China’s quarterly GDP growth continued to slow, expanding by 4 percent in Q4. Strong growth early in the year delivered annual GDP growth of 8.1 percent, a result that was easily within the government’s cautious 6 percent target. Growth is unlikely to pick up any time soon as Covid-19 outbreaks linked to Chinese New Year and the Winter Olympics seem inevitable. Any lockdowns will dampen consumption and may disrupt supply chains. In addition, the financial troubles in the real estate sector are far from over.
Lower Q4 GDP growth and the downward economic pressures must be seen in the context of government reluctance to unleash massive stimulus. Instead, the government’s policy actions in Q4 have cut economic growth; these range from heavier regulation in the tech sector, to cutting carbon emissions and curbing financial risks. Policy priorities are always likely to be adjusted over time, but the government seems increasingly willing to pay economic costs to achieve policy goals.
It was therefore no surprise that the government used the Central Economic Work Conference in December to emphasize stability rather than faster growth. In 2022, stimulus measures will be targeted ones that focus on areas vital to China’s long-term strategic goals, such as upgrading industry, greater supply chain security, digitalization, and science and technology.
Meanwhile, China’s business environment is undergoing a fundamental shift as the Chinese Communist Party (CCP) takes an expanding role. Companies are under growing pressure to conform to national strategic goals. As a result, business decisions will increasingly be governed by political patronage and rent-seeking rather than market forces as the CCP reshapes the parameters of economic activity.
China’s policy choices are likely to come at the expense of rebalancing the economy towards more consumption – at least in the short run. Thus far, the consumer internet, tutoring, the entertainment sector, and speculative investment in real estate have all felt the impact of the shift. Crackdowns on these sectors give the impression that the latest buzz word policies – Dual Circulation and Common Prosperity – are likely to be put on the backburner, at least when it comes to strengthening consumption.
Ironically, China has benefited from strong consumer demand abroad while domestic consumption continues to struggle. Persistent high exports produced record trade surpluses which gave a much-needed boost. Net exports contributed the highest share to quarterly GDP growth in more than two decades.
In politics, 2022 will be a crucial year as President Xi Jinping seeks a third term at the CCP’s 20th Congress in the autumn. Growth is unlikely to be allowed to fall off a cliff. However, President Xi’s policy choices suggest a long-term view, focused on reducing risks and vulnerabilities, to strengthen China’s capacity to face future challenges. Short-term stimulus measures are likely to remain restricted to prioritizing stable employment. If necessary, such measures could include more infrastructure building, or delays to some more restrictive policies, such as cutting carbon emissions or shaking out the highly leveraged real estate sector.