CHINA’S 2022 ECONOMIC OUTLOOK

MarukawaTomoo

China’s gross domestic product （GDP） exceeded 114 trillion yuan （US$18.1 trillion） in 2021， according to data released by the National Bureau of Statistics on January 17， an increase of 8.1 percent over the previous year—a rate slightly lower than I expected. Previously， I predicted that

China’s economic growth could reach as high as 9 percent in fiscal year 2021 given that Chinese economic recovery began showing vigorous momentum in late 2020. China grappled with several tough challenges that hampered the country’s growth forecasts last year. Among them， Evergrande， China’s second largest property developer， fell into a debt crisis which negatively impacted China’s real estate industry as a whole. Another tough issue China faced was a significant power crunch from August to October， which forced many factories to cease operations.

When looking back at China’s overall economic growth in 2021， I was first impressed that the country produced a staggering 3.52 million new energy vehicles， equivalent to the total annual production of major car manufacturing countries including Brazil， Mexico， and South Korea.

Another thing that struck me was the Chinese government’s measures to tackle the debt problems of the Tsinghua Unigroup and the Evergrande. When China’s semiconductor conglomerate Tsinghua Unigroup was facing bankruptcy and Evergrande was on the verge of collapse last year， rather than opting for government intervention， which could have led to further problems， the Chinese government allowed the market to play a vital role and gave them the go-ahead to restructure. I think China adopted the right approaches on this difficult issue.

Economic Stability Top Priority

Some research institutes have predicted China’s economic growth rate to reach 5.1 percent in 2022， considering the current strength of the Chinese economy. I believe that either 5 percent or 4 percent would be fine. My reasons follow：

In 2021， China’s per capita GDP reached US$12，552， and the World Bank updated its definition of high-income economy as a nation with a gross national income （GNI） per capita of US$12，695 or more. So， China was already very close to the new metric of a high-income economy last year. I predicted China to become a high-incomecountry around 2024. China almost hit the target last year and it is in the bag this year. Instead of continuing to strive for economic growth， China should focus more on economic stability.

Another unanticipated event is that China’s population increased by only 480，000 last year. Earlier， economists forecast China’s population to peak in 2030 before reaching a phase of negative growth. But according to 2021 data， China’s population is likely to start declining this year. If so， just a 4 percent growth rate could be enough to sustain economic development. Blindly pursuing a high growth rate will only lead to problems such as economic bubbles.

If the population remains as it is， China’s economic growth will be driven primarily by technological progress and capital accumulation.

While reading the communiqué of the Central Economic Work Conference released late last year， I paid particular attention to the part about “correctly understanding and grasping the characteristics and behavior rules of capital.” The communiqué reads： “The socialist market economy is a great creation， and there will inevitably be various forms of capital in the socialist market economy. We should give full play to the positive role of capital as a factor of production while effectivelycontrolling its negative role.It is necessary to set up ‘trafficlights’ for capital， strengtheneffective supervision of capital according to law， and preventthe barbaric growth of capital.”

This never-before-seenstatement evidences China’sdetermination to exercisesome oversight and controlover capital， especially ascapital is starting to showoligarchic tendencies.Already， some Chineseinternet giants have evolvedbeyond their boundariesas ordinary businesses toserve as cornerstones ofthe country’s informationinfrastructure. Chinese people have become more and moredependent on lifestyle servicesprovided by these companies， which indirectly leads tothe emergence of oligarchictendencies.

It is worth noting thatprevious spontaneous growth of private capital providedimpetus for the development of the Chinese economy andaccelerated the country’stechnological advancement.So it is important to ensurethat such capital continues to maintain growth momentum. Furthermore， most privatecompanies in China arestruggling with intensecompetitive pressure dueto some internet giants’monopolistic operationsthat need to be broken up.Implementation of capitalmarket supervision policyshould be specific and leverage the pros while avoiding thecons.

The government shouldalso play a significant rolein fostering new drivers ofeconomic growth. For example， development of autonomousvehicles and new energyvehicles cannot simply rely onprivate capital. The government should facilitate constructionof roads， traffic lights， andother infrastructure， maintainthorough communication with non-governmental agencies，create conditions for practicalapplication of relevanttechnologies， and establishrelevant rules. Clearly， the rapid development of new energyvehicles in China is largely thanks to local governmental incentives such as license plate privileges seeking to boost sales of new energy vehicles.

The communiqué of the Central Economic Work Conference reiterated the need to “adhere to the supply side structural reform as the main line，” but said China would not adopt a zero interest rate policy or quantitative easing like Japan did. The communiqué called for efforts to “carry out infrastructure investment moderately ahead of time.” If this year’s economy fails to rebound as hoped， China could roll out investment incentives to boost economic growth.

CPTPP & SOE Reform

This year， Japan and China will implement major projects on economic and trade cooperation.

The Regional Comprehensive Economic Partnership （RCEP） trade agreement covering 15 countries including Japan， China， and South Korea took effect in January. RCEP is the first free trade agreement involving China， Japan， and South Korea， and its signing will certainly make a positive impact on the Japanese economy. Japanese companies will start seeing more opportunities which should be seized in a bold and efficient manner.

Some have argued that the RCEP is not liberal enough. Well， Japan—not the RCEP—is the party to blame for that. Generally， members of RCEP are expected to phase out tariffs on 91 percent of goods， but Japan still maintains high tariffs on agricultural and livestock products such as rice， wheat， beef， and pork. Japan’s tariff elimination rate is 88 percent for ASEAN， 86 percentfor China， and 81 percent for South Korea.

The multilateral tradepact needs to be improved regardless of which countrywill dominate in the future; its entry into force is not an end.All member states includingJapan， China， and SouthKorea should further enrichthe content of cooperationso that the RCEP frameworkcan extend beyond free tradeto influence a wider range ofareas.

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership（CPTPP） is another issuethat will influence Japan-China relations this year.

China officially submitted itsapplication to join the CPTPPlast September， and Japan， one of the founding members， has been taking a cautious wait-and-see approach.

Some analysts have calledChina’s application to join theCPTPP competition for the U.S. presence in the region. But there is no logical reason forinternational trade to target or exclude any particular country. In this sense， I support China’s accession to the CPTPP and also call for Japan and other CPTPPmembers to support China.

China still has obstacles toovercome to join the CPTPP.Government subsidies to state- owned enterprises （SOEs） aswell as cross-border data flows are two major challenges.

China has as many as200，000 SOEs， so obviously CPTPP could not excludeall of them. The key ispreventing relevant policiesfrom adversely affectingnormal trade. For example，SOEs can engage in trade， but they cannot expand exportsby leveraging governmentsubsidies. So， it would not be an insurmountable problemif all parties could thoroughly communicate and make clear rules.

The CPTPP agreementstates that parties shallensure unrestricted flow ofinformation and data relatedto the internet and the digitaleconomy， and that no partyshould prevent internet serviceproviders or consumersfrom transferring， accessing，processing， or storing relevant information across borders.This contradicts provisions of current Chinese law. However， objections to the free flow ofdata across borders have been growing in Europe and Japanalike. Instead of requiringChina to comply with theCPTPP， member states willmore likely find mutuallyacceptable solutions throughnegotiations， such as a newprovision prohibiting cross-border transfer of importantpersonal data without theowner’s consent.

On the issue of China’sapplication for CPTPPmembership， it is importantthat member countriescommunicate and negotiatewith China on such topics.When China applied to jointhe World Trade Organization （WTO） 20 years ago， it alsonavigated many roundsof negotiations involvingextraordinarily toughrequirements， but finallysucceeded after overcomingvarious difficulties. Today，China’s efforts to join theCPTPP will likely bolster thecountry’s SOE reform.