The 2022 CPC Congress: Impact On Foreign Trade & Investment

October 24, 2022 Posted by China Briefing Written by Chris Devonshire-Ellis Reading Time: 9 minutes

China Domestic Consumption Growth Development For The Next Decade Plus

By Chris Devonshire-Ellis

The Chinese Communist Party Congress has now finished, with President Xi Jinping securing a third term in his role, and a re-appointment of the key seven members of the Politburo Standing Commitee made. Changes were also made to China’s constitution as concerns numerous long-standing polices.

Much of the Western media has focused on the differences between the Western ‘democratic’ system and that of China’s, in addition to discussions concerning China as a security threat. In this article, I concentrate not on these topics but on trade and investment policies that will impact on China’s foreign trade relations and investment.

China’s Global Economic Position ‘A Top Priority’

Xi was emphatic in his statement that “China cannot develop in isolation from the world. The world’s development also needs China” and highlighted that economic development was the party’s “top priority,” but added that development needs to be balanced with national security (a lot of Western media attention focused on China security as a ‘top priority’ and omitted the economic reference).

In continuing reform and ‘opening up’, Xi stated that Beijing would introduce changes to China’s economic policy aimed at improving growth, without giving specifics, while saying that “We will firmly fully deepen reform and opening up, firmly push forward high-quality development.” He also stressed that maintaining China’s strategic trade and investment links with the rest of the world and economic opening “will only be wider.”

That goes hand in hand with China’s overall economic policy, currently built around the ‘Dual Circulation Strategy’ and implies no change from this. That, introduced in 2020, specifically calls for the development of China’s domestic demand on one hand, while simultaneously developing conditions to facilitate foreign investment and boost production for exports on the other.

Boosting Chinese Domestic Consumption 2022-2035

This effectively means there is no reversal of plans to continue the development of China’s domestic market – in fact Xi expressly stated that reforms would be introduced to further expand and develop this. Xi also included a call for China to achieve “Chinese-style modernization,” referring to an effort to achieve high-income status for Chinese nationals – yet without following the economic and political policies seen in advanced economies. That means no rampant capitalism that has led today to the US having one of the world’s least balanced wealth sharing economies.

That is good news for foreign investors looking to sell product to China as it directly states that Beijing continues to plan for a higher level of Chinese citizens own wealth and the continued raising of disposable income levels. This is of particular interest to international exporters who will continue to see growth opportunities within the Chinese domestic market, and for foreign manufacturers who may wish to locate their production in China directly to feed that same local market.

Xi Jinping pledged to ‘substantially grow’ China’s middle-income group as a share of the total population by 2035.

In terms of measuring that, according to statements made by China National Bureau of Statistics Commissioner Ning Jizhe in January 2022, China has more than 400 million middle-income earners, or 140 million families, as part of its 1.4 billion population. These existing middle-income earners is already a group larger than the total population of the United States, are seen as key for the world’s second largest economy to resort to the domestic market for future growth. China doesn’t provide an official definition of its middle-income group, as income levels vary considerably across the country. However, according to Ning, a typical Chinese family of three earns between 100,000 and 500,000 Yuan per annum – in US dollar terms between US$14,000-70,000 a year.

A Coming Decade Of Sustained Chinese Consumer Growth

That is expected to grow. Research conducted by the CPPCC – Beijing’s top political advisory body – earlier this year indicated that another 300 to 400 million people from China’s population have the potential to join this middle-income group and are based primarily in the private sector.

More than 400 million people worked for private firms or self-employed businesses in China in 2019, while the private sector contributed to over 60% of China’s GDP. It is this sector that the CPC are additionally and continuing to target as key drivers in China’s wealth creation. It basically means for foreign investment and export interests that the new CPC policy is to more than double China’s middle class domestic consumption in the next twelve years to 2035.

In attaining this, Xi also specifically pointed out the need to raise the level of personal income and increase the sources of revenue, while acknowledging that employment, education, medical services, child and elderly care and housing, should be addressed. Foreign investors involved in vocational training, childcare, elderly care, and related industries such as the medical and specialist construction industries should all take note as these are not just linked to a middle-class boom but also social issues – a key concern for the CPC.

Boosting China’s Exports

China’s immediate export development policies are tied to ASEAN, where China has been the bloc’s largest trade partner since 2009, while ASEAN became China’s largest trade partner in 2020. The CPC is careful not to cause ripples in existing trade ties, and especially with the United States, however the problems within the US-China trade corridor have been largely engineered by Washington in the form of tariff wars and sanctions. That means China’s export emphasis is changing – and puts US manufacturers based in China under stress if they continue to focus on the US export market from the PRC. That corridor is narrowing: such businesses must already be aware that they ought to be looking at relocating all or part of their export manufacturing processes elsewhere. In terms of 2022, and the additional stresses placed on supply chains and costs due to the Ukraine conflict, our firm, Dezan Shira & Associates has seen India and Vietnam as primary destinations for US companies in China to relocate too in order to preserve their export flows back home.

China’s bilateral trade with ASEAN January to July 2022 amounted to US$544.9 billion, an increase of 13.1% year-on-year. Bilateral trade between China and ASEAN accounted for 15% of China’s total foreign trade, and the ASEAN region will be one that China continues to pay development attention too. That goes hand in hand with the Regional Comprehensive Economic Partnership (RCEP) which includes all the ASEAN members together with Australia, New Zealand, Japan and South Korea.

The Belt & Road Initiative

Elsewhere, China is also making significant inroads in developing outbound investment (the Belt and Road Initiative) and trade. The country has signed off significant energy and trade deals with Iran, Russia and Saudi Arabia this year. The Belt and Road Initiative, which both provides China with export opportunities for its SOEs, is also tied to trade as a more significant, longer-term play as the infrastructure is later exploited and used for imports and exports.

While the BRI is often maligned, in fact, China’s outward investment value in 2021 and the first quarter of 2022 saw a 12.3% year-on-year increase over previous levels, topping the global outward investment chart for the first time at US$153.71 billion, according to the Report on Chinese Enterprises Globalization 2021-2022 published by the Center for China & Globalization (CCG). This is important because the CCG is non-Governmental, independent, and was founded in 2008 by a committee of the Western Returned Scholars Association, an organization under the United Front Work Department. That BRI investment reach is little understood (but much-criticized) however will continue to provide infrastructure platforms for China to both import the products it needs, and export the products it can sell, for decades to come. The BRI remains an inherent part of China’s export policy. Yet it too, will evolve.

Now in its ninth year, the BRI will be re-calibrated. Beijing always knew that a percentage of its overseas loans would become problematic at some stage, and now this has occurred, adding to its loan portfolio will result in more prudence in Beijing’s lending. However, while the geopolitical tussle with the United States continues, Beijing will not want to be seen as an inconsiderate partner who walks away when the going gets tough. That renegotiation of problem debts will keep BRI projects going, while discourage debtors from shunning Chinese finance in favour of other underwriters who may then utilize that much-needed infrastructure for their own purposes.

The Shanghai Cooperation Organisation and BRICS

We can also expect China to continue to underscore its commitment to other regional, largely Eurasian initiatives, including at the top of the pile the Shanghai Cooperation Organisation (SCO), and BRICS initiatives, which also include significant trade elements. These are likely to be expanded. The SCO already includes eighteen members of varying status, with other countries – including Saudi Arabia – expressing interest. While the SCO has at its core a large security element directed at preserving the peace in Afghanistan, its territory encompasses much of the vital INSTC and Middle Corridor supply chains. China will be looking to further develop these relations.

The BRICS are also highly likely to be expanded, and already includes significant countries with huge influence in their own regional trade blocs. Brazil is the largest member of South America’s Mercosur, Russia the Eurasian Economic Union, China with RCEP, India with the SAARC South Asian bloc and South Africa with the African Union and AfCFTA trade agreement. Indonesia and many other nations including Egypt and Turkiye are all keen to join. This policy of developing China’s international trade ties with countries on the periphery of, or not included within the G20 will continue. Vibrant supply chains will emerge.

Russia & Ukraine Conflict: Impacts

China has already hedged its energy bets and tied them to Russian supplies, in addition to making significant, hundred-billion-dollar agreements in the Middle East and lesser ones elsewhere. China – which was burned by insufficient energy planning way back in the late 1980’s – has had a coherent and long-lasting plan ever since. Beijing will be using the existing conflict and the subsequent fallouts to negotiate deals with Russia over gas and oil supplies. Any impact has been and will be on supply chains and is in the process of being absorbed.

But there will be implications in Asia – and especially for EU manufacturers. For them, the prospect of cheap energy seems a distant past. Cutting themselves off from Russian energy is already raising production costs across the EU. This will have knock-on effects that will to some extent impact China as well as Asia, in ways that will help solve the EU energy crisis (although costs will still be higher than before) but will also benefit Asian economies.

This is more likely to impact India than China and ASEAN, however a migration of EU manufacturers in search of cheaper oil and gas for production will see some of these relocate to India and elsewhere to take advantage of the less expensive energy deals these countries have made with Russia. While relocating away from China to ASEAN and India may make sense for US businesses, this may not apply to EU companies on the lookout for lower manufacturing costs. Factoring in the ‘Russia sanctions costs’ and examining production costs in India, China and other countries such as Turkiye and the UAE may yet be beneficial for EU business. I expect this trend to develop in 2023.

Summary

Other publications are publishing somewhat conflicting ideas of what transpired at the CPC Congress and discussing issues such as US sanctions on China’s semi-conductor industry, security concerns and the autocratic vs democratic debate – ignoring the fact that 2,296 delegates attended the CPC and gave their votes. Many of these headlines are negative. Many simply parrot US policy as carried by Washington analysts and political advisors without much real insight as to what is really going on with China and promoting American perspectives and interests – much of which are currently aimed at promoting negative opinions about China. While there is merit in considered opinions as concerns the political and ideological differences between the two, not enough time is spent in analyzing the trade impact of the current CPC Congress. That is peculiar when one considers China’s position as the world’s largest exporter.

The CPC however was clear in its objectives as concerns trade. It is continuing its policy of developing and encouraging wealth creation within its middle class and is aiming for more than a doubling of that between now and 2035. This brings huge opportunities for global manufacturers looking to export to China, as well as to service companies wishing to deal with Chinese consumers home, and abroad. There are also, within that, huge opportunities for global manufacturers looking to base themselves in China to garner more control of their production, the supply chains and distribution networks, and a larger chunk of the profitability.

In fact, looking back at China’s performance in what it said it would do and what it did, Beijing has shown itself as a reliable deliverer of trade messages. When Beijing previously stated it would continue to ‘open up its economy’, it followed that up with strategic adjustments that carry real weight. The 2022 ‘Negative List’ for example, that actually lists the industry sectors that foreign investment is welcomed to participate in, was the country’s most liberal ever. The good news for global exporters, export manufacturers, and international businesses with an eye on the China market, is that the CPC have just laid that out as a policy to be continued for the next twelve years.

Chris Devonshire-Ellis is the Chairman of Dezan Shira & Associates, and has a 30 year career in advising foreign investors in China. His firm has thirteen China offices and several hundred staff and also maintains a considerable presence throughout ASEAN, India, Russia and the Middle East. Contact: asia@dezshira.com or visit www.dezshira.com