Although marred with geopolitical risk, China’s Two Sessions to focus on stable and inclusive growth

The upcoming Two Sessions (Lianghui) to be held on the 4th of March always draws global investors’ attention. This year is particularly important for a number of reasons. First, China has entered the third year of the pandemic and the question remains as when China will be ready to turn away from its zero-covid strategy. Second, 2022 is a crucially important political year amid the US-China strategic competition and the recent military conflict in Ukraine. Finally, the Chinese economy has been decelerating after the second half of 2022 with a turn in monetary policy stance. Given the above, here are a few thoughts about what we are expecting from the meeting.

The first issue is whether, this time around, Chinese policy makers will offer a more precise target for their desirable growth rate in 2022. It seems clear that a slowdown since the second half of 2021 is not likely to be tolerated this year as we have already seen the government took countercyclical monetary and fiscal policies, even though the immediate impact has so far not been fully noticeable. Against the backdrop, the Two Sessions are likely to signal a stronger message to stabilize the economy, with a special focus on supporting household consumption, boosting infrastructure investment and aiding small- to medium- sized enterprises.?

The growth-strengthening policies will also have implications for the real estate market. During the second half of 2021, China real estate market underwent plummeting fixed asset investment, but the real estate developers have recently been given more breathing space from the banks. Given the economic importance of the sector, the regulatory pressure on the sector is expected to be moderately alleviated.?

Going beyond the short-term objectives, China’s Two Sessions will also embrace policies towards sustainable and high-quality growth.?A key issue will be how to cushion the expected fall in the labor force as the population is aging. Some of the related issues have already been mentioned in the previous Two Sessions as well as in the run up to the current Five-Year plan, such as postponing retirement age, but no precise action has been taken yet. Secondly, Chinese authorities will continue pushing for innovation, especial in strategic sectors, such as semiconductors, AI, and robotics, preparing for a potential further decoupling in the global supply chain. Thirdly, China will continue to take measures to narrow social inequality under the guidance of “common prosperity”, with particular emphasis on equal education access, medical care, rural development, etc.?

Given the clouds on the external environment and how important both trade and inward FDI have been for China’s growth since the pandemic started, Chinese policy makers may come up with renewed policies to further foster opening-up and trade liberalization. This will probably include pushing for participation in regional agreements, such as CPTTP, as well as finalizing the Comprehensive Agreement on Investment (CAI) with the European Union (EU). However, both targets remain elusive in 2022 given the increasingly complex landscape as regards the international environment.

Last but not least, China’s strict zero-Covid policy will induce higher cost for China’s economic performance in 2022, especially after the emergence of the Omicron variant. While more flexibility should be expected so as to cushion the deceleration in economic growth, it is still unclear whether, or to what extent, it will happen this year.?

All in all, China’s Two Sessions will be a key event to send us a message about the direction of China’s economic policies in 2022. Our expectation is that economic growth will be put as an important short-term objective, which will include more breathing space to the real estate sector. Beyond that, a clearer trajectory towards a more inclusive growth model – under the mantra of “common prosperity” – will also dominate the headlines.??