Understanding China’s 2022 “Two Sessions” – an executive summary

China held this year’s “Two Sessions” on March 4^th – 11^th, 2022. The event reaffirmed that China will focus on domestic, social and economic stability to address the mounting challenges posed by international uncertainty and the continued outbreaks of Covid-19. Setting the economic growth target at 5.5% – somewhat higher than estimates made by international economists – Premier Li reiterated that China seeks to address short-term challenges without sacrificing long-term structural reform or sustainability commitments. Instead, China will leverage fiscal and financial polices to stimulate the vitality of all market entities to sustain employment. At the same time, systemic measures will enhance income to release greater domestic consumption. These in summary are the headlines announced at a Press Conference after the final session on the morning of March 11^th.

China reemphasized the government’s confident determination to ensure food security and increase the efficiency of production through innovation and technology, optimizing the plantation structure to increase the supply of oilseeds. The idea is to better balance domestic supply and imports, conscious that global food trade is facing disruption on top of the ongoing Russia-Ukraine situation. To Mr. Tang Renjian, China’s Minister of Agriculture and Rural Affairs, this simply means that “China has the confidence to ensure its 1.4 billion residents continue to be able to have daily food as usual”.

China also reaffirmed that the opening-up policy will be maintained and deepened to encourage foreign direct investment (FDI) and open trade. There is an emphasis on providing continuity, predictability and fair opportunities for both domestic and for foreign companies. China will continue to rely on regional cooperation to balance bilateral cooperation when it comes to trade while expecting to move up the supply chain in terms of producing goods with more added value.

For foreign multinational companies, the challenges and uncertainties posed by the changing bilateral relationships (principally between U.S.-China, EU-China, and Russia-China) are undoubtedly the biggest concern when it comes to trade and foreign direct investment. Having said that, there is a sentiment that it is now necessary to prepare for an even worse situation arising in the longer term. There is a silver lining with Russia in that the US and the Europe both want China to play a role as a mediator. At present, it seems that China has no plans to play this role and will stick to a neutral position. If this holds, U.S.-China relations may come under more pressure, while EU-China relations could follow suit.

During 2022, the ongoing Covid-19 pandemic means that China will continue to explore safe and streamlined blanket policies for both the exchange of people and goods as it seeks to balance the need to protect its society and people with the interests of the economy. To this extent, Chinese leadership understands that the zero-tolerance policies in China and those of “living with the virus” in other parts of the world are difficult to reconcile. China’s policies will remain dynamic.

China to encounter more risks and challenges in 2022

In the context of the current Russian-Ukrainian conflict, the challenges facing China are expected to intensify as follows:

• Downward pressure on China’s economy is expected to continue to increase with food security challenges becoming more severe than ever. The challenge facing China’s economy is one of slow economic growth due to weak demand, supply shocks, and resultant low expectations. In terms of food security.  China strives to guarantee domestic food supply while moderately relying on imports. Domestic production has been set as the most important KPI for all level officials in keeping annual output of staple grains above 650 million metric tons. This is to be achieved through a three-pronged strategy: ensuring plantation acreages and optimizing the planting structure, leveraging technological development to increase production efficiency, with biotechnology developments and commercialization expected to speed up albeit moderately. In terms of products, soybean and oilseeds were singled out for increased output, to meet greater domestic demand and to address the pressures posed by surging global prices.
• A continued deterioration in the international environment, and an increase in geopolitical risks: As U.S.-China relations have continued to deteriorate, so too have China’s relations with all of Western society.  Geopolitical issues, in particular Taiwan, Hong Kong, Xinjiang and the South China Sea will become more prominent, which in turn will further contribute to the deterioration of international relations. Furthermore, the Russian-Ukrainian crisis poses a serious challenge to China’s economic recovery.  China’s huge demand and high dependence on global energy markets makes it extremely sensitive to such geopolitical risks.
• The disruption of supply and industrial chains due to the Covid-19 pandemic: The price of bulk commodities remains high, and the operating costs of companies have increased, which in turn squeezes the profit margins of these companies. With the reduction of pandemic controls and the return to normal life overseas, production in those markets will resume, which coupled with rising international shipping costs, will lead to a continued fall in demand for Chinese exports.
• Problems and risks in current manufacturing operations remain prominent: Administrative practices such as power cuts and production restrictions affect the production capacity of business. In 2021, power cuts in China were implemented on a one-size-fits-all or campaign-style basis. On the one hand, this highlight concerns over China’s energy supply, and on the other hand, it shows the disorderly behaviour of local governance in response to carbon goals

Policy trends in 2022

To cope with the above challenges and accomplish the goals set for 2022 in order to further economic development and social stability, the NPC has determined that China’s policies in 2022 will focus on people’s livelihood-oriented domestic circulation, sustainable development in industry, and high-standard opening-up.

• China puts people’s livelihood-oriented domestic circulation at the heart of government policy in 2022. China will continue its people-centred development path and take a series of measures to protect market entities in order to strengthen employment-first policy.  China will focus on the development of manufacturing and small and medium-sized enterprises (SMEs), and will attach importance to energy, food and industrial chain security.  It will enhance the vitality of enterprises through a key policy of tax refunds and cuts and emphasize domestic and regional circulation.  Improvements in market operation environment and governance levels, adherence to reform, implementation of higher levels of opening up and adherence to existing epidemic prevention policies are all aimed at improving people’s livelihood.
• China places greater emphasis on sustainable development in industry. Pressures such as ‘carbon-dioxide peaks and carbon-neutrality’ and ‘dual-control of energy consumption and intensity’ have added major challenges to China’s manufacturing industry. It is worth noting that there is no specific target set for energy consumption intensity this year, rather there is an “overall assessment during the 14^th Five-Year Plan period(2021-2025)” which emphasizes that “appropriate flexibility should be reserved, and new renewable energy and raw material energy consumption will not be included in the total energy consumption control.” “Appropriate flexibility” leaves room for prevention of behaviours such as campaign-style approaches which are not conducive to stable economic growth. The exclusion of new renewable energy and raw material energy consumption from the total energy consumption control supports the development of new energy industry and consumption, taking into account the requirements for stable growth and the needs for high-quality development. China seeks this balance to simultaneously achieve economic development and social stability and meet carbon goals.
• China also places greater emphasis on higher levels of opening up to stimulate development momentum. At the press conference after the NPC meeting, Premier Li Keqiang clearly emphasized that no matter how the international situation develops, China will unswervingly continue opening up, referring to the analogy that the Yangtze River and the Yellow River will never flow backwards to underscore China’s determination in this respect.
• On the demand side, expanding imports enriches domestic market supply and meets consumers’ needs for personalized, diversified and high-quality consumption upgrades. From the perspective of supply, opening up is conducive to the entry of global high-quality resource elements into China, exerting the “catfish effect” to drive full competition in the market, which in turn helps industrial transformation and upgrades. Judging by expectations, no matter how the international situation evolves, China’s unswerving determination to take the initiative to expand opening up has given foreign-funded business reassurance to operate in China.

Appendix: What You Need To Know – Goals and Key Tasks in 2022

The goals set by the 2022 NPC

2022 Tasks and Interpretation (Analysis of 2022 China National People’s Congress)