China Q1 2022 economic data showed the GDP expanded 4.8 percent from last year, a better than expected performance that points to the country’s strong fundamentals – industrial production, consumption growth, construction activity, fixed asset investment, and FDI. We briefly explore why China’s policymakers remain confident despite multiple economic headwinds threatening to slow the pace of growth.
According to the recently released economic statistics by the National Bureau of Statistics and the Ministry of Commerce, China’s first quarter (Q1) growth exceeded expectations, with an increase of gross domestic product (GDP) by 4.8 percent and growing inflow of foreign direct investment (FDI) by 25.6 percent. Despite new domestic COVID-19 lockdowns and unanticipated geopolitical events, China’s authorities remain optimistic as the country’s high-tech industries and green economy continue to show robustness. New policy interventions also facilitate market openings and raising efficiencies to attract foreign investors.
China’s economic data from Q1 2022
In Q1 of 2022, China’s GDP expanded 4.8 percent from a year earlier, showing a better-than-expected performance and surpassing the four percent recorded in Q4 2021, as per data from the NBS.
Despite challenges from fresh COVID-19 outbreaks and geopolitical uncertainties, China’s economy continues to recover. In Q1, the value added of industry above the scale grew by 6.5 percent year-on-year (y-o-y), picking up from the fourth quarter of the previous year and maintaining fast growth. The high-tech manufacturing industry grew by 14.2 percent y-o-y, significantly higher than other industrial sectors.
On the consumption front, the contribution rate of final consumption expenditure to economic growth was 69.4 percent, 18.7 percentage points higher than the same period last year. The market demand for consumer goods expanded, driving the growth of related manufacturing industries. In Q1 2022, the added value of consumer goods manufacturing industry increased 8.1 percent y-o-y.
Fixed asset investment (FAI) increased 6.7 percent y-o-y, compared with a 12.2 percent y-o-y rise in January-February. State spending has been further concentrated in infrastructure FAI. Yet, a sector breakdown showed that activity in the construction industry increased only 1.4 percent y-o-y in real terms over the quarter, despite the jump in infrastructure spending.
Nonetheless, retail sales fell 3.5 percent y-o-y in March, more than the expected 1.6 percent decrease and down from 6.8 percent y-o-y growth in January-February. The Chinese job market has shown slight signs of stress with the unemployment rate at 5.5 percent and more than 10.7 million university graduates entering the labor force.
On the financial side, annual tax cuts and fees is reaching RMB 2.5 trillion, which will support the stabilization of the real economy. People’s Bank of China will lower cash reserve requirements for banks, releasing about RMB 530 billion (US$83.25 billion) in long-term liquidity, to ease difficulties of enterprises and promote the smooth operation of the economy.
In Q1 2022, mainland China attracted RMB 379.87 billion (US$59.66 billion) in foreign direct investment (FDI), excluding foreign investment in banking, insurance, and securities. This inflow increased 25.6 percent y-o-y during this period, which the Ministry of Commerce (MOFCOM) described as a “stable beginning” for the year. China’s FDI inflow has continued to see an upward tick, shunning the negative effect of the COVID-19 pandemic.
According to the State Administration for Market Regulation, there were 10,000 new foreign-invested enterprises newly established in China in the first quarter.
To further break down the data, the actual use of foreign investment witnessed the largest increase in high-tech sectors, recording a 52.9 percent increase y-o-y (RMB 132.83 billion yuan) in high-tech industries, 35.7 percent increase in high-tech manufacturing, and 57.8 percent increase in high-tech services. The service industry also increased to RMB 278.52 billion, up 17.1 percent y-o-y in Q1.
In terms of regional distribution, the actual use of foreign investment in the eastern, central, and western regions of China increased by 23.4 percent, 60.7 percent, and 21.9 percent y-o-y, respectively.
China’s emphasis on innovation-driven development and its accelerated efforts to establish a unified domestic market have been driving FDI growth, especially in high-tech and the services sectors. MOFCOM also foresees increase of investment in alternative fuel vehicle manufacturing, with the country’s accelerated efforts to pursue innovation-driven development and a greener growth pathway.
Enabling environment for robust investment
China’s firm determination to expand market access and build an efficient, fair, and unified domestic market continuously injects fresh impetus into the economy and fosters high-quality development. The country has created a supportive environment for foreign enterprises for further investment.
Shortened negative list for market access
On March 25, 2022, China’s National Development and Reform Commission (NDRC) released a shortened negative list for market access from 123 in 2020 to 117. The new list removes restrictions on stock issuance, mergers and acquisitions of listed companies, and internet financial information services. Now, investors no longer need prior approval to participate in these industries.
This is part of a continuous effort by China to open up its economy and liberalize its financial sector as the government seeks to further stimulate economic growth.
Analysis of NDRC data shows that China has shortened the negative list for market access since 2018, and the number of items on the list has been curbed by nearly one-fifth. Nonetheless, restrictions on news media have further tightened.
The list applies to both international and domestic investors. It should be distinguished from the Special Administrative Measures (Negative List) for Foreign Investment Access and the Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones (FTZs), which are separate negative lists that apply exclusively to foreign investors.
Establishing a unified domestic market
On April 10, China released “Opinions on Accelerating the Establishment of a Unified Domestic Market”, a new set of plans for developing the country’s internal market. The opinions will reduce local protectionism, market segmentation, or impediments restricting economic circulation, to facilitate a smooth flow of products and resources on a larger scale, thus increasing market efficiency and reducing transaction costs.
Efforts will focus on high-level connectivity of market facilities by upgrading the circulation network, smoothing information exchange, and optimizing trading platforms to improve efficiency.
Further standardization of the internal market also benefits foreign investors reciprocally. Free from misalignment of institutional arrangements and human factors, barriers to market entry and exit will be lessened. Domestic and international markets will be better connected, with regulations and standards more compatible and China’s dual circulation development paradigm enhanced.
Regional Comprehensive Economic Partnership (RCEP)
Effective January 1, 2022, the RCEP is one of the largest regional trade blocs. According to Customs statistics, in the first quarter, Chinese enterprises benefitted a fair deal from membership to the RCE – RMB 6.7 billion in imports with preferential tariff treatment worth RMB 130 million and RMB 37.1 billion in exports with preferential tariff treatment worth RMB 250 million.
What to watch going forward: Challenges and opportunities
The state of global affairs has become more complex since March. China is now facing twofold challenges – the pandemic resurgence at home and uncertainties due to the conflict between Russia and Ukraine.
More specifically, extended lockdown in the commercial hub, Shanghai, has prompted fears of rising recessionary risks and stress to enterprises in terms of production and operations. How to balance economic development and effective control of the virus remains the critical question for the Chinese government.
In addition, the conflict between Russia and Ukraine has interrupted global supply chains of certain products and increased export controls. As geopolitical tensions increase, so will commodity and logistics costs as well. While China has refrained from joining sanctions on Russia, Beijing may face potential pullout of international investors.
All these factors slow down the growth rate and increase China’s economic downward pressure. Faced with these challenges, the NBS has still voiced optimistic views, indicating the long-term positive fundamentals of China’s economy have not changed and has the capacity to overcome difficulties and achieve sustainable growth.
Meanwhile, the focus of China’s economic policymaking has changed in recent years, from the pursuit of high-speed growth to high-quality development. The key drivers of such economic growth include capacity-building in the high-tech manufacturing industry, which witnessed favorable outcomes amid challenges in the first quarter.
China’s green transformation is also steadily advancing. Low-carbon products are growing faster. In Q1 2022, the production of new energy vehicles and solar cells increased by 140.8 percent and 24.3 percent, respectively. Clean energy consumption continues to rise.
Moreover, consumption growth was a leading contributor to China’s Q1 economy. Chinese authorities are keenly promoting the integration of online and offline consumption, developing new consumption modes, and accelerating the quality and expansion of the rural consumption market – to sustain this consumption growth.
Looking forward, several macroeconomic policies and restructuring initiatives will gradually come to effect. Below are some areas to keep track of:
- The establishment of a unified domestic market to bring more efficiency to market players by reducing transactional costs.
- Tax cuts and increased support for real economy that offer enterprises relief during economic distress and stabilize jobs.
- Development trend of entrepreneurship and innovation sectors featuring the high-tech manufacturing industry, namely information transmission, software, and IT services.
- Online retail sales on the back of attractive cross-border e-commerce comprehensive pilot zones.
- Health and pharmacy industries to likely see more growth amid the COVID outbreaks.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at email@example.com. Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, and Bangladesh.