A China 2021 recap looking at the year’s major developments that will affect the country’s investment prospects going into 2022. Foreign stakeholders with business interests or operations in China will benefit from monitoring the economic developments, policy impulses in education and green industries, and implementation of new data and cybersecurity regulations. Given that the COVID pandemic is still ongoing, US-China rivalry refuses to abate, and global supply chains remain stressed – there will be plenty of internal and external variables to account for in the new year. Besides this roundup, we also look at what lies behind China’s impetus of ensuring ‘common prosperity’.
2021 has been a remarkable year for China.
While the country’s economic growth slowed down in recent months due to multiple COVID outbreaks, power shortages, and a regulatory crackdown in certain sectors, the overall economic recovery is stable. China’s full-year GDP growth is expected to reach 8.0 percent in 2021 (IMF forecast in October), down 0.1 percentage points from the forecast in July.
Entering 2022, economists speculate that the Chinese government could stick with their approach of fine-tuning policy – maintaining a stable monetary policy while keeping liquidity reasonable and providing targeted fiscal support for small and midsize businesses, scientific and technological innovation, and green development, to boost the short-term growth and advance long-term reforms.
Businesses should be aware that this year witnessed sudden changes to the market as the government adjusted its socioeconomic policy priorities. A slew of new laws and regulations were introduced at short notice, presenting multiple compliance risks but also opportunities. Foreign investors and companies with operations in China are advised to track the recent developments to fully grasp the nature of the trends that will shape the business environment in 2022.
Below we offer a condensed summary of an eventful 2021 where the Chinese government tightened data security regulation, clamped down on monopoly and anti-competitive practices, enforced dramatic education reforms, and much more. We also dig into the main events and explain their impacts.
China in 2021: A short recap
Starting 2021, China has entered the period of the 14th Five-Year Plan (2021-2025). The Chinese Communist Party (CCP) celebrated its centenary anniversary in July and concluded the sixth plenum of the party’s central committee in November, which paves way for the appointment of China’s next leadership.
The country’s first-ever Civil Code came into force on January 1. This was followed by a slew of new laws, notably the sweeping Data Security Law (DSL) and Personal Information Protection Law (PIPL), which add legal teeth to the increasing regulatory scrutiny of cross-border data flows and personal information protection.
Lawmakers also started revamping the Antitrust Law and cracking down on anti-competitive behaviors, in part to rein in the sprawling private tech sector, especially the “platform economy”. At the same time, the government is compelling this industry to abolish the illegal “996” work policy and improve worker benefits.
Under the pressure of a growing demographic imbalance, China’s top legislature finally amended the Population and Family Planning Law this year, which eventually abrogated China’s long-standing birth control measures and legalized the three-child policy. The government also has its eyes on the quality of China’s next generation, imposing sweeping reforms in the education industry that dramatically banned all private profit-making businesses from teaching compulsory education subjects.
The government has long wanted to break the vicious circle of property speculation and credit expansion. The latest rules include more restrictions on developer financing and home purchase, serving a significant blow to the property sector. Meanwhile, China Evergrande, one of China’s biggest real estate developers, found itself in a headline-making liquidity crisis, followed by Kaisa and other developers.
Within the real estate sector, China introduced a property tax in October. As part of the campaign to narrow a yawning wealth gap and promote “common prosperity”, the National People’s Congress (NPC) authorized the State Council to implement a pilot property tax scheme in selected regions.
Externally, as President Joe Biden took office in the US White House, 2021 saw competition intensifying between the US and China, especially in the technological, financial, and military arenas. In June, the US Senate approved the American Innovation and Competitiveness Act to compete with Chinese technology and China passed the Anti-Foreign Sanction Law to counter sanctions from the US and its allies.
Despite the two country’s leaders agreeing to “guardrails” around their bilateral relationship in a virtual meeting in November, the US continues to blacklist Chinese quantum computing and semiconductor entities. Recently, the two powers clashed over stock listings, with US-listed Chinese firms caught in the geopolitical crosshair.
Beijing is determined to develop its technology capacity to move up the global value chain, which will inevitably bring it into conflict with US interests (reminiscent of the US-Japan trade rivalry from the 1960s to 1990s). In November, a new Beijing Stock Exchange was launched, to channel finance to small and mid-sized innovative firms.
One of the few areas where the two powers can work together is probably combating climate change. During the final days of the COP26 summit, the US and China made a surprising joint declaration to cooperate on climate issues over the next decade.
In the run-up to the COP26 summit, China announced the long-awaited Action Plan for Hitting Carbon Emission Peak By 2030. In September, Chinese President Xi Jinping said China would stop supporting new coal-power projects overseas. To achieve the net zero carbon emission target, China is expected to roll out more policies to regulate polluting commodity industries, transportation pollution, and household waste; consequently, there will be several opportunities in the sustainable energy industries and environmental protection.
2021 also marked the 20th anniversary of China’s accession to the WTO. In September, as the world’s largest merchandise trading economy, China formally applied to accede to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trade agreement, and two months later, applied to join the Digital Economy Partnership Agreement (DEPA). The applications come when the Regional Comprehensive Economic Partnership (RCEP) is about to take effect from 2022.
What are major developments from 2021 that will impact doing business in China in 2022?
Tightening data regulations
‘Data regulations’ is definitely a keyword for China’s 2021. In the second half of the year, China introduced a string of laws and regulations tightening control over data:
- On June 10, 2021 – China’s top legislature, the National People’s Congress (NPC), officially passed the Data Security Law (DSL), which came into force from September 1, 2021. The law stipulates how data is used, collected, developed, and protected in China. It emphasizes on top-down coordination of data security implementation among governments and differentiated fines based on severity of violations.
- On July 10, 2021 – the Cyberspace Administration of China (CAC) began revising the Cybersecurity Review Measures after the investigation into the ride-hailing firm Didi Chuxing. The Measures for the first time propose that any Chinese companies that hold the personal information of one million or more users would need to seek a government cybersecurity review before listing abroad.
- On August 20, 2021 – the NPC adopted the Personal Information Protection Law (PIPL), which took effect from November 1, 2021. The Law tightens scrutiny of personal information collection and use and sets strict rules on how companies should handle such kind of data.
- On August 30, 2021 – the State Council unveiled the Regulations on the Security and Protection of Critical Information Infrastructure (CII), formulated on the basis of Cybersecurity Law (CSL), which is effective from June 1, 2017. The Regulations defines which companies are most likely to be defined as CII operators and what are their compliance obligations.
- On September 30, 2021, the Ministry of Industry and Information Technology (MIIT) fleshed out the Management Measures for Data Security in the Field of Industrial and Information Technology Sectors (Draft). The Measures clarify how firms should handle sensitive industrial and telecoms data and classify data into “core”, “important”, and “ordinary categories”.
- On October 29, 2021, the CAC released the draft version of the Measures for Data Export Security Assessment. The Measures offer clarify on the governmental body responsible for overseeing security assessments and what procedures companies must undergo to get clearance to transfer data overseas.
- On November 14, 2021, the CAC released the Network Data Security Management Regulation (Exposure Draft), which unifies data security rules introduced by the CSL, the DSL, and PIPL and rolled out review requirements for companies pursing IPOs in Hong Kong.
How to read these developments?
So far, the three sweeping laws – the CSL, the DSL, and the PIPL – altogether form the legal framework for cyberspace governance, information security, and data (privacy) protection in China.
The DSL, effective from September 1, contains a wide range of provisions related to data security, of which perhaps the most important part is probably the dealing of the “important data”, which generally refers to data related to “national security, national economy, and the people’s livelihood”. The DSL as well as some other regulations have repeatedly stipulated that transferring “important data” overseas are subject to a government review.
While DSL does not elaborate on what constitutes “important data”, it requires government departments to formulate the catalogue of “important data”. The MIIT had become the first central authority to follow the directive. The draft management measures for data security in the field of industrial and information sectors released by the MIIT classify data into three categories and flesh out the definitions of “core data”, “important data”, and “ordinary data”, although no specific examples of different categories of data are provided.
The PIPL, taking effect from November 1, is China’s first law specifically regulating the protection of personal information, which has a far-reaching impact on the data privacy compliance of enterprises. One particular important point is that for firms processing personal data of more than a certain amount (set by the CAC) as well as CII operators, personal information collected or generated within the territory of China are required to be stored within China. If it’s necessary to provide the data overseas, the firm must undergo a security review conducted by the CAC in advance.
As to the question on how the government review will be conducted, in October, the CAC released the long-awaited draft Measures for Data Export Security Assessment, which explains more about the procedures companies must undergo to get clearance to transfer data overseas.
Businesses should note that both laws stipulate fines for violations. For violating the PIPL, organizations could face the maximum penalties of RMB 50 million (US$7.8 million) or 5 percent of revenue and for individuals, they could be liable up to RMB 1 million’s fine (US$156,700).
Fighting anti-competitive practices
Ever since November 2020 when China suspended the IPO of Ant Group, Alibaba’s financial arm, regulators have been tackling a long-simmering problem in tech sector: anti-competitive practices.
After a four-month anti-monopoly probe, Alibaba was fined a record RMB 18 billion (US$2.77 billion). In addition, the fintech giant Ant Group was asked for a wide-ranging rectification, including to rectify its risky lending practices and enhance data privacy protection.
Other internet conglomerates including Tencent, Baidu, ByteDance, and Didi Chuxing were also fined for violating the anti-monopoly law. Smaller internet firms, including foreign-invested enterprises, were not immune – for example, in April, an English-language takeout platform Sherpas was fined US$178,000 by Shanghai market regulator for anti-competitive conduct.
A string of anti-competitive behaviors, such as forced exclusivity arrangements (also known as ‘picking sides), ‘cash-burning’ strategy to gain market shares, unapproved M&A activities which may cause an industry monopoly, misleading advertising, and deceptive and unfair pricing, have been targeted by the market regulator.
As part of the anti-monopoly campaign, China enforced an antitrust guidelines for the “platform economy”, giving more teeth to the first major revisions made to the Antitrust Law (the second public consultation was completed in November this year) in 13 years. A new antitrust bureau was launched in November, which will be responsible for conducting antitrust investigations and oversight into M&A activities and market competition.
Reorienting education for the next generation
With an aim to reduce the workload of students and promote educational equity, China has embarked on reforms to its education system, including the bans on for-profit tutoring in core education, the cancellation of written exams in the first and second grades, as well as the roll-out of China’s first Family Education Promotion Law (to be effective from January 1, 2022).
In July, the State Council released the Guidelines for Further Easing the Burden of Excessive Homework and Off-Campus Tutoring for Students at the Stage of Compulsory Education, which stipulates:
- Existing institutions that teach subjects on the school curriculum (hereafter “disciplinary training institutions”) must register as non-profits.
- Any disciplinary training institution must not go public.
- Listed companies are banned from financing or investing in disciplinary training institutions through the stock market, nor purchasing the assets of such institutions by means of issuing shares or paying cash.
- Foreign capital is banned from investing in disciplinary training institutions via M&A, franchise development, and variable interest entities (VIEs).
- No off-campus training agency may organize disciplinary training on statutory national holidays, rest days, winter, and summer vacations.
The reforms have overhauled the structure of China’s tutoring industry, where a swarm of tutoring institutions went bankrupt and substantial consumer demand remains.
Nevertheless, while the government is restricting foreign investment on academic tutoring for school-age students and increasing scrutiny of foreign teachers and imported education materials, investors should aware the opportunities still exist – the government is simultaneously promoting private investment in areas like vocational education as policy makers seek to upskill the country’s workforce.
Besides taking aim at the education sector, China’s focus on the growth of the next generation also spilled over to the online game industry. To avoid gaming addiction to harm children’s academic and personal development, in August, China limited the amount of time children can spend on video games, a dramatic blow to the world’s largest online gaming market. Meanwhile, the National Press and Publication Administration has not published a list of approved new games since the end of July.
Beginning the journey to net zero emissions
In September 2020, China’s President Xi Jinping pledged that China would hit carbon emission peak before 2030 and become carbon neutral before 2060.
In the lead-up to the COP26 summit this November, China released the long-anticipated Action Plan for Reaching Peak Carbon Emission by 2030. The Action Plan lists three major carbon milestones (set for 2025, 2030, and 2060) and ten key tasks in order to achieve the carbon peak goal, which are expected to bring compliance risks to industries like coal, petrochemical, chemical, steel, non-ferrous metal smelting, construction, and transportation, as well as opportunities to green and low-carbon energy, green and low-carbon technology, and circular economy in the next decade.
In July, China launched the world’s largest carbon trading market in Shanghai to cut carbon emission growth. At launch, the carbon market covers over 2,225 companies that operate coal and gas plants to produce power and heat, but policymakers plan on expanding the scope of the carbon market to include other polluting industries, including steel, cement, chemicals, and aviation.
Achieving these carbon goals is cash-burning. It is estimated that almost RMB 140 trillion (US$22.4 trillion) – above five times the size of the current German economy – is needed over the next thirty years.
The government’s strategy is actively promoting green finance – a set of policies and incentives to channel private sector capital, primarily through loans and bonds, into green projects and industries.
It is adopting different tools for green finance, including making it more attractive to banks. For example, in November, the central bank launched its carbon-reduction support tool, designed to provide cheap funding to financial institutions that operate nationwide to channel low-cost loans to businesses in the clean energy, environmental protection, energy conservation, and carbon-reduction technology industries.
In addition, the government is considering ‘green credit’ and ‘green trade’. The central bank considered green credit and green bond performance in bank assessments. The commerce ministry recently released the five-year plan for promoting foreign trade, which proposed to set up a “green trade index” and collect data on the carbon intensity of trade.
Externally, China is also looking to align green finance standards with international best practices. With an eye on cross-border investment, China and the EU have finally formulated a jointly recognized standards for defining green projects in November (which is open for public feedback until January 2022), in a move to help channel global capital to sustainable businesses in the two markets.
Chinese top officials have been increasingly promoting “common prosperity” this year.
In fact, this concept is behind many of the top leaders’ key decisions, including supporting small and mid-sized firms, regulatory crack down on tech giants, improving labor protection, the reforms in the education system, subsidizing vocational training, introducing the property tax, and encouraging charity and donations by rich groups and enterprises, etc.
It is expected that in the next decades, the country will be more focused on addressing inequality, redistributing wealth (including across regions), and creating more opportunities for upward social mobility.
No doubt this concept has worried wealthy individuals, deep-pocketed enterprises, and certain sectors (like the luxury industry). To deter capital flight, top officials have emphasized that common prosperity is not “killing the rich to help the poor”.
On the second day of the Sixth Plenum, the CCP’s top official indicated that development would remain the top priority for China to realize common prosperity. This would mean that common prosperity is not just about equitable distribution of existing wealth, but also about expanding the country’s wealth and growing the middle class.
Common prosperity is an essential requirement of China’s socialism and will impact policymaking in 2022. While its period invocation has been vague in detail and scope, more concrete measures are expected to get fleshed out in the next few years.
Tackling supply chain disruptions
Global supply chains and shipments have faced more challenges this year with the COVID-19 pandemic causing worldwide shortages and changing consumer patterns. For China, its supply chain conundrum is thornier and twofold with challenges on the logistical and demand front as well as technology blockades imposed by the US. The US has blacklisted more Chinese quantum computing, semiconductor, and other tech entities and American companies are banned from selling materials and equipment to Chinese firms.
To shore up its supply chains, so far, Beijing has four interlocking strategies: the Dual Circulation Strategy (DCS), domestic innovation, the Belt and Road Initiative (BRI), and a counter-sanctions legal regime, according to analysis from Trivium China.
Foreign investors are worried that China is trying to replace foreign technology. The country is indeed pushing domestic innovation, especially with a focus on some key areas: semiconductors, quantum computing, 5G, biotech, AI, etc. At the same time, it is seeking diverse and reliable global supply chains to secure energy and food supply. These motivations mean that China is certainly not keen to separate itself from the world.
On the other hand, China is also finding ways to increase the world’s dependence on Chinese markets and Chinese products. The latest moves include the application to join CPTPP and DEPA and promoting RCEP. Becoming a bigger import market is another strategy to increase other countries’ dependence on China – the reason to launch the import expo in Shanghai, although it will ultimately hinge on China’s spending power, which also relies on ‘common prosperity’.
Finally, Beijing is building a system of legal mechanisms to counter foreign sanctions, including the introduction of Anti-Foreign Sanction Law and the unreliable entity list. Analysts think these rules haven’t been applied to any significant degree yet, as the main aim is to alert foreign entities and individuals to potential risks. However, China could make an example of an “unreliable” company when it perceives threats to its national security in the future.
Heading into 2022
2021 brought up challenges for many businesses in China, who dealt with local market developments and systemic concerns plaguing global supply chains exacerbated by the pandemic.
As Chinese policymakers focus more on the quality of the country’s development trajectory, looking ahead to 2022, the government is expected to: prioritize policies relating to an aging society; ensure that private capital (including foreign capital) is in alignment with key development goals; strengthen the resilience and security of industrial and supply chains; and tighten control over areas linked to national security.
Given the dynamic geopolitical and business climate, understanding China’s policies and development goals is necessary for making timely adjustments to business development strategies and avoiding compliance risks.
Dezan Shira & Associates’ Business Advisory team works alongside in-house tax, audit, HR, and technology teams who are well-equipped to advise foreign investors throughout the lifecycle of their business projects, enabling them to manage risks and maximize their business options. For advice on managing your business growth in China and other parts of Asia, you are welcome to contact us at China@dezshira.com.
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