opportunities for East Asian and Asia-Pacific countries to benefit from the Chinese economy and boost their own development.

Besides, to further promote economic globalization and regional economic integration as well as boost global cooperation in the digital economy and other fields, China has applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Digital Economic Partnership Agreement. And at a time when anti-globalization sentiments have been growing in some developed countries, China is promoting economic globalization, supporting free trade, and helping propel the regional and global economies forward amid the pandemic.

Since developing countries lag far behind their developed counterparts in high-tech, some have fallen into the “middle-income trap”. But China, thanks to technological breakthroughs and innovations, is becoming a leader in human sciences and technology by breaking the developed countries’ monopoly in high-tech.

As a matter of fact, China’s scientific and technological development is increasingly benefiting developing countries. Through the Belt and Road Initiative, China’s infrastructure and digital technologies have reached many developing countries, which have used them to their advantage to alleviate poverty, boost their economic development and improve their people’s livelihoods.

China has always advocated win-win cooperation. And developing countries will benefit from deepening economic cooperation with China, as they can raise their people’s incomes and promote regional and global development. As China deepens reform and further integrates with the world, it will continue to contribute more to global economic growth and inject new dynamism in the world economy.

In short, an increasingly open China is creating more and more opportunities for foreign companies to share the fruits of its economic development by further opening up its market.
Source: China Daily

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